Read my posts and Sam Stone’s posts on page 1. You are talking about demand side economics, not supply side. Spending on consumer goods is demand side economics. Supply side focuses on investing.
I corrected the typo (or poor word choice) to invest.
Specifically talking about tax cuts to drive investment. That’s supply side economics. Or do you disagree that tax cuts to drive investment is a significant of the supply side economics?
Cutting taxes across the board affects both supply and demand because people in different economic groups spend the money differently.
well, yes. And if you want to be pendantic, cutting taxes should increase demand among *all *economic groups. The marginal effect is much greater the lower the income.
No, I don’t disagree with that.
Is that what you want to debate?
Debate is same as the OP - whether the Bush tax cuts of 2001 and 2003, which did not result in increased investment by the rich, would be seen by supply side economists as a degree of invalidation of supply side economics.
I’d concede that 2001 had far too many other ontributing economic levers going on to make any kind of conclusion.
Sorry if I missed it but I haven’t seen anyone covering 2003 and whether that could plausibly be attributed to other factors.
And I’d be really interested in seeing the Moody’s analysis of the Reagan/Bush Sr years. Casual internet searches turn up too many suspect hits without the underlying data. Gah, I miss having my Bloomberg terminal. I could get the source data laid out in about 15 minutes if I did.
Actually, that’s not what the article says. I just re-read it. The article is approaching the tax cuts from a Keynesian point of view, saying that the Bush tax cuts on personal marginal income did not result in the rich spending their money. They saved more of it instead.
First, ‘saving’ their money could very well mean they are increasing their investments in business. The article doesn’t say. Second, marginal rate cuts for wealthy individuals are not really supply-side tax cuts. Supply-side tax cuts are aimed at reducing barriers to business growth and investment, and are usually things like capital gains and dividend tax cuts.
Here’s a long report by the National Center for Policy Analysis on the effect of the 2003 capital gains tax cut.
According to the article, here’s the measured effect of that cut after four years:
Table III in that same report has data for the effect of capital gains cuts since 1996. In 1997 the capital gains rate was lowered to 20% from 28%. In that year, capital gains taxes actually increased from $85 billion to $100 billion. It then increased rapidly over the next four years to 149 billion (almost certainly due to the tech bubble, in my opinion), then collapsed to a low of $56 billion. That year, the capital gains rate was lowered from 20% to 15%, and again capital gains taxes increased immediately to $79 billion in the next year.
It’s hard to disassociate the revenue numbers from the fluctuations in the economy, but it looks to me like capital gains tax cuts have, if anything, a positive effect on tax revenue.
Here’s a CBO Report estimating the impact of raising the capital gains taxes next year (part of the ‘taxes for the rich’ the Democrats want to let expire).
The change will result in an increase in the capital gains rate from 15% to 18% for short-term gains, and to 20% for longer-term gains. According to the CBO:
So, raising the capital gains tax will reduce revenues in 2010 and 2011, and in later years revenue may increase, but the increase won’t be commensurate with the increase in the rate.
It seems like at least in the case of the capital gains tax, the CBO accepts supply-side theories - at least in terms of revenue collected. They don’t really speculate on the effect of capital gains taxes on economic growth. In addition, an immediate rise in capital gains revenue is not surprising, given that this is one area that affects behavior dramatically because it’s easy for wealthy people to defer paying capital gains tax by not selling assets.
For example, it seems likely to me that part of the stock market doldrums occurring right now could be explained by people unloading capital to make sure they pay the tax at the current rate instead of next year’s higher rate.
Here’s another CBO report from way back in 1986, which looks at historical capital gains tax rates and their relationship to revenue. In general, it found that the ‘revenue maximizing’ capital gains rate is somewhere between 17% and 33%. But basically, they say that based on economic conditions, increases in capital gains taxes could reduce overall tax revenue, and at best the increase in revenue that comes from capital gains increases is nowhere near as much as a straight static analysis would indicate, because people’s behavior changes.
This paper by the ‘Adam Smith Institute’ is clearly from an organization biased against taxes, but it does contain a useful table showing capital gains tax rates and revenue for every year since 1955, sourced to the U.S. Treasury department. There’s a fairly clear inverse correlation between capital gains tax rates and revenue. However, there’s a lot of noise in the data, and since the economy was growing rapidly in those years, it’s hard to determine causality.
What we can say, however, is that there’s no evidence that raising capital gains taxes increases government revenue by anywhere near the percentage of the capital gains tax. To me, that alone is an argument for maintaining or even lowering the current capital gains tax rate.
One thing the CBO does not talk about is the disparity between countries in terms of capital gains taxes. One effect of high capital gains taxes is that it can push investment out of the country into countries that have lower capital gains tax rates. At the time the U.S. had higher capital gains rates, so did most of the world. But the trend around the world has been for capital gains taxes to be lowered, because countries are realizing that high capital gains taxes don’t really provide more revenue, but they do have a chilling effect on capital investment.
If you want, we can go through similar discussions about other supply-side tax changes. Those would include dividend taxes, corporate taxes, and tax simplification for business. Personal tax rates aren’t really part of the supply-side equation. At least, not at the relatively low levels they are at today.
My ‘analysis’ of his data consists solely of READING HIS OWN FREAKING TABLE. That’s it. And the quote of his you keep trotting out is exactly as misleading as your own - he makes a claim about wealth increasing - starting from exactly the same crazy outlier you do. He’s obviously spinning for political effect.
Except that you haven’t even remotely made the case for this theory of yours.
Of course I wouldn’t. Redistributing wealth has never caused a long-term improvement in the health of any economy. Raising taxes on businesses and capital in a recession is idiotic.
Again, you’re stuck in a very simplistic view of Keynesianism. To you, anything that gets people to spend money is good for the economy. But even a proper Keynesian would tell you that taxing half the country and giving the money to the other half will not stimulate anything. Keynesian stimulus requires that you borrow money and actually increase the money supply. The problem for Keynesians is what happens when your borrowing is at the point where additional debt becomes a drag on the economy. That’s the Keynesian version of a liquidity trap. It’s a spending trap. And in my opinion, that’s where the U.S. is now. There’s all kinds of data showing that the fiscal stimulus didn’t work. There is new research showing that new taxes or new debt will have a contractionary effect on the economy.
Like the Monetarists, the Keynesians have run out of bullets. How about we stop dicking around with the economy and engaging in social engineering in the name of stimulus, and start letting people run their own lives and their own businesses?
You almost answered your own assertion. Of course when capital gains taxes are lower than dividend taxes, there will be a push to recharacterize dividends as capital gains in order to take advantage of the better taxes. This does not mean that more revenues are generated, period, merely that they shifted around a bit and are perhaps even lower.
It distorts the economy in this situation to preferentially treat capital gains, because it increases the incentive for a company to hold on to its money rather than return it to the shareholder if the managers think that that is the right thing to do.
Your starting point is the 2001 recession and your end point after the Dow was surging. Nice cherry picking. How about we look at capital gains tax revenue over an entire business cycle? :
A better test is whether receipts are higher over the course of an entire business cycle. Last week, as part of its latest 10-year budget projections (pdf!), the Congressional Budget Office published its estimate of capital gains receipts in fiscal 2007. I’m willing to bet that, recession or no, FY 2007 will prove to be a peak in capital gains receipts that won’t be matched for several years. Which means we can compare it with the peak of the last cycle, in 2000. Here’s the chart, with the numbers adjusted for inflation:
http://timecuriouscapitalist.files.wordpress.com/2008/10/capitalgainstaxreceipts.jpg?w=590&h=320
So no, the reduction in the capital gains tax rate from 20% to 15% in 2003 did not result in an increase in revenue over the course of the business cycle. In 2000 receipts totaled $119 billion, which equals $143 million in 2007 dollars. In 2007, they totaled $122 billion. That’s a 15% decline.
And how about some more studies?
Cutting capital gains rates reduces revenues over the long run. That’s the conclusion of the federal government’s official revenue-estimating agencies, as well as outside experts and the Bush Administration’s own Treasury Department.
[ul]
[li]The non-partisan Congressional Budget Office (CBO) and the Joint Committee on Taxation have estimated that extending the capital gains tax cut enacted in 2003 would cost $100 billion over the next decade. The Administration’s Office of Management and Budget included a similar estimate in the President’s budget.[/li][li]After reviewing numerous studies of how investors respond to capital gains tax cuts, CBO commented that “the best estimates of taxpayers’ response to changes in the capital gains rate do not suggest a large revenue increase from additional realizations of capital gains — and certainly not an increase large enough to offset the losses from a lower rate.”[/li][li]The Bush Administration Treasury Department examined the economic effects of extending the capital gains and dividend tax cuts. Even under the Treasury’s most optimistic scenario about the economic effects of these tax cuts, the tax cuts would not generate anywhere close to enough added economic growth to pay for themselves — and would thus lose money.[/li][/ul]
While a capital gains tax cut can lead investors to rush to “cash in” their capital gains when the lower rate first takes effect, it does not raise revenue over the long run.
[ul]
[li]Especially when a capital gains cut is temporary, like the 2003 tax cut that Gibson cited, investors have a strong incentive to sell stocks and other assets in order to realize their capital gains before the capital gains tax rate increases. This can cause a short-term increase in capital gains tax revenues, as happened after the 2003 tax cut.[/li][li]Capital gains revenues also increased after 2003 because the stock market went up. But the stock market increase was not a result of the 2003 tax cut, as a study by Federal Reserve economists found. European stocks, which did *not *benefit from the U.S. capital gains tax cut, performed as well as stocks in the U.S. market in the period following the tax cut.[/li][li]To raise revenue over the long run, capital gains tax cuts would need to have extraordinary huge, positive effects on saving, investment, and economic growth that virtually no respected expert or institution believes they have. In fact, experts are not even sure that the long-term economic effects of these capital gains tax cuts are positive rather then negative.[/li]
One reason is that preferential tax rates for capital gains encourage tax sheltering, by creating incentives for taxpayers to take often-convoluted steps to reclassify ordinary income as capital gains. This is economically unproductive and wastes resources. The Urban-Brookings Tax Policy Center’s director Leonard Burman, one of the nation’s leading tax experts, has explained, “shelter investments are invariably lousy, unproductive ventures that would never exist but for tax benefits.” Burman has concluded that, “capital gains tax cuts are as likely to depress the economy as to stimulate it.”
[/ul]
Middle-income families derive only a miniscule benefit from the 2003 cuts in capital gains and dividends.
Charles Gibson’s second statement — that 100 million Americans own stock and would be affected by a change in the capital gains tax rate — also is mistaken.
[ul]
[li]Most middle-income Americans own much or all of their stock through 401(k)s, IRAs, or other tax-preferred saving accounts. They do not pay taxes when their stocks within those accounts go up, so a change in the tax rate doesn’t affect them.[/li][li]Even among the minority of middle-class Americans who do benefit from the capital gains and dividend tax cuts, the benefits are very small. This is because capital gains and dividend income is highly concentrated at the very top of the income scale. The Tax Policy Center estimates that the highest-income 5 percent of U.S. households receive 83 percent of total capital gains income.[/li][li] According to the Tax Policy Center, the average household in the middle of the income spectrum received $20 from the 2003 capital gains and dividend tax cuts. The average household earning over $1 million received $32,000, or 1,600 times as much.[/li][/ul]
http://www.cbpp.org/cms/index.cfm?fa=view&id=1286
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I’m happy to let our fellow forumers decide whether the economics professor we’re discussing, the most-referenced expert on wealth in America, understands his own numbers better than you do.
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Redistributing wealth after 1929 caused the best period of growth in any economy in economic history. In 1929 wealth was as concentrated as it is now and the economy went into meltdown. In the decades afterwards, with a more equitable distribution of wealth, the US economy made history.
There’s endless evidence to show the stimulus was as successful as we could have hoped it to be, given its limited size. The CBO, which you’re happy to (selectively) quote elsewhere, says it was a success. And other fiscal stimulus programmes around the world were absolutely fantastic successes, there’s no debate in Asian countries whether their fiscal stimulus programmes were successful. America just needs a much bigger stimulus because it’s stuck in a liquidity trap, there’s no drag on the economy because interest rates haven’t gone up with exiting spending and won’t with a great deal more.
The sine qua non of any economic recovery is an increase in consumer demand. Without that we’re not going to see any improvement for US business. So how, absent a redistribution of wealth or massive government spending, are we going to see an increase in demand?
There isn’t a liquidity trap. That’s just a fancy term mis-applied to investors not seeing any true profitable opportunities after being burned by the mortgage meltdown. We heated up an economy based on our misunderstanding of rising house values. That was an illusion. Ok, now that businessmen and investors have learned that it was false wealth, what do they put money into now? They don’t know yet. Printing more money isn’t going to magically make them know either. Also, because of everybody in the financial chain didn’t understand the economics (bankers, rating agencies, etc), they’ve lost trust and enthusiasm for anything others say about this X or this Y is a “good” investment. They need to rebuild that trust. Printing more money doesn’t magically make this trust reappear.
I get calls from my Wells Fargo banker every other month asking me to open a line of credit for $1 million. I always say no. There’s no opportunity I’m aware of where I can put that $1 million to use that profits me more than the interest rate the bank would charge me. What would I do with it? Buy real estate? Nope, we’ve already scene that movie and it didn’t end well. Hire more people? Nope. I haven’t created enough of a compelling product to bring in the revenue that pays their salaries. There is no liquidity trap. There are just a million people like me making similar decisions. Adding more “liquidity” isn’t going to change my mind.
If consumer “demand” was truly what makes the world go 'round, the countries of sub Saharan Africa should be among the richest nations. Surely, the poor population there demands a zillion things: clean running water, air conditioning, shoes, new iPhones, etc. What’s their issue then? Oh, that’s right… they don’t make/sell anything the rest of the world wants.
What’s with the bizarre focus on “demand”? Every country that wants boost economic development always tries to lure “suppliers”, technology, factories, etc. Demand is the easy part – supplying stuff people actually want is the hard part. If demand was the magic formula, the we could just encourage everyone to have more sex and birth a million more baby citizens “demanding” things.
It’s better to focus on “supply” , specifically innovation. What can we make to sell to ourselves and others? Demand follows from that. Who “demanded” electricity, phones, or black oil liquid when they were first discovered? If a bio lab invented a pill that cured cancer tomorrow, all sorts of new “demand” would suddenly appear. Liquidity would suddenly stop being “trapped.” Investors would trip over themselves trying to get a piece of such a company. If the investors couldn’t get into the ground floor of that company, they’d fund other companies in the hopes of cloning their research. Even if standard monetary capital was somehow “trapped”, it wouldn’t matter because consumers would sell one of their kidneys on the black market to get a hold of those pills.
We will see an increase in demand when the economy adjusts to make more things people will want.
Sam, I disagree that the Moody’s article is a Keynesian point of view. Maybe in some purely theoretical world one can split hairs that fine but we’re talking about a theory and some reasonable approximation of real world application. I took an upper division economics class in 1983 from Dr. Schell, who was a supply sider, a stereotypically eccentric professor type with a very strong German accent, a President Reagan economic advisor and a contributing architect of Reaganomics. Even he was focused on matching the theory with the practice.
We may have to agree to disagree on this, but it’s pretty hard to have a debate if we can’t even get ballpark close on common understanding. Calling marginal tax cuts (or expiry of tax cuts) for the top 1% income bracket sure appears a lot more supply sided than Keynesian. I’m more than willing to disregard 1991 as being too difficult to ascribe. Cherry picking beginning and end dates, as pointed out above, to invalidate 1993 isn’t something I would agree with.
You are correct that the article does not say what “saving” the money means and that’s a real weakness. Ditto that they didn’t run the numbers back to Reagan. And of course we don’t have the source data to see if they are cherry picking.
I’ll keep looking for better invalidation of supply side economics in the real world. It’s pretty slim pickings if that’s limited to Reagan’s two terms as the only real supply side economic experience in a major economy since it seems Bush I & II both were simply economically irresponsible rather than supply siders.
For those of you postulating the liquidity trap, just look at the experience in Japan from oh 1990 to present. They are still dealing with anemic growth and writing off hidden radioactive financial waste buried in the books all over the place following their great bubble. Alas, it’s looking like the US and probably Europe as well are facing at least a decade hangover in the aftermath of the greatest ponzi scheme in human history.
Hold on a second. I didn’t cherry-pick a damned thing. I presented, in totality, a paper that looked back four years to the time the capital gains cut was made. I recognized that it wasn’t a complete picture, so I went out and looked for more data, including a table that shows every freaking year of revenue and rates since 1954. For you to characterize this as dishonest cherry picking is simply insulting.
Furthermore, I was careful to note the limitations of the data, the possible confounding effects, and I even said that it was hard to determine causality. I was a hell of a lot more careful in my presentation than you’re being.
Furthermore, the conclusions I drew were the same as two different CBO studies that I linked to. There is evidence that capital gains tax cuts can return more revenue in the short term, and this is probably entirely due to short-term behavioral changes as investors react to the change itself. In the long term, the evidence is much more sketchy in terms of revenue - so much so that the CBO could do not better than assign an ‘optimum rate’ of being somewhere between 17% and 33%.
Finally, I noted that the effect of a capital gains cut is going to very much depend on other things such as foreign capital gains rates. A Ludovic points out, the relationship between capital gains rates and other tax rates is also going to have an effect.
Cherry picking my ass.
No, it’s really not. What you really want to do is what the CBO did - regression analysis of multiple capital gains changes over multiple business cycles, to try to isolate the changes from other factors that might be going on within each cycle.
Look, this is no surprise. Capital gains revenue varies mostly with changes in the economy, not changes in the tax rate. If you overlay that big chart of capital gains revenues from 1954 over a chart of economic growth, I think you’ll find it lines up very closely.
This is a specious argument. LOTS of things changed between 2000 and 2007. For example, the biggest marginal rates cut in history, an attack which wiped out a trillion dollars in wealth, etc. Furthermore, you cannot take the peak of the last business cycle, which coincided with a huge tech bubble, with the peak of the second. Just look at what happened in the two years before your starting point: Capital gains revenue jumped from 110 billion to 149 billion because of the tech bubble. In other words, if you take ANY slice across the two business cycles other than the one you used, you get a wildly different result.
As for the rest of your studies… They aren’t studies, they’re forecasts. And that’s fine. However, your cite is a left-wing policy think-tank, and they don’t cite the original CBO report. So I don’t know if they are taking things out of context or not.
But in any event, this doesn’t contradict the CBO report I linked to. They said that revenues would increase over the long term by expiring the capital gains tax cut, but that the revenue would not be anywhere near to being in proportion to the rate increase because of the anticipated reduction in capital gains realization.
I also said that the CBO’s range for ‘revenue maximizing’ capital gains was somewhere between 17% and 33%. Since the rate is at 15% now, it stands to reason that there would be some revenue increase by increasing the rate.
The point is that it’s not a very efficient tax from a revenue standpoint, because it changes behavior more than most taxes. And we haven’t even talked about its effect on growth. If a 5% increase in the tax causes a 1% increase in capital gains revenue but a 3% decrease in economic output related to capital gains, that may increase revenue while still hurting the economy.
Sorry. The Moody’s article isn’t Keynesian - your interpretation of it is. All the Moody’s article says is that income tax rates for high income individuals results in them saving more money instead of spending it. You asked if this is a refutation of Supply-Side economics. It is not, because A) a marginal rate cut is not a ‘supply side’ tax cut, and B) supply side economics is not about getting people to spend more money, but about getting them to invest more money. That article seems to suggest that that’s exactly what happens - give a tax cut to the poor, and they spend it buying up current production. Give it to the rich, and they invest it in future productive capability.
Yeah, fine. So let’s talk about what happens to capital investment when capital gains and dividend taxes change. Let’s talk about what happens to employment when taxes and regulations related to hiring are lowered. Let’s talk about what happens to business investment when corporate taxes are lowered. Those are supply-side changes. Changing marginal rates for individuals is at best a secondary supply-side effect, since many of those individuals may not even be involved in productive activities.
Does it have to be either? The only ‘supply side’ argument for that kind of tax cut is precisely that rich people tend to save their money, and business activity is financed through personal savings. But that’s a hard effect to measure, and such a cut isn’t really the focus of ‘supply siders’. So let’s talk about capital gains taxes, dividend taxes, corporate taxes on profit, and regulations.
Again, I didn’t cherry pick anything. I simply presented all the data I found. I didn’t pick out a subset of it. I even made sure to go and find the data for every year from 1954.
So you answered your own OP - the article you linked to really doesn’t speak to ‘supply side’ economics at all. It was a red herring.
Not true. There are lots of ‘supply side’ changes we can look at. If you look at that table I linked to, you can see that capital gains rates were increased in 1970, 1971, and 1972. They were lowered in 1979 and 1984. They were raised again in 1987 and again in 1988. Then they were lowered in 1990, lowered again in 1997 and 2003. That’s just capital gains rates. We could also look at corporate taxation rates, dividend rates, etc.
Japan has also tried to stimulate its way out of its recession, to the point where its debt is 160% of GDP. It didn’t work. Maybe they would have been better to take a short, sharp reduction in GDP and let the economy clear out the dead wood and start rebuilding from a healthier perspective instead of wasting the last decade propping up ‘zombie’ companies and building out expensive infrastructure no one uses.
It certainly looked to me like you were trying to make a claim that capital gains tax cuts were actually a good thing and might raise revenues. I’ll take your word for it that you weren’t. I’m pleased to see we both agree that cutting capital gains doesn’t increase revenues.
Can you answer this post now please?
http://boards.straightdope.com/sdmb/showpost.php?p=12922514&postcount=91
OK then, let’s not call it consumer “demand”. Let’s call it consumer “money.”
And when the Fed can’t cut interest rates anymore than they already have and the economy needs an interest rate cut to get it going, you’ve got what economists call a liquidity trap.