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Originally Posted by Bluesman
For instance, it IS a corrollary that an increase in rates equals an increase in revenue, according to what you're saying. Sure, not 1:1, all other things being equal, but STILL: jack up the rate (but not too high), and see a corresponding increase in revenue. So, why don't we do that when the Federal spending increases? Find that magic number that will equal the deficit, (rate increase times the coefficient of whatever percentage we're likely to lose), and just like that, we're back in the black.
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The problem here is that you are thinking on the average and not on the margin. Would a change from 35% to 36.9% really change behavior all that much? Also, think through some various scenarios.
Did you change your working hours to adjust your income based on the Bush tax cuts (not a trick question, I know the answer is no because you income wasn't tied to hours worked or productivity - there are others like you out there who can't respond to tax incentives in the short-run, and unless the tax bracket rates are the make/break for a job, they may not respond in the long-run, either).
I'd be curious to see what Confed did as another example. I suspect he probably worked 50-60 hours as a master electrician and probably didn't change his # of hours worked (or maybe would have decreased them due solely to being able to keep more income from the hours that he did work). Of course, maybe he increased them because there was finally enough demand to be able to work more due to the housing boom. I'm sure there are some who increased, but if you're already maxing out hours, you're probably more likely going to cut back. For some, it's not a matter of trying to work as much as possible, but simply work just enough to make enough to live the lifestyle they desire.
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Originally Posted by Bluesman
And then we're on a track to stand economic rationality on its head: in those times when economic activity falls and federal spending is going up, we increase taxation to cover our shortfall...and the following year, we have to do it AGAIN, and at a faster rate, because as we go along this road, we're destroying economic activity. And the downward South American death-spiral takes us into an uncontrolled descent into terrain.
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This is a slippery slope fallacy and it also calls for way more government intervention than most economists would call for. Also, South American economies self-destruct not because of high taxes, but because of high spending that is financed through printing more money, creating (hyper) inflation, which is bad for your economy. The underlying cause isn't taxes, but out of control government spending.
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Originally Posted by Bluesman
I dunno, man; I'm a convinced supply-sider, and I think Arthur Laffer had the right idea: people are rational beings that can be expected to behave in their own economic self-interest when faced with confiscatory marginal rates, and they'll be as creative as they feel they have to be to shelter that last dollar earned.
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I think that the Laffer curve is a great thought experiment and provides some insight. However, because it looks only at the substitution effect (work is now cheaper since I keep more income, so I will work more) and ignores the income effect (because I keep more of my current income, I am now richer, and so I may not even need to work as much or I may work just the same), it doesn't have very strong predictive powers, making it a weak model (it also requires you to know which side of the Laffer Curve you are on - if you are a total believer in it, then you should be perfectly fine with the argument that increasing taxes increases revenue, up to a point -- and so you shouldn't be describing your slippery slope scenario).
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Originally Posted by Bluesman
Also, I'm purty sure that we CAN grow our way into self-financed tax cuts. I mean, look at the way the American economy out-performs those places that have MUCH higher rates (I acknowledge all the other factors that contribute: productivity/work ethic, light regulatory regime, cheap and plentiful capital, etc.), and you can see that growth rates are tracking along with low taxation. Over a span of time, that extra one percent (or whatever) rate-of-growth is going to be DECISIVE in making our economy the 800-pound gorilla, and I am absolutely convinced that it starts with a relatively low rate of taxation. And when you tax THAT behemoth, even at low rates, you get more money than if you'd kept the tax-screws on tight and made certain that we were like some wheezing, sclerotic Euro-state with a rate that is higher, and a economy that was lower as a result.
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The true policy issue here that is looming is what our expected expenditures are, and that is what is scary. We have the flexibility now to debate tax rates because while we carry debt, it isn't yet an overwhelming burden that threatens solvency.
However, while your compounding growth is a correct argument, it cuts both ways in the current fiscal environment. That growth rate (due solely to tax cuts) must result in revenues that increase faster than interest that compounds on the debt created from the initial drop in tax revenues.
In the end, the empirics of tax cuts have fallen on the side that they don't pay for themselves.