—But history shows that such a guess is likely to be way off.—
When deciding whether to take on a mortgage, you need to think about what you need to continue to pay it in the future. Obviously, things can change: you could get a great higher paying job that you never saw coming, or you could get fired. Interest rates could change, you could get the opportunity to re-finance, etc. But you still need to have targets, based on as many plausible scenarios as you can think of, for what you can plausibly worry about. To be prepared. To have thought about the possibilities. Indeed, that’s half the mission of the OMB: to give the relevant stakeholders the ability to think about those possibilities.
True. But there’s no way to anticipate whether a tax cut will cost money or make money. Both have happened in the past. For that matter, there’s no way to tell whether a tax hike will make money or cost money (as it did after the Bush hike of 1990 stagnated the economy.) It’s unpredictable. It depends on the size of the economy, and not even the most staunch Keynsian will claim that we can manipulate that with any consistency in results.
Yes, the OMB ought to keep an eye towards the future. But they should either face up to a realistic projection and stick to long-term effects (10-30 years ahead, and based more on an educated guess about how the budget will affect the economy), or they need to just admit that they have no idea what the economy (and therefore tax revenues) will be doing 3 years in the future.
Well, maybe they will realize it when good evidence is presented that this is actually the case. In fact, as I have presented before, even “median” boats have risen rather anemically over the past 20 years, whereas “poor” boats essentially haven’t risen, and “rich” boats have risen phenomenally (something like 150+% in real terms). See , for example, point 4. in this link.
I’m waiting breathlessly for the evidence that they don’t cost money.
Around the sametime that Clinton cut the capital gains tax, didn’t he also raise the tax rates on the higher incomes and didn’t the economy grow like crazy anyway?
As for Reagan, we’ve deconstructed the rising revenues myth before. The point is that you have to consider revenues in real terms (because if you don’t consider constant dollars, revenues almost always rise year-over-year) and you have to look at revenues from the income tax (because payroll taxes were hiked big time under Reagan). Then you find there was a dip in income tax revenues so it took until like 1987 for them to recover to 1981 levels…I believe such a dip is unprecedented in modern history.
Well, it’s nice that you got your arguments set so you win either way.
Do you have any evidence that this tax cut had anything to do with the economic stagnation or is this just another article of faith and belief that correlation = causation when it fits your prejudices?
There are actually far worse approaches to economic policymaking than a vote by economists. Such as listening only to the ones who tell you what you want to hear, for instance.
—But there’s no way to anticipate whether a tax cut will cost money or make money.—
Well, tell that to the administration, which is speaking about it making money as a decided fact.
It’s also ambiguous to say that it “makes money.” Does that mean that the growth it spurs doesn’t decrease revenues as much as the simple taxbase x taxrate would suggest? Or is it the old “it pays for itself!” thing, which seems to imply that you get more money overall than you would if you hadn’t cut taxes?
But, utterly aside from those points, is it your position that the OMB is only possible with publishing a prediction under only ONE set of hypothetical conditions? The whole point, which you seem to have missed, is that they are capable of giving wide ranges for all sorts of different scenarios so that lawmakers can think about the fiscal possibilities, about what situations are important. There are a lot of important certainties: like the reality that unless Baby Boomers start a massive die-off right now, they are going to put a heavy burden on government entitlements. These are longer term, but its simply irresponsible not to think about them.
Since there seems to be such demand for hard numbers, I hear present the individual federal income tax revenues in 1996 dollars over the last ~40 years. I got these from the historical tables available in the federal budget.
Basically, you take the first column in Table 2.1 and divide it by the “Composite inflator” in Table 1.3. (I used the FY2001 historical budget tables because that is what I had printed out; then I went and added the last few years using the FY2004 historical tables. For some reason, the “composite inflator” is different in the two sets of tables even though they both use 1996 dollars, but these differences are small at any rate.)
Individual income tax receipts in billions of 1996 dollars:
So, we see a few major exceptions to the general upward trend in revenues: 1969-1976, 1981-1986, 1990-1993, and 2001-?? (If we believe the Bush Administration’s own budget projections, the current dip will last through 2007…i.e., 2008 is the first year when the individual income tax revenues will exceed in real terms what they were in 2000 and then just barely!)
Well, the downturn was abrupt, and timed about as exactly as possible- and has continued. Note that the rapid rise co-incided with Clinton winning, even before he took office (altho, there was some indications of an upturn before that).
However, you are correct- worries of war also send the market down, and this might have been an even stronger cause that concerns about GWB’s economic policies. Still- the downturn was not caused to taxes being to high, thus lowering taxes will not nessesarily help. The downturn was caused by worries & concerns over the upcoming administration. Thus MORE of those policies simply cannot cure this current downturn.
Yes, I agree- tax cuts CAN help the economy. And they SHOULD help the economy. But they do not always do so. Taken in a vacuum- almost always, but they may be futile as part of other polcies which work against them.
—Well, the downturn was abrupt, and timed about as exactly as possible- and has continued.—
What does “continued” have anything to do with anything? Are you saying that Bush can magically control the bussiness cycle fortunes of an entire economy just by mispronouncing a few words and smirking?
—Still- the downturn was not caused to taxes being to high, thus lowering taxes will not nessesarily help.—
This is like saying that high blood pressure was caused by too much fat intake, not too little high blood pressure medication, so the medication can’t possibly help. But, of course it can.
I’ll note, back to the topic of the thread, that many conservative collumnists have come out denouncing the new budget, noting that even under Clinton, discretionary spending fell, while it has risen 18% with Bush. Even Reagan managed to cut more, and with a Democratic Congress! They also note that it becomes a very hard sell anymore to claim that this is all a strategy (a strategy that would amount to deliberately deceiving the American public, anyway) to help lower government spending in the future because of runaway spending. The Republicans control the legislature and the executive (and at least on economic issues, the Supreme Court as well). They have no one to blame anymore.
One quote: “* Restrain federal spending. Excessive federal spending has a dampening effect on the American economy. Although the post-September 11th world may require some new expenditures to combat terrorism, many of the federal spending increases of the past fifteen months have had nothing to do with terrorism. We urge you to reduce spending, end programs that have outlived their usefulness, and roll back government’s share of Gross Domestic Product. This is the right way to stop federal budget deficits and restore budget balance.”
Emphasis added.
That letter also recommends tax cuts, and provides no specifics about what government programs should be cut.
The EPI (mainstream?) letter is here: http://www.epinet.org/stmt/index.html
(I didn’t know that the financial economist William Sharp signed open letters.)
Key quote:
“To be effective, a stimulus plan should rely on immediate but temporary spending and tax measures to expand demand, and it should also rely on immediate but temporary incentives for investment. Such a stimulus plan would spur growth and jobs in the short term without exacerbating the long-term budget outlook.”
Note how this is not a call for new government programs. Such a letter would attract fewer signatures.
Of course, short run stimulus may not be the goal…
Actually the Taxpayer’s Union letter is pretty funny:
So, the financial markets are wobbly because investors are uncertain about what tax rates will be after 2010 (snicker)? Oh, and if Congress passes a law to make the tax cuts permanent that will dispell this uncertainty?
BWAHAHAHAHAAHA.
Um, somehow I think that source of uncertainty is a teeny tiny part of our problems.
—Excessive federal spending has a dampening effect on the American economy.—
This, actually, is not true. Spending now DOES help the economy for the time being (counterintuitively even if it is wasteful spending). It just has a price, in the long term.
—So, the financial markets are wobbly because investors are uncertain about what tax rates will be after 2010 (snicker)? Oh, and if Congress passes a law to make the tax cuts permanent that will dispell this uncertainty?—
Yes. That’s all I have to say (whether the tax cuts are good or bad is another issue, and, as I’ve always said, the spending rate and projected spending rates are way more important than the tax rates)
Well there’s the upcoming war. There’s the fact that the PE ratio, adjusted for accounting nonsense, is about 40. (Equivalently, there’s the rapid expansion of the stock market during the late 1990s, which was subsequently shown to be based on phony numbers, relative to the figures released in, say, 1995).
There’s the perenial uncertainty due to Congress’ annual tinkering with the tax code.
And there’s the fact that deep tax cuts will be unsustainable after 2010 without a fundamental rethink regarding medicare and social security spending, which (roughly speaking) the Bush admin is studiously avoiding, blue ribbon commissions and campaign promises nothwithstanding. (I suspect Apos agrees on this last bit.)
Oh, I do. I’m just trying to agree with what is true. It’s dishonest to pretend that medicare and SS aren’t in serious jeopardy because of these cuts and the oncoming demographic shift (if only more of the Boomers were smokers! then we’d be okay!). If you think those programs are bad, then say so. Don’t lie about it and pretend that the idea of putting the government in dire straits is an honest or useful way to address the issue.
Greetings. Well here is some input from the Fed’s guru himself.
Apos, I had to read this thread at quantum speed and your many posts didn’t get the careful reading I’m sure they deserve. But I am a bit perplexed by this statement:
“Future generations will almost certainly be richer and better off as a whole than present day individuals.”
Is that a statement that you genuinely hold to be absolute; or just some principle of “progressivity” that you were postulating for the purpose of argument?
The tax rate is not just uncertain after 2010. It’s uncertain every year up to 2010, because there will be ongoing efforts to prevent each new step toward lower taxes from taking effect. Democrats have already begun the battle to freeze tax decreases.
OTOH I agree with flowbark and other posters that the current weakness in the stock market has other causes.
If things get slow in your neck of the woods, perhaps you can give us another stanza beginning,