If only Bush wasn't spending $$ like water....
Friday, June 09, 2006
The Dirty Little Secret about Tax Cuts
The dirty little secret the liberal types don't want you to know: the reason that the defecit isn't WORSE is thanks to the increased economic activity that lowered tax friction causes. Here's a nice (but slightly out of date) picture:
If only Bush wasn't spending $$ like water....
If only Bush wasn't spending $$ like water....
28 comments:
And that's why I wish that folks would stop putting an equals-sign between tax cuts and the deficits... they're fundamentally different issues.
No kidding. It's hard to blame folks too much though, 'cuz it's really an educational issue. If you don't know enough about economics, then of course cutting taxes sounds like cutting tax revenues, and statements to the contrary, at least until you understand the basis for it, sound like either demogoguery or wishful voodoo. Whenever someone mentions taxes & defecits, the better take is always to address the conceptual defecit.
Yes, you have to address the whole "static analysis" concept, and be ready to demonstrate that "tax receipts + deficit" != "checkbook accounting."
And are you going to link my new place, er whut? :)
When next I update my links section, yes -- major housekeeping is overdue there.
I think your chart and your comment about Bush may be related. Moneyis being spent in huge quantities on the current war. Therefore, is it not possible that the increase in tax revenue is due to people & business who are, essentially, war profiteers? Considering a. the tech industries involved in war and b. the contracting out of previously gov't handled functions to private industry it seems reasonable that war should be good for the economy - at least in the short term.
I know it's a facile argument, but my brain is still in the checkout line.
amanda
Amanda,
Step back a second and take a look at what you're saying:
a. Tax revenues are spent on war profiteers
b. A proportion of the total money spent is returned to the government as taxes (directly, and as secondary-effects).
c. This then results in an increase in federal revenues.
In a word, um, no. If government could do that, there would never need to be a tax increase, ever. One private donation could fund the government for eternity.
The economy doesn't grow because federal money (which, you have to recall, is money pulled OUT of the economy from some people and given to other people instead) is allocated here and there and used to grow taxes -- the best you could theoretically get to in terms of receipts would equal what you spent... and that's assuming you don't want the federally-allocated money to *do anything.*
Two side issues at stake here-
One, let's be careful with terms: no matter our general ideological differences (you're an egalitarian, I'm a libertarian -- I don't think we have any conservatives in this thread), "profiteer" has a *specific* meaning. If you call somebody a profiteer, you are directly accusing them of unethical acts. In our context, that's reducing ourselves to ad-hominem.
Two, the days of a "war boost" to the economy is long gone -- that hasn't applied for a generation, because the technology upon which the war depends more or less has to be purchased anyway, simply to keep the Chicoms from starting WWIV because they think they're the big dogs on the block (if you think *we* suck, try a government with no habeas corpus, that forcibly harvests organs from the "partially executed"). "Modern" wars actually have remarkably little impact on the economy, because the military and its appropriations are so far removed from most of the civilian world. (Which is good and bad, but mostly bad imho, b/c it results in the civvie world having no understanding of how the military world works.)
Most of these appropriations are the feds trying to not screw over its soldiers (for once) just because there's a war on and materiel has to be replenished.
Now, in terms of taxes, here's the skinny on static analysis' failure to comprehend what's going on.
If I tax Bob at 10%, I get 10%
If I tax Bob at 20%, I get 20%
If I tax Bob at 45%, I get 20%
Huh? How's *that* work?
Well, Bob's no dummie. Whatever his general political stance, Bob doesn't like losing almost half his income every year to the feds. So as soon as taxes go past a certain level, he starts engaging in avoidance behavior. He parks his money in trust funds and other government-approved mechanisms to avoid being taxed. (Ever notice that it's always REALLY RICH politicians opposing tax cuts?)
While that money is parked in Tax-Avoidance-Land, it's not doing much except sitting there. It doesn't pay for schools. It doesn't pay for roads. And more importantly, since it tends to be small business folks in their Mom-n-Pops using these suckers as self-defense from the Feds (trust me, I run hundreds of searches per year. Most of these trusts are by and for the folks running shops in your average shopping center)... this money isn't being used to buy stuff (I can tell you for a fact that if I was taxed less, I'd buy more books!). And it's definitely not being used to create more businesses, and to either pay workers better or else allow for more people to be hired in the first place.
So "static analysis" fails us. There is a point beyond which, the more we tax, the less we get, because we're taxing so much that it's worth the effort and money to hire lawyers to do the CPA's version of hiding your money in a mattress.
When you cut taxes, you're not really changing taxation up at the top -- they've already got their nest-eggs squirreled away out of reach. What you're really doing is encouraging the middle shopkeeper-class and small merchants to bring some of their money back out of the mattresses and into the economy.
This is why the "Laffer curve" proves true.
So, there's an optimal range for how much to tax. Judging by the explosive growth in Ireland and Eastern Europe, we can generally posit that this range is somewhere between 15-20%, and truly optimally, if you can avoid the temptation to buy votes with social programs that take from Peter to pay Paul, around 13%.
I might add that the Laffer curve used to target 11%, and that it's highly unlikely that the optimum tax rate is constant for any economy. I'd love to see a bunch of econometrics aimed at deriving general formulae for the optimum tax rate given other economic assumptions. But he's right, there is one.
As to war profits ("profiteering" is an accusation of theft & fraud that, although I'll bet a dollar to a doughnut you believe it, is irrelevant here), to receive more than 100% of the money you handed out doesn't make sense.
As has been pointed out, Amanda's scenario (in which the govt spends money on war-related expenses, receives a portion of that money back in taxes, yet this produces a profit) is mathematically impossible.
It also ignores the fact that containment cost a LOT of money. Back in the 90s we were spending $10s of billions a year on fuel costs and outright bribery of various nations for airspace rights. The current war is certainly more expensive, but it would erroneous to compare the cost of war to $0.
One of the problems with this debate is that liberals and conservatives both tend to ignore the concept of economic equilibrium, in favor of their particular pet notion.
Liberals swear they don't want to, but enact policies that take more and more and more money away from the haves and give it to the have-not. The principal reason this angers people like me is that they do so with no regard to whether or not their programs are actually producing the intended result. Nor do they accept/realize that some people are poor because they flat out suck (liberals get mad at this because they're racists and immediately assume that I'm talking about a black welfare mom when in reality most of these people I can think of are trailer trash white folks).
Conservatives, on the other hand, tend to consider this and conclude that tax cuts are always good and will always spur the economy. This is every bit as wrong.
The real ugliness to this is that planning for the country is on a macro level and needs stability to work. With the partisan dogma interfering with reality economics, it puts us in trouble when a new administration comes in and promptly reverses the past's economic policies (while blaming them for the resultant shortfalls).
Oh and the avoidance issue is undebatable by any liberal or conservative since it was the primary justification that Bush Sr and Clinton used to apply the substitution effect to the cost of consumer goods and the like..
Of course I'll never take Clinton seriously on economics since his big 'triumphs' were plagiarized from the CWA and after he said with a straight face that someone who makes $100k/yr for 10 years is a 'millionaire'..
Oh and Jim, Steve Forbes put his estimate for the flat tax equilibrium point at 17%, although I believe he thought that was a little optimistic..
I would be very happy to pay a flat no-exemptions 20% income tax.. Especially if Ted Turner, Bill Gates and Larry Ellison were too..
Part of the problem, still, is what constitutes income. Are all inflows of money, even repayments of debt, taxable? Are capital gains income? If you're forced to pay taxes, must you pay taxes on the amount of your income that you mailed to the IRS?
Even if there must be a big IRS of sales-receipts, it's still a conceptually simpler problem to enact a sales tax than an income tax.
True. *Either* would be better than today's system, where you cannot simply say "hey, Bob, what's your tax percentage" and expect Bob to have a clue.
I'm afraid I don't have time to address all of these right now, but I do want to mention a few things that I was thinking -
1. the gov't isn't spending tax revenue. It's spending borrowed money. It's not a perpetual motion machine - there's energy going into the system.
2. The money that war puts into the economy seems to be in replacement (gas, new trucks ordered when the old ones get blown up) and troop services (food, water, electricity). I disagree that that is money that would be spent anyway and note (from Time mag & upi) "
Over the past three years, Congress has approved $320 billion for military spending over and above the regular Department of Defense budget, which itself has risen about 40% since 2001"
I suspect the large majority is going to US firms. Thus, an increase in profitability.
war profiteers: see Halliburton.
"Liberals swear they don't want to, but enact policies that take more and more and more money away from the haves and give it to the have-not. The principal reason this angers people like me is that they do so with no regard to whether or not their programs are actually producing the intended result."
I wouldn't swear that. And as far as I'm concerned such programs *do* product the intended result. Redistribution of wealth. That is a whole 'nother argument, but as jimdesu will attest, I really am a socialist.
Regardless of who we want to loosen their purse strings, the gap between rich and poor is growing, partially because of our tax structure, and the middle class is shrinking. The fewer of those shopowners you have, the less money gets spent, regardless of tax cuts.
Argh! Look what time it is!! Dammit. I must go home & sleep. We're having a wake tomorrow. Not sure about james' email but an invite did go to "Addy"s.
Amanda
I wish I was a socialist too.. I just can't bring myself to endorse/condone a system of government that has led to totalitarianism every time it has been enacted, killed 10s of millions of people, and stands in stark contrast to a normal human's natural desire to be allowed to keep what they have worked for rather than have it handed off to someone who has done nothing to earn it.
Don't forget the French: sometimes it doesn't lead to totalitarianism, just to imploding birth-rates instead.
Amanda:
Point #1: Sadly, right now you're right -- we're mostly spending debt. This was not always so, though. We *could* live within our taxation if we had the political will to do so.
Point #2: The Pentagon's books are so bad (according to, believe it or not, Rumsfeld, in a speech made on September 10th, 2001 -- you can see where that went!) that we wouldn't need to increase the budget if we could just control the one we had.
I think right now part of the problem is that we as a nation have been put off our moorings: we used to be the Land of Opportunity, and now folks're more fighting to make us the Land of Equality. I don't think those two things are compatible.
To continue on Land of Opportunity versus Land of Equality, and the point of the posting (this really wasn't a sideswipe at Amanda -- she & I'll happily debate socialism for years), is that when you punish earnings past a certain optimum, those who could earn more and in the process benefit not only themselves, but all of society simply choose not to do so. The bums asking for handouts will always be there asking for handouts, but the folks who could really enrich both themselves and others simply cease doing so. Tax rates get high enough, eventually, and everyone becomes equally hide-bound to a system that discourages individuals from growing the economy. Instead of making money, eventually you get economies like Europe, where the biggest social successes entail not the creation of wealth, but the securing of synecures.
(Economically speaking,)liberals, who want the government in charge, are generally happy with this, because it means they get to call the shots (at least when they're in office) and arrange everything according to "Father knows best". Conservatives, who want individuals to be in charge, decry this and ask that those who prove themselves be allowed to profit in the spheres in which they're proven. As a libertarian, I side with the conservatives on this score.
"when you punish earnings past a certain optimum, those who could earn more and in the process benefit not only themselves, but all of society simply choose not to do so. "
That is the crux of the matter that socialists don't believe happens. The trouble is, it DOES happen; there are tons of examples of it happening.
I mean, for one thing, look around the world and see how few inventions are coming out of semi-socialist (since there really aren't any pure socialist govts thank god) countries relative to what capitalism is producing.
And while it is true that the gap between rich and poor is growing, the standard of living of the 'poor' is also continuing to improve. Check the statistics (provided by the very govt that leftist-economists want to run everyone's life).. 'Poor' households in this country typically own two cars, two television sets, have air conditioning and more than 1/2 own property.
The gap may be growing but EVERYONE is being pulled upward. The trouble is, that's not good enough for people who believe in forced economic equality.
Well, if you've swallowed the liberal (I'd like to swing away from socialism, so as not to make this a bash-Amanda-fest -- I've only one socialist reader & I'd like to keep her ;-) ) position a society is just if everyone is equal, then you don't care about poor people getting to have IPods so long as rich people can't have them either. They're Radical Egalitarians, after all.
I'm not attacking Amanda; I'm attacking socialism for the evil that it is. Like communism, it is a Utopian fantasy whose divergence from human nature means that any implementation can only lead to misery and oppression.
Socialism and Communism only killed what.. 20 million combined in the 20th century? Gee, I can't believe that people have given up on such great systems.
"Socialism and Communism only killed what.. 20 million combined in the 20th century".
The problem, as always, is a philosophy being used as the excuse to consolidate power into what is actually a fascist state. If a gov't relocates people into camps or simply shoots them, I consider that more Stalinism or Maoism. The idea of getting rid of minority or opposing opinions is not socialism - at its best socialism it the protection of the minority or less powerful from being exploited by people in the majority or the more powerful. Totalitarianism is not necessary . Democracy and socialism can in fact co-exist, and market factors can operate within that system. Socialism is in play whenever the gov't stops an upstream factory from dumping radioactive gypsum into the river that flows through someone else's field.
Hundreds of thousands of people were killed in 9 Christian crusades, but there are still people who are Christians - because it can be used for or against the good of humanity.
amanda
"Socialism is in play whenever the gov't stops an upstream factory from dumping radioactive gypsum into the river that flows through someone else's field."
How do you figure? That's a question of law enforcing basic property rights, no different from preventing your neighbor from throwing his trash over the fence into your yard.
If you define socialism by such broad terms then it would be impossible not to be socialist.
That's NOT socialism, A. In socialism, the gov't POURS the toxic waste in the river, and pollutes its OWN farms where the worker in the government owned cooperative works and the gov'r owned bookstore worker spends his/her vacation. In all states where socialism was officially practiced. All of them.
Trust me--I lived there. And that's all I have to say about this matter.
Well that's dismissive AM :)
Didn't mean to...really. Just sayin'from experience. I really AM nice...
100 million skulls.
Amanda, *that* is the legacy of socialism.
And the response of the "well, I could make it work" response pretending that all those previous attempts didn't count, is the simple assertion of somebody who wants to be at the top of the heap calling the shots -- not the poor slob waiting in line for his weekly shoe ration, and hoping he can keep his shoes functional until his next voucher comes along.
Your definition of socialism is, as superbiff points out, a synonym for "anything good," and therefore is so muddy that it can't really be debated.
But hear this, even if you disagree with it: socialism *inevitably* leads to gangsterism and totalitarianism, because who-you-know corruption and "connections" becomes the new coin of the realm. Forced financial egalitarianism merely creates dramatically increase political inequality.
Government pollution being merely one of the less unsavory aspects of the high body count and widespread misery that socialism brings.
The only "soft" alternative to socialism that has ever been put into place is the policy mandates of the Social Democrats, which are the norm across Europe. It kinda protects property rights, and kinda allows for a market to operate (they call it a "social market")...
and it is a complete, unmitigated failure, and a failure that has resulted in vast unemployment and a social horizon so miserable that the vast majority of countries practicing it are LITERALLY on a path to extinction by demographic collapse accompanied by fiscal ruin, as each succeedingly-smaller generation cannot foot the bill to pay for the costs of the larger generation preceding it. If government has all the power, then so does whoever is in a position to manipulate that power. It's great to be one of the elite in those countries -- being the folks living UNDER the system, rather than one of the folks running it, sucks.
Economics does not have an inherent moral value. "Pi" is not an evil number. Similarly, basic descriptions of aggregate human (that's economics) cannot be voided without either evolving mankind into some other species, or else the continual application of violence.
That's the choice. But the alternative is to ask oneself whether fiscal egalitarianism is really a more laudable goal than political egalitarianism.
One could argue that social programs are by definition Socialist. However, even in a 'democratic Socialist' country (Germany for example), you're not really talking about Socialism per se, you're just talking about more social programs. By that definition, there has really never been a non-socialist government (unless of course, one considers warlordism 'governance').
The more Socialist a country is, the less incentive there is for people to work harder and create new wealth, industry and thus, jobs. Utopian leftists discount this, believing that everyone will somehow move to a 'caring about others' mentality and be willing to work harder than required, despite receiving no benefit.
However, there is yet to be a single example of this happening while there are hundreds of examples of the very opposite (recent trends in France's labor laws are a great example of this).
Some people will cite San Francisco's commune history as examples that it works on even a small scale, but they tend to forget that many of the "commune"-ists were actually drawing disability. Some of them legitimately so, but many just abusing the system -- human parasites.
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