clarity

On 5-22-2006 zippyjuan wrote:
“If income levels do not change and things which effect taxes like deductions do not chage [sic], then what happens to tax (or any) revenue if you change the rates? An increase in tax rates will result in an increase in tax revenue. A decrease in tax rates will result in a decrease in tax revenue. If the economy is producing say a trillion dollars in taxable income and the tax rate is ten percent, then the government will recieve [sic] $100 million [sic, 10% of 1 trillion is 100 billion]. If the tax rate is increased to fifteen percent, then the government recieves [sic] $150 million [sic, 15% of 1 trillion is 150 billion].”

In the words of Henry Hazlitt, “Economics is haunted by more fallacies than any other study known to man.” And zippyjuan’s assertion is one of them. It is truly unfortunate that what he posits seems so intuitive. But history has shown, in fact, that zippyjuan's assertion is the inverse of reality:

“Another fundamental confusion over tax cuts is confusing lower tax rates with reductions in tax revenues collected by the government. One of the enduring political myths of our generation has been the claim that the rise of federal deficits during the 1980s resulted from President Ronald Reagan's "tax cuts for the rich."

Tax rates were cut. Tax revenues were not. More tax revenue was collected during every year of the two Reagan administrations than had ever been collected in any previous year in the history of the country. Nor was this experience unique.

When John F. Kennedy cut tax rates during the 1960s, tax revenues went up. The whole point was -- and is -- to encourage more economic activity, and more activity generates more tax revenues, even at lower rates.”

- Thomas Sowell

“We need government, and that means taxes. But when we think about government spending, and the taxes needed to finance its spending, we should also think of the effects of taxation.

Suppose I hire you to repair my computer. The job is worth $200 to me and doing the job is worth $200 to you. The transaction will occur because we have a meeting of the mind. Now suppose there's the imposition of a 30 percent income tax on you. That means you won't receive $200 but instead $140. You might say the heck with working for me -- spending the day with your family is worth more than $140.

You might then offer that you'll do the job if I pay you $285. That way your after-tax earnings will be $200 -- what the job was worth to you. There's a problem. The repair job was worth $200 to me, not $285. So it's my turn to say the heck with it.

This simple example demonstrates that one effect of taxes is that of eliminating transactions, and hence jobs. But politicians have what we economists call a zero elasticity vision of the world. They think people will behave after taxes just as they behaved before taxes and the only effect of a tax is to bring in more revenue. Here's a question for you: Would we and society be better off if you and I agreed to the repair job but did not tell anybody? I'd say yes, but we'd be criminals.”

- Walter E. Williams

MikeD

Is this really a new user, or an established G/A'er under another name?

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InfiniteNothing

Seing as they posted a new thread instead of a new post...and that they posted about a 2 month old thread... I'd say he is genuinely new.
But on topic, it all depends on which side of the laffer curve you're on right? I say we're on the left side.
Also, really, must we annotate spelling errors. It's just a forum.

clarity

The original thread (http://www.gotapex.com/finance-inves...hlight=tax+rev (Tax Rev. up on the backs of the rich.)) is closed. Hence the new thread.


What is the source for your statement that "we're on the left side [of the Laffer curve]?" Is that just a guess? I ask this because the sources I have found seem to indicate that at least the higher income-tax rates are on the right side of the curve. The following is one of those sources.

From The Wall Street Journal:

Soaking the Rich
Guess who is paying more in taxes now?

Wednesday, July 12, 2006 12:01 a.m. EDT

Yesterday's political flurry over the falling budget deficit shows that even Washington can't avoid the obvious forever: to wit, the gusher of revenues flowing into the Treasury in the wake of the 2003 tax cuts. The trend has been obvious for more than a year (see our May 23, 2005, editorial, "Revenues Rising"), but now it's so large that Republicans are trying to take credit while Democrats explain it away.

Republicans do deserve some credit, though not exactly the way they're claiming. Democrats are right that the White House February estimate of a $423 billion budget deficit in Fiscal Year 2006 was inflated, perhaps to be able to claim progress later this election year. Also not very important is the White House claim that it has already met its second-term goal of "cutting the deficit in half." That was always a minor and political ambition.

The real news, and where the policy credit belongs, is with the 2003 tax cuts. They've succeeded even beyond Art Laffer's dreams, if that's possible. In the nine quarters preceding that cut on dividend and capital gains rates and in marginal income-tax rates, economic growth averaged an annual 1.1%. In the 12 quarters--three full years--since the tax cut passed, growth has averaged a remarkable 4%. Monetary policy has also fueled this expansion, but the tax cuts were perfectly targeted to improve the incentives to take risks among businesses shell-shocked by the dot-com collapse, 9/11 and Sarbanes-Oxley.
This growth in turn has produced a record flood of tax revenues, just as the most ebullient supply-siders predicted. In the first nine months of fiscal 2006, tax revenues have climbed by $206 billion, or nearly 13%. As the Congressional Budget Office recently noted, "That increase represents the second-highest rate of growth for that nine-month period in the past 25 years"--exceeded only by the year before. For all of fiscal 2005, revenues rose by $274 billion, or 15%. We should add that CBO itself failed to anticipate this revenue boom, as the nearby table shows. Maybe its economists should rethink their models.

Remember the folks who said the tax cuts would "blow a hole in the deficit?" Well, revenues as a share of the economy are now expected to rise this year to 18.3%, slightly above the modern historical average of 18.2%. The remaining budget deficit of a little under $300 billion will be about 2.3% of GDP, which is smaller than in 17 of the previous 25 years. Throw in the surpluses rolling into the states, and the overall U.S. "fiscal deficit" is now economically trivial.

This would all seem to be good news, but some folks are never happy. The same crowd that said the tax cuts wouldn't work, and predicted fiscal doom, are now harrumphing that the revenues reflect a windfall for "the rich." We suppose that's right if by rich they mean the millions of Americans moving into higher tax brackets because their paychecks are increasing.
Individual income tax payments are up 14.1% this year, and "nonwithheld" individual tax payments (reflecting capital gains, among other things) are up 20%. Because of the tax cuts, the still highly progressive U.S. tax code is soaking the rich. Since when do liberals object to a windfall for the government?

The other favorite line of critics yesterday was summed up by North Dakota Democrat Kent Conrad, who said the deficit would still "explode" in the long term because of the "coming retirement of the baby boom generation." But this is a political bait-and-switch. When Senator Conrad had the chance to do something about the "long term" by reforming Social Security in 2005, he refused. But now that the tax cuts he opposed are reducing the short-term deficit, he's back to fretting about the long term. At least Mr. Conrad is consistent in wanting a tax increase.

There surely is a long-term budget problem, driven largely by fast-growing entitlements for seniors. Federal spending is still climbing by 8.6% this year, with Medicare alone growing at an astonishing rate of 15.5%, or $33 billion in the first nine months of this fiscal year (which ends September 30). Thank the GOP prescription drug benefit for that future taxpayer burden. The only solution to the entitlement problem, short or long term, is to reform both Medicare and Social Security.

As for the 2003 tax cuts, the current revenue boom is one more argument for making them permanent. They are now set to expire in 2010, and, even if they are extended, federal revenues will continue to climb as a share of GDP as more taxpayers earn higher incomes and move into higher tax brackets. If liberal Democrats are really determined to soak the rich--and we don't doubt it for a second--they'll also vote to make the tax cuts permanent.


No, really, we mustn't. It is, after all, as you so astutely put, just a forum. But I think I'll continue to anyway. In the misspelled word of zippyjuan, I’m not likely to “chage” any time soon.

LegendKiller

I'd chill the snide comments buckwheat, or you're going to find yourself in timeout pretty quickly. There is no need to be a spelling nazi, nor an ass about an "n" missing. Zippy is a member of this forum that adds a lot and puts together more analysis than linking a bunch of stuff or quotes.

I am interested in evidence showing that Reagan's tax cuts resulted in the highest tax revenue in history.

zippyjuan

As was mentioned in the other discussion, the rich are paying more in taxes because they are getting more money. The lower incomes did not see as much of an increase in their tax payments because their incomes did not increase as much. Your example of having a tax on your computer job does not apply because you knew before you negotiateed your repair deal what the tax rate would be so it was included in your calculation of whether or not to take the job. People are not "surprised" at taxes.

If the intent of the tax cuts was to stimulate the economy, they were targeted at the wrong income levels. To stimulate the economy, you need money to circulate and that means people buying things. Give a rich man another $1000 and he will most likely not spend more money than he already does- he can buy whatever he wants to already so the money goes into a bank or buys stocks or something. If you give a poor man $1000, he will be more likely to spend most of it on purchases which increases the demand for products and encourages firms to higher more employes to handle the increase in business. The bulk of the tax cuts went to the wealthiest individuals.

In my paragraph you quote, you will note that I said all things remaining the same, cutting taxes reduces the money coming into the treasury. But things did not stay the same. People finally started to come out of the depression and dulldrums of 9/11 and the Afghanistan and Iraq invasions. The news had been giving them constant reminders that the world was very dangerous so people were uncertain about the future and curtailed their spending activities. Finally they started to realize that the world was not coming to an end and they resumed their spending habits. This stimulated the economy more than the tax cut did.

The budget defecit is still growing. Just not as fast as it was forecast to. All the allocations for the wars in Iraq and Afghanistan along with Huricane Katrina relief are not on the books- they were passed as emergency supplementals which are not being counted against the defecit. If you want to give a president credit for good economic progress under his watch, Bill Clinton was the first president to balance the federal budget in decades, left it with a surplus despite having Reagan's underfunded military buildup and within one term Bush eleminated the surplus and created the largest deficit ever seen since WWII. Both Reagan and Bush have the largest deficits in history. This was reduced by their tax cuts? Doesn't sound like it. Republicans like to criticize Democrats about taxes but they (Republicans) have larger budget increases than Dems and also leave larger debts since they do not pay their bills. In the last 40+ years, the only presidents to leave the budget in better shape than they got it in were Democrats with the exception of Nixon, although it did decline under Nixon/Ford.

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VTGreg

Actually according to reports I saw this past week in USA today, the budget defecit will decrease this year compared to last years and is projected to continue decreasing over the next few years until it is almost eliminated in 2010. This of course assumes that the tax policy and projected spending is not changed with any congress changes this year and a new president in 2008.

Also, while tax policy does play some of a role, there are many other factors that contribute greatly to tax revenues and the budget defecit. Clinton was extremely fortunate to be president during a period of unprecedented growth, mainly due to the internet boom.

Since Bush has taken office, he has dealt with 9/11 and Katrina, both of which have had a drastic impact on the budget defecit.

As for your theory that everyone that was positively impacted by the tax cuts spend as much money now as they would if taxes were higher, that's your theory but I have heard plenty of commentary and plenty of data to support the opposite.

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johnnymk

I have stated it before. The reason the tax revenue Federally and to the States was so great during the nineties was because of capital gains during the dotcom and tech revolution during that period.

zippyjuan

I agree with you Johnymk. And the economic improvement that is being credited to Bush comes from the housing boom and people starting to spend after their 9/11 depression. Not the tax cut. Only certain groups were the primary benificiaries of the tax cut so it definately did not benefit all groups positively. Incomes of wealthier individuals has gone up while lower incomes have not seen increases. Actual economic growth is pretty flat right now and events in the Middle East have increased uncertainty to the market- especially reguarding fuel costs, so it looks like both businesses and individuals may cut back a bit again, but probably not as dramatically as after 9/11. The economy is aleady showing signs of more slowing- since early 2005 the growth rate for new employment has been dropping.
http://www.foxnews.com/story/0,2933,202917,00.html

The "defecit reduction" is only about $20 billion from last year so I would not say that we are on any course to balance a budget by 2010. Bush himself has dropped that line and is only seeking to halve it. And as I said, none of this includes the supplemental bills that are funding Katrina and the wars in Iraq and Afghanistan meaning that the actual deficit is larger. Structural spending also pushes the cost of some programs into the future so that they do not show up as well (but this is a practice that has gone on for a long time- well before Bush). Although he asks for a line- item veto, he has never seen a bill he didn't like.

An interesting and pretty balanced look at the budget from Robert Samuelson of the Washington Post from earlier this year:
http://www.washingtonpost.com/wp-dyn...020701278.html

A look at supplemental spending: http://www.aei.org/research/nri/publ...pub_detail.asp

Nija

Looking purely at that graph, Carter's numbers look great, however, he ain't got nothing on JFK

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Maarchk

Can someone fill me in on how Clinton did so well? Did he cut the budget and not touch taxes? I know he decided to not start a war so that helped save a few billion but he worked miracles.. Can someone toss me an article to fill me in?

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InfiniteNothing

It's hard to say with so many invisible economic hands at play but most obviously I believe he raised taxes and there was alot of tax revenue from the .com boom.

LegendKiller

Clinton revenues were high because of cap gains taxes from a booming stock market, higher corporate taxes from booming profits, and higher income taxes from individuals.

Clinton expenditures were lower from base closings, cutting the military size, reducing some pork spending.

Keep in mind that a lot of the appropriations Bush has made have circumvented the classic budget methodology. Some estimates have put the war in Afghanistan and Iraq at $1 trillion, with Iraq being the vast majority of that.

Considering that the national debt was at $6 tril when he got in and is at $9tril now, and is expected to hit $12tril by 2011 or so, he isn't on the greatest path.

A 50% increase in debt, 30% of which is a result of the war, and another huge bulk is due to unlimited and unvetoed pork, and then finally a large chunk is from tax cuts, is really bad.

The economy is doing well and tax collections, even if the tax cuts had not happened, would have been healthy (or healthier).

Some dispute that the economy is only going because of the tax cuts, which is a decent response. It's like spending to keep yourself in a lavish lifestyle while charging up your credit cards. It looks good, it feels good, but it is a false wealth that will eventually have to be paid back.

Maarchk

Cool. thank you for the views on this. does bush get more pork spending going through because he has a republican house or he just slides in line items and bills where he feels it?
Any chance he could cut spending (besides the war) in the next few years?

InfiniteNothing

He's just not much of a vetoer

zippyjuan

He doesn't write the budget- only proposes things. The Senate and House write it. The Republicans control everything so they are spending more on things that go to their voters and donors to keep them happy and not worrying about paying for them. They know Bush will not veto their budget. He did say at least twice that he would never aprove a budget over a certain amount, but even though they were even bigger than that, he signed anyways. This is why I prefer a divided system with one party not in control of everything so there are more checks on what gets passed and they need to work together more. Congress does not even meet on a regular basis so many of the members have never even talked to each other. When you see someone talking on CSPAN, it is to an empty house. Their speaches are only for their local audience back home in their state or district.

VTGreg

Pork spending is a huge problem with the annual budget and Bush has not done a good job curbing this. Bush's fiscal policy has not been that of a typical republican and that has been one cause for the swelling of the deficit.

Bush also took over an economy that was on the ropes when Clinton left office. While Clinton was very fortunate to ride the coattails of the .com boom to higher tax revenue, Bush was every bit as unfortunate to have to deal with the .bomb. This lead to much lower tax revenue.

Couple the lower revenue with 9/11, Katrina, the war in Iraq and poor fiscal responsibility and you get to where we are now. Some of these are factors Bush had no control over, others he did. There are many that attribute the growing economy and increased tax revenue to Bush's tax cuts, there are many that say that growth would have occured regardless of the cuts. There is data to support both and the opinion is typically divided by party lines.

Bottom line, there are many variables, some controllable, others not, that factor into the economic results of a presidency and we typically don't see the full picture until a few years after that administration.

Unfortunately, the current deficit is a drop in the bucket compared to what it will be if there isn't some serious medicare reform in the near future.

clarity

Define “the rich?” Is “the rich” any household in the top 1% of income earners? How much federal income tax revenue does this top 1% pay?


Define “the lower incomes?” Is this any household in the bottom 20% of income earners? How long does the average household remain in this quintile?


Firstly, the computer-repair job example is not mine. It is that of Dr. Walter E. Williams, Professor of Economics at George Mason University. Secondly, what is often overlooked in an economic transaction is that both parties have to agree for the transaction to take place. In his example, both parties agree that the value of the repair job is $200. When the 30% income tax is imposed, however, the repairman takes this tax into his “calculation of whether or not to take the job” by raising his price to $285. Whether he was surprised by the tax or not surprised by the tax, he still now will only take the job for $285. But the prospective customer has to agree to this price—and doesn’t. The tax has caused the elimination of a transaction that would have taken place without the tax.

The tax is seen. The effect of the tax is unseen—and unrealized to people with a zero elasticity vision of the world.


Define “stimulate the economy?”


This is all conjecture. How do you know what say 10,000 “rich” people are “most likely” to do with an extra $1,000? Even assuming that they would all do the same thing with the money—you may feel this, but how do you know this? How do you know that 10,000 “poor” people would “most likely” spend the money right away? Would they spend all of it right away or maybe spend $600 and save the rest? I was “poor” (by U.S. standards) during a period in my life, and I know that I tended to save money then.

Additionally, what if the majority of those 10,000 "rich" people do put the $1,000 in the bank. Do "rich" people who have saved money from past tax cuts to buy larger ticket items today not stimulate the economy? Do "rich" people who have saved money from past tax cuts so they could buy things when they retired, and are retired now, do they not stimulate the economy today?

Furthermore, you characterizing a tax cut as 'giving someone extra money' is very revealing of your view of the world. But in a free market economy, for the most part, income is earned. And that means a tax cut results in the government taking less of someone's rightfully earned income. Somone is not 'given' an extra $1,000. They are being allowed to keep $1,000 more of their money.


“One of the most basic confusions is between income and wealth. You can have high income and low wealth or vice versa. We have all heard of athletes and entertainers who have earned millions and yet ended up broke. There are also people of relatively modest incomes who have saved and invested enough over the years to leave surprisingly large amounts of wealth to their heirs.

Income tax cuts apply to income, not wealth. So the fact that some rich people say that they do not need a tax cut means nothing because they are not getting a tax cut on their wealth, since their wealth is not being taxed anyway.

Looked at differently, high tax rates hit people who are currently earning high incomes -- usually late in life, after having worked their way up in their professions over a period of decades. Genuinely rich people who have never had to work a day in their lives -- people like Congressman Kennedy -- are unaffected by income taxes, except on what they are currently earning, which may be a tiny fraction of what they own.

In other words, soak-the-rich tax rates do not in fact soak the rich. They soak people who are currently earning the rewards of having contributed to the economy. High income taxes punish people for becoming prosperous, not for having been born rich.

Even estate taxes can be minimized by hiring ingenious lawyers and accountants. But people who have had to work all their lives may not be nearly as able to afford such expensive ingenuity.

Someone who eventually works his way up to $100,000 a year will qualify as "rich" in liberal rhetoric but, by the time you reach that level, you may have a child in college and need to put some money aside for your retirement years. You are very unlikely to be able to afford a yacht.”

- Dr. Thomas Sowell, retired Professor of Economics and Senior Fellow at The Hoover Institution, Stanford University


This depends on how you define “all things remaining the same." I guess if you could freeze all the innumerable variables and factors that influence a massively complex economy of 300 million people, and freeze all of the billions of interactions and choices of those 300 million people, you could safely arrive at your conclusion. But what is the point of such a far-fetched abstraction? I care what actually happens in reality. And in the 1920’s when tax rates were reduced, tax revenue increased; in the early 1960’s when tax rates were reduced, tax revenue increased; in the 1980’s when tax rates were reduced, tax revenue increased; and in 2003 when tax rates were reduced, tax revenue increased.

And remember, Congress can, and almost always does, outspend any amount of tax revenue. So merely the fact that there is a deficit is very little indication regarding the amount of tax revenue the government takes.


This is all conjecture. Which people were in “the depression and dulldrums of 9/11 and the Afghanistan and Iraq invasions?” Were you in this depressed group? Were any of your friends or family in this depressed group?


Who is “them?” How do you know this group curtailed their spending? Why do you not include yourself in this group? Did you not have a source of news, so consequently you were not uncertain about the future, and therefore did not curtail your spending? Or were you up the “constant reminders that world was very dangerous” but just knew better than “them?”


Again, all conjecture. Who is “they?” Why do you not write “we?” When did you realize the world was not coming to an end?


That is your hypothesis. It is very easy to write paragraph after paragraph of assumptions and assertions, but this of course does not prove your hypothesis. Do you have any hard evidence to support it or do you just believe it because it fits your vision of the world? And all that a homemade graph proves is that you can extract bits of data from the numerous publications that the Congressional Budget Office publishes and make a graph of that data. Whether these bits of data are relevant to the overall material well-being of 300 million flesh-and-blood human beings is nothing more than a guess for you and for me.

zippyjuan

You are using a lot of words and I am not really sure what point you are trying to make. I do have a degree in Economics. Could you please define "define"? Can you provide any evidence to support any position you may have or is this just a debate exercise? I have not made any position on whether taxes are good or bad or who should pay more. I have merely attempted examined the impacts of the Bush tax cuts. I am making a claim that the tax cuts are not the reason for the cash inflows that the Treasury has been recieving as Clinton was not able to claim his balancing of the budget and the cash flows the government recieved during his watch. He did not cut taxes and experienced a much larger inflow of money than Bush.

In your repairman example, it is critically important that the two parties were aware or not aware of the tax implications of their agreement. The example said that they reached an agreement for the transaction at $200. If they knew that there would be a tax when they made their agreement, this is included in the $200 figure and the transaction would be completed as negotiated. If the tax is imposed outside of their decision- ie a decision by the government to raise taxes on such transactions after the agreement was reached but before the transaction was completed- then the tax was not included in the agreed upon figure and they would have to negotiate a new agreement or decide to void the previous one if a new price could not be agreed upon. The ability of one or the other to shift costs to the other would impact what the final new price would be in this situation. If the seller could pass on all his costs to the buyer, then the buyer would have to cover the 30% tax. If the seller could not sell his item at any higher price, then he will have to absorb the 30% if he still desires to move his product. If neither could pass all the costs of the new tax to the other then the price would fall somewhere in between and both would share in the added costs of the tax.

When you look at your paycheck, are you surprised that taxes were taken out? When you buy something are you surprised to pay a sales tax? Do you say "No, I don't want to buy that! I have to pay taxes on it!" No you do not. You are aware of the tax and include it in your decision to make or not make the purchase. If you are told that you are being hired at a job for say $100,000 a year, do you expect to recieve and keep that much money? No. People are aware of taxes and include them in their decisions on what to do. If taxes are changed, whether that be increasing or decreasing them, then that may effect their decisions to do something. If your taxes are reduced, now you have more money than you were expecting to have. What do you do with it? That may depend on how much money you got and how much money you already have. If you have a million dollars. and you get $100, you are probably not going to spend much more money than you already do. If you have $50 and are given $100 then you are more likely to go and buy something with it or pay some bill you owe.

The flow of money is what stimulates the economy. You need business investments to create things people want to buy, but if nobody wants to buy or cannot buy, then the investment does nothing for the economy. It is buying that stimulates the economy. I buy a pair of shoes at the store. They have to buy another pair from their suplier to replace the one I bought from their inventory. The seller of the shoes then uses the profits from that sale to buy a book. Then the book seller uses his profits to buy some groceries. This is what I mean by stimulating the economy. In the 80s, people had excess money from stock market investments so they spent it on buying lots of things. This stimulated the economy and created demands for lots of jobs. Then the market turned around and the profits were not there for people so they bought fewer things. Fewer people were needed for jobs so they were laid off or had their hours cut back. Less money was then circulating and the economy went into recession. In recent times, a boom in real estate put money into peoples pockets and they spent it on things to fill up their new houses with and other puchases. Again more money flowed and more workers were needed to provide the products and services needed. Raising taxes reduces the money people have to spend and lowering taxes increases the money they have to spend. If you want to get the most money circulating for your tax cut, you want to give it to the people most likely to spend more money. And that group tends to be people at mid or lower income levels. They are the most likely to spend an extra dollar given to them than people who already have lots of money and own pretty much everything they want.