Tax Cuts and Revenue

[Ricter]

In the past when I've said, "but taxes were much higher in our past than today, and look how we've grown", I'll get the reply, "yes, but real taxes weren't that high because of deductions and loopholes".

So real taxes were not that high during Kennedy because of deductions and loopholes.

 

[piezoe]

Here is another quote from Quiggin, Jem, that I trust you will enjoy immensly:

Pg. 144-5; The most optimistic study, undertaken by Greg Mankiw, former Chairman of President George W. Bushes Council of Economic Advisors, and Matthew Weinzierl, found that, assuming that the conditions of the standard neoclassical model were satisfied, dynamic effects would offset about 17 percent of the initial cost of a cut in taxes on labor income and about 50 percent of the cost of a cut in taxes on capital income.

However, as subsequent analysis showed, these results depended critically on ... how the tax cut was initially financed. Mankiw and Weinzierl assumed that tax cuts are associated with expenditure cuts sufficient to maintain budget balance, and that these expenditure cuts do not create any additional market failures. ...

Eric Leeper and Shu-Chun Susan Yang examined the case when, as actually happened with the Bush tax cuts, the cuts were initially financed by higher debt. In this case, it turns out that dynamic effects can actually increase the initial cost of a tax cut

A further difficulty was that, since the increased income was the result of additional savings, it could not in economic terms, be regarded as a pure economic benefit. ...Even for large tax cuts, the dynamic benefit is rarely more than 1 percent of national income.

The same point may be made in terms of the effects on the government budget. Even if tax cuts eventually generated enough extra revenue to match the annual cost of the cuts (and of course they never do!) the budget would still be in long-term deficit because of the need to service the debt built up in the transitional period.

N.B. in economics speak "dynamic effects" in this context means "effects... realized over time as the capital stock in an economy grows."

Enjoy, Jem!

 

[piezoe]

In the past when I've said, "but taxes were much higher in our past than today, and look how we've grown", I'll get the reply, "yes, but real taxes weren't that high because of deductions and loopholes".

So real taxes were not that high during Kennedy because of deductions and loopholes.

As is often the case, Richter, you're one of the few sensible people here. I too found that Will Rogers quote delightful.

 

[jem]

more baselining / modeling b.s.
we are not trying to replace the revenues which theoretically could exist in an economy that grows at x percent... because the whole reason for the tax cuts was because the economy stopped growing x percent.

--- let me create a quote you may enjoy... I take the structure from Salby...
in the real world of those who favor limited govt... tax cuts are followed by an increase in revenue (see charts presented a few pages ago) .
in the model world of leftists... the economy always grows no matter how much you tax it.

Here is another quote from Quiggin, Jem, that I trust you will enjoy immensly:

Pg. 144-5; The most optimistic study, undertaken by Greg Mankiw, former Chairman of President George W. Bushes Council of Economic Advisors, and Matthew Weinzierl, found that, assuming that the conditions of the standard neoclassical model were satisfied, dynamic effects would offset about 17 percent of the initial cost of a cut in taxes on labor income and about 50 percent of the cost of a cut in taxes on capital income.

However, as subsequent analysis showed, these results depended critically on ... how the tax cut was initially financed. Mankiw and Weinzierl assumed that tax cuts are associated with expenditure cuts sufficient to maintain budget balance, and that these expenditure cuts do not create any additional market failures. ...

Eric Leeper and Shu-Chun Susan Yang examined the case when, as actually happened with the Bush tax cuts, the cuts were initially financed by higher debt. In this case, it turns out that dynamic effects can actually increase the initial cost of a tax cut

A further difficulty was that, since the increased income was the result of additional savings, it could not in economic terms, be regarded as a pure economic benefit. ...Even for large tax cuts, the dynamic benefit is rarely more than 1 percent of national income.

The same point may be made in terms of the effects on the government budget. Even if tax cuts eventually generated enough extra revenue to match the annual cost of the cuts (and of course they never do!) the budget would still be in long-term deficit because of the need to service the debt built up in the transitional period.

N.B. in economics speak "dynamic effects" in this context means "effects... realized over time as the capital stock in an economy grows."

Enjoy, Jem!

 

[Mercor]

We've been through this many times, so my comments are bound to fall on the same deaf ears. You can not use government revenue growth, by itself, in periods of inflation and expanding government expenditures to evaluate the effectiveness of tax cuts in producing increased revenue. Economists who have made a serious study of the effect of actual tax cuts purported to have increased government revenue have concluded that the tax cuts actually decreased revenue and expanded debt. Revenue increases that occurred following tax cuts were due to inflation and increased government expenditure fueled by borrowing. This is too well-known in economics to require further comment. Those who want to can go to the internet for the many extensive studies by legitimate economists.

This is all part of the Trickle-Down and Laffer curve Era of the Reagan Presidency. Now, in retrospect, recognized as rather naive if not outright silly. Reagan himself said that his greatest disappointment was the failure of tax cuts to pan out as planned.

I could highly recommend "Zombie Economics" by the Australian Economist, John Quiggan, as an entertaining and instructive read. Quiggan addresses the subject of tax cuts and their effects on government revenue in detail in Chapter 4 on "Trickle Down Economics", which he introduces with this delightful Will Rogers quote:

The money was all appropriated for the top in the hopes that it would trickle down to the needy. Mr. Hoover didn't know that money trickled up. Give it to the people at the bottom and the people at the top will have it before night, anyhow. But it will at least have passed through the poor fellow's hands.

The purpose of tax cuts is not to raise tax revenues. The purpose of tax cuts is to create private economy growth.
The side effect of growth, unfortunately, is greater tax revenue. Growth without greater tax revenue would be the best situation.

Supply side economics is the concept that more production will create more competition that will lead to innovation and lower cost products. This is the reward for the large middle and lower classes. Its figured that Walmart increases the purchasing power of the consumer 20% by lower prices.

 

[piezoe]

You working for the Chamber of Commerce now, Mercor? My post which you quoted was addressing the absurd idea that tax cuts would pay for themselves by increasing revenues. You,however, raise another matter, but of course related, i,e, the idea that tax cuts will create private economy growth. Well they might and they might not. It is not at all cut and dried.

The problem with these tiresome politicians is that they endlessly promote tax cuts when running for office, without mentioning anything about what they plan to cut to compensate for the revenue lost. Or they are simply naive, have only a rudimentary understanding of economics and actually believe that tax cuts will pay for themselves, as some supply siders did in the 1980s. If we were on the downward sloping part of the Laffer curve that might be the case, but we are not. We are obviously nowhere near the downward sloping part.

 

[lotek771]

We've been through this many times, so my comments are bound to fall on the same deaf ears. You can not use government revenue growth, by itself, in periods of inflation and expanding government expenditures to evaluate the effectiveness of tax cuts in producing increased revenue. Economists who have made a serious study of the effect of actual tax cuts purported to have increased government revenue have concluded that the tax cuts actually decreased revenue and expanded debt. Revenue increases that occurred following tax cuts were due to inflation and increased government expenditure fueled by borrowing. This is too well-known in economics to require further comment. Those who want to can go to the internet for the many extensive studies by legitimate economists.

This is all part of the Trickle-Down and Laffer curve Era of the Reagan Presidency. Now, in retrospect, recognized as rather naive if not outright silly. Reagan himself said that his greatest disappointment was the failure of tax cuts to pan out as planned.

I could highly recommend "Zombie Economics" by the Australian Economist, John Quiggan, as an entertaining and instructive read. Quiggan addresses the subject of tax cuts and their effects on government revenue in detail in Chapter 4 on "Trickle Down Economics", which he introduces with this delightful Will Rogers quote:

The money was all appropriated for the top in the hopes that it would trickle down to the needy. Mr. Hoover didn't know that money trickled up. Give it to the people at the bottom and the people at the top will have it before night, anyhow. But it will at least have passed through the poor fellow's hands.

piezoe, you crack me up. You define success as to how much revenue the government consumes. The rest of us define success as to how efficient and little of our money the government consumes.

 

[Arnie]

After reading piezoe and Ricter....oh....my.......God......

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[Scataphagos]

That was the non-farm payrolls released on the 3rd.

Wow... CNBC was really late.

 

[AAAintheBeltway]

All this theorizing is unnecessary in the real world. We know that congress and the president will spend something like 105% of tax revenues, probably more when you account for all the dishonest accounting. The only exception in the last 40 years or so was a brief period in Clinton's presdiency when the internet bubble produced booming tax revenues and gridlock with a republican congress blocked more spending.

So high or higher taxes are not a matter of fiscal rectitude. They are purely a means of taking from one group and giving to another to buy votes. If you approve of that, you are likely a democrat and no amount of anaysis willchange your opinion. Legions of liberal economists labor to sell us on what we all know is nonsense, namely that higher taxes are good for the economy. Others, like the idiot savant Krugman, have as their mission selling us on the idea that a government running a gigantic deficit and printing money at unprecedented rates is strangling the economy by being insufficiently stimulative.

Quoting some academic means zero to me. Few have any credibility. Like the AGW cultists, they have an agenda, either political or financial, and they have traded their integrity for the cause.