are Hegelians by fifth grade.
It was a simple scatter graph between tax rate as a percent of GDP and total revenue from:
I just highlighted the relatively few times on the same chart where taxes decreased and revenue increased over the same time period. I didn’t research the whys, but I can pretend I have knowledge:
You can increase revenue with lowered tax rates in economically good times But it’s not BECAUSE you decreased the tax rate. The revenue is based on the economy. If you have 1 million people working for $50k/year, you pull in more money at 9% ($4.5B revenue) than if you have 100,000 people working for $50k/year at 20% ($1B revenue).
The Bush tax cuts didn’t increase revenue, the economic bubble that was swelling increased revenue, in spite the tax cut, not because of it.
He said leading to, not associated with, so I suspect the two of you agree. I agree also.
Personal insults are not permitted outside The BBQ Pit.
This is a Warning that you need to refrain from such behavior.
[ /Moderating ]
Boy it sure is hard to make out in that figure. What years are you using for tax cuts? It sure doesn’t look like there are notable points where the slope of the line for revenue meaningfully increases subsequent to any of your little red lines (relative to the trend that existed prior to it) so it would be helpful to figure that out numerically.
So, which years do you consider reflective of significant tax cuts?
That is each year’s tax % of GDP. The years that it fell that happened to coincide with increasing revenue got marked.
And I agree. I was illustrating that it CAN happen, but it’s not necessarily because of the tax rate itself and is more based on what the economy as a whole is doing.
So those aren’t instances of policy-mandated reductions in tax rates?
I’m not sure how that helps to address the question then.
They are the policy mandated tax rates as a percentage of GDP to normalize the rate into a single figure. So if the Total %GDP rate falls from 20% to 15% it’s because we gave 5% of the rate back in terms of tax breaks. This could have been via a single tier of the individual progressive rate, or it could have been a slash to every tax our government holds near and dear to it’s heart.
I consider it easier to follow than separating each different tax into it’s own rate, revenue base, and collection amount.
But won’t that figure change with changes in GDP, even when there are no actual changes in tax policy?
Not really, no. There is some slight variation in terms of getting non-tax revenues (administrative fines, court judgements, etc) but these are fairly miniscule to the overall tax intake. Tthe rate doesn’t change in regards to the GDP because if the GDP drops the government’s intake drops also.
If the GDP drops, individually paid positions go away, netting you less from the individual income taxes. The business income tax intakes also decrease because the businesses are making less money. And so forth. If you don’t change tax policy, that ratio stays the same. You take in less in real dollars, but the percentage is the same.
You mean, aside from the one you already found yourself, and which prompted the start of this thread? If you’re going to argue with us, well, we can play along, but if you’re going to argue with yourself, what are we supposed to do?
Well, there’s this guy:
You may find him familiar.
Sure, but you’re just talking about what the relationship between the overall tax revenues and GDP has been over time. The question is what the effect of instituting changes in tax policy (e.g. increasing or decreasing the marginal rate is).
You’re pointing to times were the relative proportion of tax revenue to GDP went down, not to times where a change in tax policy led to increasing tax revenue, which is the assertion in question.
This is the internet. Most debates are indistinguishable from, if not actually with, a fourth grader.
That chart expresses what the tax revenue as a % of GDP has been over time in relation to 2005 Millions of Dollars of Revenue. The taxes that make up that rate will always yield 20% of GDP and will not change without changing the underlying tax policies. Just because GDP drops to $8 doesn’t mean you still won’t get 20% of that as total revenue. So, if that effective rate increases, taxes were increased overall. If it decreases, taxes were lowered overall.
And note that this isn’t a single tax, it’s ALL effective taxes (individual, business, Social Security, Medicare, etc). So if you drop the individual to 0% and raise the business to 89%, that might increase the tax percentage versus lowering it.
Can you start at the beginning? ISTM that even relative revenues will differ as GDP rises and falls because not all tax bases are eroded by losses in GDP or bolstered by gains.
Okay.
Let’s say that you are taxing ten people at 10% of their income. You are taxing 25 businesses at 20% of their income. You also have a few misc taxes that are basic fees (for this terrible example, say $1 per person and $2 per business.) If that all adds up to $1,000 and that $1,000 is 10% of GDP, ($10,000) you have an effective tax rate of 10% GDP.
If your GDP drops, you don’t employ ten people anymore. If it goes up, you employ more than ten people. It’s similar with the number of businesses. More in good times, less in bad times. (This obviously works way better when there are many millions working than in my terrible example.)
So as the GDP rises, you stay at roughly 10%. You obviously get a some revenue from non percentage rates which creates an effective floor of what the GDP can be and still have this work, but it’s not enough to significantly skew the rate. It’s not perfect, but it’s a good proxy for tax rates that can be highly complex. E.g. If you lower the individual tax rate of earners from $25k to 45k only, how does that factor in to what revenue becomes? What happens if you ALSO drop the business income tax rate? And also eliminate taxes completely for anyone making over $250,000? Etc
Thus, to change your effective rate, you have to change your policy. Any change that changes the overall revenue intake will be reflected by this.
So if you look at ten years and see 20% and revenues are rising, that shows that the economy is good. If you see it going from 21% to 22%, that means that policy (the underlying rates) increased in some way. If it goes from 22% to 21%, then policy decreased rates in some way.
This DOES cloud the individual policies that might have made the changes (a new 0% individual rate and 100% business rate, for instance), but when arguing about decreasing taxes and saying it increases revenue, it’s a useful short hand to look at and see the overall tax picture in relation to revenue incoming.
Okay, I’m going to link to the Romer and Romer paper one more time. First, I’m going to explain what this paper is doing because it seems to be misinterpreted so much.
By the way, one of the Romers is Christina Romer, former chair of Obama’s council of economic advisors, and one of the of the architects of the stimulus. No right-wing firebrand here.
What she was trying to do here was figure out if tax increases increase or decrease GDP growth. The problem with doing this is that tax changes are often made in response to upturns and downturns in the economy, and their effects become hopelessly entangled in other macroeconomic changes. So the Romers selected out the subset of tax changes that are ‘exogenous’ - those made for ideological reasons or for reasons that don’t have anything to do with current changes in the macroeconomic picture. This would then give them a better measure of just what effect those taxes have.
This is a very influential paper, by the way, and as far as I know it has not been refuted.
This is what the abstract says:
And from their conclusion:
So… tax increases hurt economic growth, and they do so primarily by acting as a disincentive to investment in the productive economy. This makes total sense when you consider that calculating the return on an investment has to be done by including the taxes paid on the return from your investment. The higher the tax, the more return you need to break even. And therefore, projects languish that have returns that are positive but not worthwhile once taxes are factored in.
The way investment is hurt with higher taxes is that people just don’t have as much money to invest. Tax money pulled out of the private economy is money that can’t be reinvested in the private economy.
Now, this doesn’t say anything about government revenue. It’s purely about economic growth. But government revenue in absolute dollars tracks economic growth if the percentage of taxes as a percentage of GDP remains the same. Now, when you cut taxes you will clearly get an initial decline in revenue as a percentage of GDP. But if the Romer paper is correct, what then happens is that growth speeds up, and eventually you get more back in revenue than what the tax cuts cost.
This may or may not be true in some economies, or with some tax rates, or with some types of tax reductions. But it’s most definitely true in some cases, and that includes the cases the Romers looked at.
The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks
Now, the other thing it’s important to note is that an increase in GDP doesn’t just increase government revenue - it increases everyone’s standard of living. It’s a major win for the entire economy.
So even if it didn’t increase government revenue a tax cut might be a good thing because it would improve everyone’s lives. And of course, the tax cut immediately improves the income of the citizens, which I happen to think is rather important. It is, after all, their money.
Perhaps a better question to ask is, “Is an increase in taxes worth causing GDP to fall by three times the amount of the tax?”
Do you really want to shrink your economy by 3% so you can give 1% more of it to the government?
n/m (simulpost)
so Sam Stone, you endorse Christine Romer’s stance on taxes?