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Banished
Join Date: 04-04-08
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Quote:
Originally Posted by Shek
Even after accounting for tax-incentive induced growth, the tax cuts we have seen do not pay for themselves. However, because of the dynamic nature of the response, what you don’t see over time is that a 25% cut in taxes results in a 25% decrease in tax revenues, ceteris paribus (this is the fancy Latin way of saying everything else held constant). The decrease in tax revenue is less than that because of tax-incentive induced growth.
This is not the opposite of what I’ve been stating, and it looks at the question/problem from the wrong angle.
First, in general (given a relatively small change), you’d probably see the opposite of what the tax-cuts saw. Most likely, there’d be an initial increase in revenues, but it’d tamp down growth and so you wouldn’t see a directly proportionally increase in tax revenues, but something less over time.
Second, this is really an empirical question where we must analyze behavior on the margin. Are we looking at Kennedy changing the top tax bracket from 90%, or Reagan from 70%, or Bush from 39.6%? A drop from 90 to 70 or 70 to 39.6 is going to change my behavior a great deal as opposed to 39.6 to 35 (or we can look at the opposite scenarios where you increase rates from 35 to 39.6, etc.). I could come up with equally silly scenarios on the extremes of both directions. If tax cuts are so good, why not drop the tax rates to 0%? If tax raises are so good, why not increase the rate to 100%? The point is that the magnitude of the impact of a change in taxes is not going to be same across all the potential rates so it be based on numbers to get the analysis correct.
Next, to explore the supply-side argument a little bit more in depth (warning, I use some basic terminology from econ 101, although it’s part that people love to hate the most), let’s think through the example of labor taxes, i.e., an income tax on your annual earnings. The supply-side argument is that if you tax at a lower rate, then people will substitute away from leisure time towards the now relatively cheaper work time. In other words, less taxes induce me to work more since I get to keep more of it. This is correct; however, it is only half of the story. Because the tax rate is less, my income actually increases without me working a single minute longer, and so I am richer. Thus, I may actually work even less.
It now becomes a matter of empirics, but it’s clear that while some may work more, there will also be some that work the same and some that work less. It will depend on whether a person’s goal is to make as much money as possible or to live a certain lifestyle.
The problem with this construction is that you’ve created a false dichotomy. In fact, you can use the conservative playbook, which is to lower taxes and cut spending. Unfortunately, we’ve seen the lower of taxes and an increase in spending. The real issue out there is the massive and looming deficits as a result of huge “mandatory” social programs passed under the FDR, LBJ, and Bush 43 Administrations, with the former two being the primary culprits.
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I would agree. I think part of the problem in regard to entitlements was the nature of the Bush cut. it wasnt a stimulus package. Gas was poured onto the economy and when it heated up we didnt return to fiscal responsibility we jsut dug a deper hole. I agree supply side works but think the degree of revenue created is vastly overstated whenever a tax cut has been proposed. I think this has some truth to it
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The Hostage Economy
By PAUL KRUGMAN
George W. Bush's tax cut plan has never been distinctive for its content, which is standard-issue conservatism — big tax cuts for the rich, a few crumbs for middle-class families with children the right age, nothing for the poor. What is distinctive is the way the plan has been sold. I can't think of any precedent in the history of American economic policy. Has any previous administration been quite this shameless about misrepresenting the actual content of its own economic plan?
But it is starting to look as if maybe, just maybe, the cynicism of the sales effort is about to backfire. Mr. Bush now runs some risk of being hoist by his own pet argument.
The only way to understand the structure of the Bush plan is to see it as the creation of someone who believes in the trickle-down theory: make the rich richer, and a rising tide will lift all boats. Or more accurately, the plan can be seen as a device intended to reassure those who do believe in that theory that Mr. Bush is not his father. And it is no secret that the plan was originally concocted to ward off a feared challenge from Steve Forbes.
Now Mr. Bush could have tried to sell his plan in terms of the ideology that the plan actually reflects. But he has never done so. Instead, he has engaged in an elaborate disinformation campaign. Part of this effort involves an attempt to deny the plain fact that the tax cuts will mainly go to the very, very well off. But the campaign's most striking feature has been the attempt to sell the tax cut as a short-run stimulus to spending — as the answer to an economic slowdown that Mr. Bush has done his best to play up, and which his doomsday rhetoric may have worsened.
What's ironic is that the timing of the Bush tax plan makes it just about completely useless as a short-run stimulus package. In order to keep the headline numbers down, the plan delays the really big tax cuts far into the future, putting hardly any money into the hands of consumers this year and not much next year. And recently administration officials have begun to admit that if they are really serious about doing something for the economy now, they need to add an immediate tax cut onto the plan.
But then the question arises: why not adopt the add-on and forget about the original plan? Or better yet, why not implement one of the short-run stimulus plans proposed by Democratic senators, and discuss those huge long-term tax cuts for the rich at our leisure?
Of these alternatives, I'd vote for Joe Lieberman's suggestion that the Treasury simply send every taxpayer a $300 check. Not that I really think it's necessary: if I had to choose, I'd take another percentage point off the Fed funds rate any day. (Please, Mr. Greenspan?) But hey, why not? Mr. Lieberman's proposal (or the slightly different proposals being offered by other Democrats) would put money quickly into the hands of families that need it and would spend it, without busting the budget. And these proposals would also remove any sense of urgency about rushing through big tax cuts for people with seven-digit incomes.
What's going to happen, of course, is that Mr. Bush will try to take the economy hostage: he will insist that we can't have an immediate tax cut to provide economic stimulus unless we accept his whole plan. There's no logical reason why: Congress can easily give each ordinary family a few hundred dollars now without agreeing to give individuals with million-dollar incomes $50,000 tax breaks every year after 2006. But Mr. Bush and his allies will try to prevent Congress from taking any helpful short-run actions unless he gets it all — and will blame moderates for the delay.
The good news is that there are two ways this attempt at hostage- taking can fail. Public opinion may force Mr. Bush to stop playing games; or the Fed may do what is needed to turn the economy around, and the whole strategy of using a slowdown to bully Congress into passing the tax cut will miss its window of opportunity.
In either case, Mr. Bush would then be forced to sell his plan on its actual merits. And his cynical sales tactics show that he and his advisers have long since concluded that those actual merits, whatever they are, just won't cut it.
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Now how did that tax cut work for working people lets look at how it impacted job creation Stimulus? Never mind - Paul Krugman - Op-Ed Columnist - New York Times Blog check the graph out
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Unfortunately, there is little evidence that high tax rates hinder economic growth and that low tax rates help it. Despite massive tax cuts, President Bush's first term had the second lowest average growth rate since the mid-1970s. Only his father did worse. In fact, economic growth accelerated in the 1990s after income taxes were raised by Presidents George Bush and Clinton. Also, numerous increases of the Social Security tax – the last one under President Reagan – did not impede growth in the U.S. in the 1980s or 1990s.
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Regardless of who is right and I am sure we could wuote back and forth ad nausem. I think it's just wrong to cut taxes in time of war. It's our war if we believe the war on terror is worth fighting we should be willing to put our money where our mouth is |