Income tax rates are lower today for everyone (but espeically the ultra rich) than they were back then.
FICA tax rates were lower but so were benefits and frankly the rate was unsustainable. As a curious aside, FICA rates which constitute the largest chunk of taxes for the low and lower middle class have only gone down ONCE for ONE year in 1968. It has been increased 23 times and has gone from 1% to 7.65% since the end of WWII. Top Marginal income taxes have dropped from 94% to 35% since the end of WWII.
Do you think its a coincidence that the tax that affects the poor and middle calss has always gone up and that hte tax that affects the rich has always gone down?
Don’t you think its odd that the conservatives who have no chance of ever paying an estate tax ashort of winning lotto are so up in arms about the estate tax? I don’t think these folks have any idea what they are fighting for.
The incentive to produce is distorted by taxation but the distortion is not anywhere near as binary as your drug research example. A 10% increase in the tax rate doesn’t reduce productivity to zero, it doesn’t even reduce production by 10% or anywhere close to 10%. So depending on how distortive the taxation is, it might in fact be better to increase taxes than to provide the highly functional crack addict more incentive to earn money to supply his crack habit.
In some areas this is absolutely true. Its an economic axiom that there are some times when the collective allocates resources more effectively than individuals. See tragedy of the commons and externatilities for a couple of examples.
Not really sure what the rest of your post is about.
Extend your analogy just a teensy weensy bit and you will see that without the SEC, there would be dozens of Bernie Madoffs. Of course the SEC was crippled in its enforcement activity during the bush eyars (not because they were actively tryign to promote fraud but because the SEC was being pressured to show more quantifiable results rather than do its job. So they were evaulated based on number of cases resolved rather than resolving the most improtant cases first so the madoff case kept getting kicked out as too hard a nut to crack both logistically and politically).
Are you under the impression that other countries do not have food safety standards? I would probably never eat at a raodside stand in another country but restaurants in their touristy areas get inspected (or at least I think they are in Cancun).
Oh yeah and let me go over this again. The idea that long-term budget deficits can harm the economy is in no way inconsistent with Keynesian economics. And the main reason why deficits are bad has nothing to do with the permanent income hypothesis which is not what you are talking about anyway (you are confusing it with Ricardian equivalance). Deficits are bad in the long run because they crowd out raise interest rates and crowd out private sector investment. This is not some novel discovery; I believe it’s been understood clearly since at least David Ricardo in the 19th century and probably a lot earlier.
This doesn’t contradict Keynesian polcies which are perfectly compatible with a balanced budget over the business cycle. Keynesians believe in running budget deficits during a recession, not all the time. Also the crowding out effect is much less important during a serious recession because private sector investment is anyway weak.
I will again note that not only is Cristina Romer a prominent Keynesian economist but she was by all accounts a strong supporter for a bigger stimulus in the internal debates in the Obama administration and has advocated continued stimulus after leaving the administration. Maybe she doesn’t understand the implications of her paper as well as you do or maybe just maybe, her paper doesn’t in fact contradict Keynesian stimulus policies.
If fiscal conservatives started running on cutting medicare/medicaid, socvial security and the military rather than “lets cut taxes but don’t touch medicare and social security” I would understand where you are getting at but based on the proposals from the right we apparently will cover a 50% budget shortfall by cutting less than 1% of the budget.
Its not uncharted waters, we’ve seen what confiscatory tax rates do, I don’t think anyone is suggesting those tax rates. My understanding is that we are proposing a top marginal tax rate of about 39.6 percent not 94%. Or do you have a cite that liberals are pushing for these confiscatory tax rates?
We don’t have to get rid of the deficit entirely, we simply have to reduce the deficit to some number smaller than our GDP growth, don’t you think?
As I pointed out your evidence is faulty. I haven’t proved the opposite but your evidence doesn’t prove what you think it proves.
Because the problem is not single faceted. Its not just a matter of cutting spending unless you can get someone to eliminate large portions of medicare/medicaid, socials ecurity and military spending. I suppose if we cut medicare enough, the social security problem will take care of itself. I simply haven’t seen many politicans run on that platform.
Most economists also agree that at leasst some of that government spending is not only valuable but necessary to economic activity enver mind growth, in other words , some of it isn’t dead weight.
I agree that the political calculus involved in making economic decisions is undesirable but the market also engages in lots and lots of fruitless research and makes lots and lots of unproductive allocations of capital.
It depends. If the deficit spending was literally being used to dig holes and fill them up again, then tehre is certainly the spectre of having to pay for those filled up hols at some point in the future but if the deficit spending is used to pay for better road and railway system, I might conclude that the economy will grow enough that the deficit spending will pay for itself.
I could probab;y find a few that say that we can’t balance the budget without raising taxes or cutting medicare/madicaid, social security or military sepdning.
No, you said you weren’t convinced that deadweight losses due to taxation exist. They do. I think perhaps we were talking past each other because you aren’t aware of what deadweight losses are. Saying that a tax has a deadweight loss doesn’t mean that government provides no value. It simply means that taxes bring with them a cost, which becomes a barrier that government action must overcome to be a net benefit. I even pointed out in my messages that there can be circumstances where the deadweight loss doesn’t exist because the government tax can make the market more efficient. A classic example is one in which there are significant externalities in a trade.
What it really means, though, is that all things being equal, government action funded through taxation is not desirable. If the government was exactly as efficient at allocating resources as is the market, but did so through taxation, the result would be a loss of efficiency due to deadweight losses from taxation. Therefore, the government has to be better, more efficient than the market in order to make up the loss.
I directly refuted your statement. You have now shifted the goal posts, and moved them in front of a straw man. At no point did I say that government action has no value. That’s not even the question. The question is whether the government provides MORE value with the resources it extracted from the economy than the economy would have provided were the government not in the picture.
No one doubts that the government can arbitrarily fund a factory and create a bunch of jobs. Of course it can. However, before you can decide whether or not this was a good thing to do you have to look at the opportunity cost imposed by the government’s taxation or borrowing that it used to provide those funds. The money didn’t grow on trees. It was taken from people who had other plans with it.
That’s why statistics about government job creation are meaningless. And misleading. The government taxes the people, which constrains private sector growth. But it’s a diffuse suppression - jobs are lost one or two at a time in companies all over the country, or are never created because the money taxed away is no longer available for expansion or entrepreneurial activity. There’s no way to really see it. Then the government pools all that money into a big ‘stimulus’, and tracks how many jobs were created, and touts this as if it’s the savior of the economy. But in reality, it may turn out that two jobs were destroyed by the additional taxation or borrowing for every job the government created. So the government crows about all the jobs it created - while the unemployment rate continues to increase.
Well, there you go. Exactly right. Funny that I never said otherwise. So now read what I posted, and the evidence that in fact government IS less efficient once it gets above a certain size. And let’s avoid one more straw man - I’m not saying that there should be no government at all, or that all government spending is bad.
What the evidence shows is that government becomes counter-productive to growth once it grows above a certain size. That size appears to me to be somewhere around 20-25% of GDP. Below that, and you start getting serious social strife, corruption, and other problems. But once you get above that size, you get a government that starts encroaching on legitimate market activity, controlling things it shouldn’t be controlling, imposing changes by fiat that spook investment, and consuming capital that would rather be doing something else.
Other countries are realizing this. There has been a worldwide trend towards lower taxes and lower government spending. Marginal tax rates in all the developed countries have dropped. Corporate taxes have been lowered in most countries.
My country is a perfect example of the result. Twenty years ago, Canada was exactly where the U.S. is today - We were spending over 50% of GDP in the public sector, our debt load was around 70% of GDP, we were running large deficits. Our provincial governments were in debt up to their eyeballs because they were all attempting Keynesian pump priming to keep the economy going.
In the early 1990’s, we changed gears. We started cutting government spending, along with minor tax increases ($7 in spending cuts for each $1 in tax increases). We lowered the government’s share of the economy from 53% to 33%, and changed our deficits to surpluses. The Keynesian economists predicted disaster - there was no way, they claimed, that the government could remove 20% of GDP in spending without pushing us into a deep recession, and full employment required some deficit spending. That didn’t happen. Instead, our economy boomed. Our dollar went from a low of less than .70US to parity with the U.S. dollar. Our unemployement rate dropped from 2% higher than the U.S.'s to 2% lower. We reduced our debt down to somewhere around 30% of GDP.
The end result is that we wound up with the strongest economy in the G8, and are weathering the recession better than just about anyone else.
The current tax proposals would push tax rates significantly higher than those under Clinton. When the Obama administration says they only want to return to Clinton-era tax rates, they’re only talking about the top marginal rate. They also want to remove the cap on FICA taxes, which pushes the overall marginal rate significantly higher. The health care bill also raises the medicare tax in 2013 from 2.9% to 3.8% for high income earners. In addition, changes in what can be deducted will raise effective tax rates higher. The Unearned Income Medicare Tax in 2013 will also increase capital gains taxes by about 4% over what they were in the Clinton era.
And of course, there’s the implicit tax of deficit spending. Clinton was running surpluses. The U.S. is now running huge deficits.
The net result is that the tax structure that Obama wants will be significantly higher than what existed under Clinton.
Do I think that’s too high? Yes. Certainly it’s too high if the money is used to pay for more ‘stimulus’ or to pay entitlement benefits or high public sector wages. I might accept those taxes as necessary if they came with a credible plan to reduce government spending - but they’re not.
One other reason it’s too high - it’s a global economy, and capital is fluid. And the U.S.'s major competitors are all moving to lower tax regimes. If the U.S. wants to remain competitive, it cannot afford a big government with high tax rates. It would be better to actually flatten the income tax structure and replace the revenue with a VAT. Canada has a 5% VAT, and a top marginal rate of 29%. We have no inheritance tax, and our corporate taxes are lower. Guess which direction investment capital is going to move in the next decade?
That chart shows that government spending as a percentage of GDP declined all through the Clinton years. In fact, it dropped from 37% of GDP to 32% - a significant cut in the size of government. The surpluses of the 1990’s were the result of government spending reductions, coupled with revenue increased due to a red-hot economy.
That chart also shows that government spending now is higher than it has ever been other than the short spike of WWII. It also shows that the the government grew significantly in size under Bush’s watch - contrary to the claim that Bush presided over a return to laissez-faire.
Here’s the same chart with the scale changed to start at 1990. I think the picture will be clearer: U.S. Federal spending - 1990-2010. Clinton presided over a steady decline in the size of government. George W. Bush started growing government immediately after being elected. With the election of Obama, government spending went through the roof.
The point to that chart is that despite MANY changes to the tax code, including dramatic changes like the drop of marginal rates from 91% to 28%, the actual amount of tax collected has remained at about 20% of GDP, is normally distributed, and has rarely moved outside the variance level of the measurement.
The point I was making was that raising taxes to say, 25% of GDP does not seem likely no matter how you jigger the tax code. All you’ll do is increase tax avoidance activity, cause offshoring of capital, or suppress the economy.
The one exception may be a VAT. All the countries that have managed to raise more than 20% of GDP in taxes have done so with a VAT and excise taxes.
Does it? You’re drawing on a very small sample size, since the change in tax rates in the last 20 years has been very small and infrequent. The evidence I see is that that rise in revenue under Clinton had more to do with a sustained period of high economic growth, and not the change in tax rates.
It wasn’t a ‘major change’. A major change would be a drop from 91% to 70%, then to 28%. The change in the 1990’s was from 28% to 31%, then eventually to 35%. A 7% change in the marginal rate, offset by a rapid decline in deficit spending.
Then explain why tax revenues have remained so remarkably stable over the past 60 years, despite major changes in tax rates.
Hayek was writing about the UK, which took a sharp turn towards socialism after WWII, and he was writing about Europe in general, and the emerging western Communist sympathy.
But yes, there was a lot of government interference in the economy in that era. Just not as much as there is now. Actually, the reach of government shrunk dramatically under Carter, then Reagan, with the deregulation of trucking and airlines, the deregulation of parcel service, and other pro-market reforms.
And that all ended in Stagflation, which put Keynes’ theories back in a box for 25 years and which resulted in some of the regulatory reforms I just mentioned.
But the absolute level of interference was lower. This was before Johnson’s ‘Great Society’ reforms, the vast expansion of the FDA, the creation of the Dept. of Education, yada yada. The data clearly shows that government size and reach has vastly expanded since then.
Deadweight loss has to do with inefficiencies in the laws of supply and demand. How exactly do you feel it’s a function of government? Again, you’re using your premise to prove your assertion.
If the government collects the taxes and then provides a benefit to the taxpayers that was greater than the money they paid for the taxes, then the taxpayars benefitted from paying the tax. They have more because they paid the tax then they would have had if they hadn’t paid it.
I’m not sure you understand what deadweight losses are. It has nothing to do with government efficiency.
Deadweight losses due to taxation occur because they prevent marginal trades from happening. Wealth is created when people trade and move goods and capital from lower value uses to higher value uses. Taxation (and other potential issues) raise the bar for profitability, causing some trade to be abandoned. That hurts wealth creation. It doesn’t matter if the government has a really good idea for what to do with the money. The deadweight loss still occurred. Perhaps if the government does something really valuable it can return enough wealth to the economy to overcome the deadweight losses, but they still exist.
The “is it too high” question was in reference to the counterproductive nature of confiscatory tax rates like we had int he 1950’s it seems like you are upset about income tax rates that we had under Clinton. Sure Obama wants to lift the cap on payroll taxes.
After several threads in the past where conservatives TOTALLY discount the burden of payroll taxes like social security when analyzing who carried the tax burden in this country because it buttressed their argument that the poor and lower middle class hardly paid any income taxes at all, NOW payroll taxes count?!?!?!
Are you under the impression that we are going to have 800 Billion dollar bailouts every year from now on?
Race to the bottom is no answer. When the economy collapsed, where did money go? Did it go to low tax jurisdictions like Ireland and Latvia? Nope, it came here to the USA. BTW I am pretty sure there is some sort of taxation at death in Canada. I think death is a realization event in Canada.
It sounds like you are agreeing with me. Clinton’s raised taxes and the world did not come to an end.
It sounds like you are familiar with Hauser’s Law but not familiar with its criticisms.
I would like to add my criticism, much like the second commentary in the link, the effective tax rate of the country is engineered in the senate finance committee. There is a stack of legislative proposals that tap into when they want to cut taxes without getting scored as a huge deficit driver. So every time they cut the top marginal tax rate, they raise some money somewhere else. Reagan eliminated a lot of tax shelters with the passive activity loss rules and that paid for most of his tax cuts.
In the last 60 years, top marginal tax rates have almost always gone down, they went up rarely and modestly when they did go up.
In addition, payroll tax collections have gone up to make up for much of the shortfall caused by all the tax cuts.
You would have to take a really really quick glimpse of tax collection in the USA to believe that Hauser’s law means much of anything.
China’s **growth **is doing well. I think pretty much everyone agrees that this economic growth is due to the market liberalization. It was once a centrally-planned economy and thanks to the market-oriented reforms it started to grow quickly, even though it is still a pretty poor country overall: http://upload.wikimedia.org/wikipedia/commons/b/b3/Prc1952-2005gdp.gif .
The opposite is happening in Venezuela and the results have not been good. It is the only South American economy expected to experience negative growth this year.
Because changes in tax rates mean very little if you tax base is very small. Reductions of the top tax rate from 90 to 50 may seem very dramatic but if very few people are paying the 90 because of tax shelters and exemptions built into the tax code it’s not going to make much of a difference in revenues. It was only after the 1986 tax reform that the tax base was significantly broadened and after that income tax revenues show what you would expect; after adjusting for the business cycle moderate increases in tax rates lead to moderate increases in tax revenues and vice versa. If you look at the top of the business cycle in the late 80’s and the 2005-2007 period you had income tax/gdp of around 8%. At the top of the business cycle in the late 90’s it was close to 10% of GDP.
You may be right that the most effective way of raising much larger tax revenue is through VAT but that probably has more to do with politics than economics. If you have a broad income tax base there is no particular reason why you couldn’t ,say, double the income tax/GDP ratio thought that would involve major tax increases on the middle classes as well as the wealthy. Since the middle class have fewer means of evading income taxes than the rich it would be administratively quite feasible though politically very difficult. However the main point remains, the history of 1960-1985 tells us very little about the relationship between income tax rates and revenues today. It’s not too much of an exaggeration to say the 1986 tax reform virtually created a new income tax system in the US.
There seems to be a contradiction here; is there more government now compared to the 50’s or did government shrink dramatically in the middle of this period? And actually that reflects the era because it’s hard to make categorical statements; there have been big increases in government in some areas and big decreases in other areas.
You had a major increase in the welfare state through Medicare and Medicaid and a major increase in environmental, health and safety regulation. On the other hand you have also had a lot of financial and transportation deregulation. Antitrust policy has on the whole probably become more permissive. The top marginal rate has come down though as mentioned the tax base was broadened. Trade barriers have fallen steadily.
In the 50-70 era you had unambiguously bigger government than before the Depression and also a period of excellent economic performance and broad-based prosperity. As such this is a strong challenge to free-market orthodoxy which I think is the main point of the OP.
In the 1970-2010 era things are much muddier. The overall perfomance of the economy has been OK though worse than 50-70. It’s hard to draw a clear ideological lesson. I think the transportation deregulation started by Carter has been broadly successful and has stood the test of time. Declining trade barriers have also helped the US and world economy. However financial deregulation has on the whole been a failure and is now being slowly reversed. Medicare has improved the lives of the eldery but at a very high fiscal cost. Environmental regulation has been broadly successful and Americans enjoy much cleaner air and water than before. And so on.
