Foreclosure

[PassedOut]

If economists really knew the answer to these questions, there would be a consensus, the lack of consensus shows that no one really knows what will happen. Compare this to the overwhelming consensus of economists that the bank bailouts were a good move.

We've had some real-life experiments in the US that demonstrate the power of deficit spending to stimulate the economy. World War II effectively ended the great depression here. Massive deficits fueled the boom times of the 1980s.

 

And we have seen the effects of the Bush tax cuts: job creation was abysmal throughout the Bush years, and still is.

[nige1]

IMO...

 

Individuals (eg house-holders, ordinary citizens) lost. Other individuals (eg past bank-directors and share-holders) gained but the only loss to the system as a whole is the cost of the half-baked and ineffective measures concocted to deal with the crisis.

 

Big accountancy firms acted as bank-consultants to advise on attractive ways to package sub-prime loans. The same accountancy firms acted as bank-auditors to over-value the resulting instruments (through a "Chinese wall"). They should bear some of the costs of the debacle they colluded in creating.

 

Few bank-directors are stupid, lazy, or ignorant. Most are bright and know their core-business. Like the accountants, most bank-directors knew exactly what they were doing with sub-prime mortgages. Naturally they were reluctant to admit that the emperor had no clothes when they were making so much money for themselves. Perhaps we should be grateful that the scam was exposed so quickly because the damage was escalating fast. We have the internet and a handful of whistle-blower risk-managers to thank.

 

Naturally, banks treat government help as another wind-fall opportunity to exploit. In Britain, after government bale-out, banks continued to make 100%+ loans to house-buyers and to hand-out massive bonuses and golden-goodbyes to directors responsible for the mess.

 

In hind-sight, it might have been better to let the banks sort their problems out for themselves. More banks would have collapsed. Some citizens would have lost their savings. But the banking industry as a whole would have survived. And banks would have been more careful about using their own money to rescue each other. And done a better job of it. So, although some ordinary citizens would have suffered more, most would be far better off.

[PassedOut]

Clinton never reduced spending, but he can be credited for keeping government spending on a steady path despite enhanced revenues for the dot-com bubble. I don't think there is a lot of evidence he was trying to pare down debt but he certainly was more fiscally responsible than Obama or Bush. I agree with the first two points on Bush, but the lower marginal rates resulted in more federal revenues, not less. So, they weren't "poorly thought out" at all -- they worked.

Clinton stopped the massive explosion of debt as a percentage of GDP that resulted from the voodoo economic policies of Reagan and the first Bush. Clinton fixed that (and it was intentional on his part), at great political cost to his party, by adjusting tax rates so that the revenues collected came very close to matching federal expenditures. Then when the economy grew, the additional revenue reduced the federal debt in absolute terms as well.

 

I agree with the first two points on Bush, but the lower marginal rates resulted in more federal revenues, not less. So, they weren't "poorly thought out" at all -- they worked.

I do not know where you got this misinformation, but it is plain wrong. The Bush tax cuts lowered revenue collections as a percentage of GDP, but he did not adjust expenditures downward to match. That inevitably caused a ballooning of the debt as during the Reagan-Bush years. In fact, over twice as much of the current deficit comes from those poorly thought out tax cuts as comes from the wars in Iraq and Afghanistan combined.

 

Because other folks sometimes make the same type of claim, let's take a look at the basic arithmetic of the situation with a couple of simple examples.

 

Suppose the total GDP is $1000 and the tax rates are set to collect 50% for the government, exactly $500. Suppose we decide to stimulate the economy by cutting the tax rates to 40%, letting the taxpayers keep another $100. That will certainly stimulate the economy, but how much? For the government to continue to collect $500, the total GDP would have to go up to $1250. That is, the extra $100 for the taxpayers would have to stimulate the economy enough to raise the GDP by $250.

 

Now suppose that the GDP is $1000, but that the proposed tax cut is from 30% to 20%. Now to get back the $100 dollars lost, the GDP would have to increase to $1500. Each tax cut dollar would have to generate $5 of increase to the GDP.

 

It's not logically impossible for this to happen. If every tax cut dollar is spent over and over -- instead of being used to pay down debt or saved -- the GDP rises accordingly. When anyone makes the claim that cutting taxes results in increased revenue, that person necessarily argues that the multiplier on those tax cut dollars is high enough to get back more than the revenue lost. And the lower the tax rates go, the more difficult this is to do.

 

In fact, the answer to the question is known: The multiplier is not anywhere near high enough for tax cuts to increase tax revenues in the US. No serious economist, liberal or conservative, maintains that it is.

[luke warm]

Clinton stopped the massive explosion of debt as a percentage of GDP that resulted from the voodoo economic policies of Reagan and the first Bush. Clinton fixed that (and it was intentional on his part), at great political cost to his party, by adjusting tax rates so that the revenues collected came very close to matching federal expenditures. Then when the economy grew, the additional revenue reduced the federal debt in absolute terms as well.

 

 

I do not know where you got this misinformation, but it is plain wrong.

you're a business man, can you increase revenues by cutting prices? of course you can (wal mart proves this every day)... static models, such as your examples above, do not give the full story... they assume static responses by static people... this is not what happened in the '60s or '80s... for example, from '81 - '84 tax revenue from individual taxpayers was $286B, $298B, $289B and $298B, and this in spite of small economic growth (in part due to recession) of 2.5% in '81 and 1.9% in '82... the revenues from '85 - '88 were $335B, $349B, $392B and $401B... the problem with the reagan cuts were - a recession occurred and expenditures increased (gov't grew)... it can't be denied that tax cuts, other things being equal, have historically led to strong economic growth... the problem comes about when politicians increase spending rather than reducing it...

 

i see nothing wrong with a gov't that at least makes an attempt to balance the budget... i understand that the gov't can't be run like a business - i do not understand that it must be run into bankruptcy

[PassedOut]

it can't be denied that tax cuts, other things being equal, have historically led to strong economic growth... the problem comes about when politicians increase spending rather than reducing it...

Historically, the effects of lowering or raising tax rates on economic growth is a mixed bag. It is absolutely clear that deficit spending, such as during the WWII and the Reagan years can spur economic growth. However, that leaves the problem of debt service for folks down the line. I certainly agree that the federal government should aim to keep the budget in balance over the long haul, particularly so that deficit spending can be used to pump up the economy in bad times, such as we have now.

 

David Stockman, Reagan's budget director, explained in detail what would happen to the federal debt as a result of tax cuts without corresponding spending cuts: "red ink as far as the eye can see." (Arithmetic is not wrong, no matter how you try to wriggle around it.) Reagan nevertheless chose irresponsibility, as did both Bushes. In between, Clinton chose fiscal responsibility, and that was the only bright spot for 30 years.

 

A consequence of the poorly thought out Bush tax cuts is the huge deficit we face now, making it difficult for the government to expand the successful and necessary stimulus program. And the republicans have made it perfectly clear that they intend to fight Obama's programs to restore fiscal responsibility, just as they did Clinton's. The republican appeals to the free lunch crowd have just now helped them to take control of the house.

[Rodney26]

I do not know where you got this misinformation, but it is plain wrong. The Bush tax cuts lowered revenue collections as a percentage of GDP, but he did not adjust expenditures downward to match. That inevitably caused a ballooning of the debt as during the Reagan-Bush years. In fact, over twice as much of the current deficit comes from those poorly thought out tax cuts as comes from the wars in Iraq and Afghanistan combined.

 

Read this. A letter from Orzlag to Senator Conrad when Orzlag was at the CBO.

 

Growth in Federal Tax Revenues From 2003 to 2006

Total federal revenues grew by about $625 billion, or 35 percent, between fiscal

year 2003 and fiscal year 2006. CBO’s analysis of that increase in revenues since

2003 is necessarily preliminary because relevant data are not yet fully available.

CBO examined the available data using the commonly employed method of

analyzing the sources of revenue growth as a percentage of GDP. Had revenues

grown at the same rate as the overall economy between 2003 and 2006, federal

receipts would have increased by only $373 billion. The other $252 billion of the

actual increase in revenues represents growth in excess of GDP growth. As a

result, receipts as a share of GDP rose from 16.5 percent in 2003 to 18.4 percent

in 2006, an increase of 1.9 percentage points (see Table 1, attached).

 

The cratering of revenues from tax cuts that you're constantly insisting that happened didn't actually happen. As pointed out several times, there is a point on the elasticity curve between 0 and 100 that will maximize government revenues. It is not necessarily at a higher rate of taxation.

[PassedOut]

Read this. A letter from Orzlag to Senator Conrad when Orzlag was at the CBO.

 

The cratering of revenues from tax cuts that you're constantly insisting that happened didn't actually happen.

You must be joking. Receipts as a percentage of GDP during the Clinton years were at about 20%, as was the spending. As your own exhibit shows, receipts stayed much lower than that during the Bush years, even though federal spending as a percentage of GDP went up. And we are facing the consequence of that poorly thought out tax cut today.

[phil_20686]

 

Suppose the total GDP is $1000 and the tax rates are set to collect 50% for the government, exactly $500. Suppose we decide to stimulate the economy by cutting the tax rates to 40%, letting the taxpayers keep another $100. That will certainly stimulate the economy, but how much? For the government to continue to collect $500, the total GDP would have to go up to $1250. That is, the extra $100 for the taxpayers would have to stimulate the economy enough to raise the GDP by $250.

 

Now suppose that the GDP is $1000, but that the proposed tax cut is from 30% to 20%. Now to get back the $100 dollars lost, the GDP would have to increase to $1500. Each tax cut dollar would have to generate $5 of increase to the GDP.

 

It's not logically impossible for this to happen. If every tax cut dollar is spent over and over -- instead of being used to pay down debt or saved -- the GDP rises accordingly. When anyone makes the claim that cutting taxes results in increased revenue, that person necessarily argues that the multiplier on those tax cut dollars is high enough to get back more than the revenue lost. And the lower the tax rates go, the more difficult this is to do.

 

In fact, the answer to the question is known: The multiplier is not anywhere near high enough for tax cuts to increase tax revenues in the US. No serious economist, liberal or conservative, maintains that it is.

 

You are missing the point - Compound interest always wins. If I drop tax rates by 99% and get 1% extra growth per year, I will still win in the long run, it will just take 0.01*1.01^n>1 which by my calculation this is about 470 years. For all the years before that revenue is less, but for all the years after that revenue is more. Therefore, and over a millenia I will collect 20 000 times as much total revenue. (the point where both strategies are equal being about 640 years by my calculation).

 

Obviously I have produced an absurd example, but the point is clear, the argument is not that tax cuts maximise total government revenue now, clearly you collect a smaller fraction of GDP now. The argument is that the increase in % growth is enough that at some point in the future a smaller slice of a bigger pie, will be worth more total revenue. The question is should you aim to maximise goverment revenue in the short term (tax rises) or the long term (tax cuts). America's lower tax rates have meant its GDP has grown about 1% faster per year in the long term since the end of WW2 compared with other developed nations. Thats why you are a lot richer than us now :). (The reasons the difference does not appear as stark as it might is that Americas population has grown a lot more than other developed nations).

 

(Obviously I know that tax rises are probably not the only factor that affects growth and the real picture is pretty complex but this is food for thought).

[phil_20686]

i dont get it. The exhibit shows that tax revenue under bush increases faster than gdp ==> real tax rises. His income tax cuts seem to drop the budget by less than that when they were enacted - estimated as 700bn over 10 years. Thus taxes rose under bush despite the tax cuts. Mainly due to "bracket creep" and increased corporation revenue.

[PassedOut]

i dont get it. The exhibit shows that tax revenue under bush increases faster than gdp ==> real tax rises. His income tax cuts seem to drop the budget by less than that when they were enacted - estimated as 700bn over 10 years. Thus taxes rose under bush despite the tax cuts. Mainly due to "bracket creep" and increased corporation revenue.

Yes, the bracket creep (and other factors) had the same effect during the Clinton years, where receipts gradually rose as a percentage of the GDP, topping out at about 20.8%.

 

I absolutely agree that lowering taxes stimulates the economy, and appreciate any responsible spending cuts that allow that to happen. But the free lunch argument that lowering taxes increases tax revenues -- so that you don't have to make those spending cuts -- is dead wrong.

 

In your earlier post you seem to have overlooked that compounding also applies to the debt and debt services over time. That compounding overwhelms the effect you noted. There is no free lunch.

[mgoetze]

You are missing the point - Compound interest always wins. If I drop tax rates by 99% and get 1% extra growth per year, I will still win in the long run, it will just take 0.01*1.01^n>1 which by my calculation this is about 470 years. For all the years before that revenue is less, but for all the years after that revenue is more. Therefore, and over a millenia I will collect 20 000 times as much total revenue.

 

I have some words for you to think about:

"real growth"

"nominal growth"

"finite resources"

[phil_20686]

Yes, the bracket creep (and other factors) had the same effect during the Clinton years, where receipts gradually rose as a percentage of the GDP, topping out at about 20.8%.

 

I absolutely agree that lowering taxes stimulates the economy, and appreciate any responsible spending cuts that allow that to happen. But the free lunch argument that lowering taxes increases tax revenues -- so that you don't have to make those spending cuts -- is dead wrong.

 

In your earlier post you seem to have overlooked that compounding also applies to the debt and debt services over time. That compounding overwhelms the effect you noted. There is no free lunch.

 

Ah yes, I am not in favour of structural deficits. We are in agreement then. I was merely pointing out that working out whether the bush tax cuts increased or decreased revenue is a bit of a mugs game. If they resulted in any growth then America will benefit from that for all subsequent years - although extra debt may retard growth by more less or a similar amount in the future. Also, you would have to be able to workout how much the economy would have grown without tax cuts. Seems to me that they could have resulted in less or more revenue being collected. I have literally no idea how you would go about trying to work that out though.

[phil_20686]

I have some words for you to think about:

"real growth"

"nominal growth"

"finite resources"

 

I know what all these words mean, and yet I have no idea what you mean.

[PassedOut]

Also, you would have to be able to workout how much the economy would have grown without tax cuts. Seems to me that they could have resulted in less or more revenue being collected. I have literally no idea how you would go about trying to work that out though.

Nor do I. Although I share the intuition (and believe) that lower tax rates stimulate the economy somewhat, there are so many other factors at work that US data does not actually demonstrate this directly. Just looking at tax rates vs. growth, you generally find higher growth under the higher tax rates. Of course you can clearly demonstrate that deficit spending stimulates the economy, at least for awhile, but that is a dead-end proposition that produces bigger problems down the road.

 

I think it perfectly proper to argue about what spending is appropriate, and the federal government often spends money in ways that I don't endorse. Every citizen, I'm sure, has similar feelings, often disagreeing with me about priorities. But once the spending is set, it is important to set the tax rates to match that spending. Deficit spending is the right tool to get through hard economic times, but that deficit must be chopped away during better times. Otherwise the effect of compounding bites hard.

 

There was broad bipartisan agreement in the US about this for many years after WWII left the US with a huge debt. Under every administration from Truman through Carter, the US debt as a percentage of GDP was reduced. Remarkably, this was even true during the Vietnam war while Lyndon Johnson's anti-poverty programs were simulaneously in full swing.

 

After Carter, fiscal irresponsibility took over and the US debt ballooned as a percentage of GDP. Jack Kemp, a popular republican politician (and former athlete who suffered too many head butts) famously said, "Deficits don't matter." Clinton restored fiscal responsibility over the unanimous opposition of the republicans, who swore that doing so would create another great depression. Bush the younger then campaigned on the promise of restoring fiscal irresponsibility, won, and fulfilled that promise at once.

 

Just to be clear, fiscal irresponsibility in this context means cutting taxes before cutting the spending. As you can see in this thread, the fiction that you can solve fiscal problems by cutting taxes alone has been repeated often enough in the US that quite a few folks here have fallen for it. Even though that claim flies in the face of common sense, simple arithmetic, and all historical evidence, it retains great appeal for the free lunch crowd.

[mike777]

If you have a few minutes take the time and read the whole interview.

 

http://www.rightwingnews.com/interviews/friedman.php

 

 

"Milton Friedman: I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible. The reason I am is because I believe the big problem is not taxes, the big problem is spending. The question is, "How do you hold down government spending?" Government spending now amounts to close to 40% of national income not counting indirect spending through regulation and the like. If you include that, you get up to roughly half. The real danger we face is that number will creep up and up and up. The only effective way I think to hold it down, is to hold down the amount of income the government has. The way to do that is to cut taxes.

 

John Hawkins: Now let me ask you about that. In the Reagan years, we cut taxes and it ended up leading to economic growth which increased the amount of revenue that came into the government.

 

Milton Friedman: Well, economic growth will inevitably increase the amount of revenue coming into the government. But so far as the Reagan years were concerned, we have to be careful there. There were initial cuts in 1981-1982 and then there was a very good income tax law in 1986. But in between that, there were increases in taxes as well. So it's not an entirely clear picture that you can attribute the growth in revenue entirely to the tax reductions. But it's a hard thing to disentangle the effects of several things happening at the same time. In particular, there's no doubt that growth is very favorable to government revenue."

[awm]

Historically, there's a pretty strong correlation that higher tax rates on the top brackets leads to more economic growth. This contradicts the conventional wisdom about tax cuts.

 

There are a number of reasons that such correlation makes logical sense though. For example:

 

(1) Suppose I own a business. My business does particularly well this year and makes a profit of a million dollars. If the top tax rate is low, I may decide to pocket the million in profit as personal income, maybe use it to buy some expensive toys or put it into savings. If the top tax rate is high, then pocketing the million in profit means I have to pay an awful lot to the government. Instead, I may decide to pay myself only a few hundred thousand and invest the rest into growing my business (tax free for the most part) so that we will have more good years like this one in the future (perhaps when tax rates are lower). The latter course of action is generally better for the economy.

 

(2) Certain uses of money are better than others for economic growth. Stashing the money under your mattress is basically the worst, but there's a wide range. Generally spending the money is better than saving it, and spending the money to encourage other people to do something of general benefit (like say, building a high-speed rail) is better than spending it on vanity projects or foreign goods (at least as far as our national economy goes). Government is not necessarily the most efficient at spending money -- but neither is it necessarily the least efficient. Wealthy individuals are usually not very efficient in this respect, so taking some money from the wealthy and letting the government to spend it (i.e. on infrastructure) could easily be better for the economy as a whole. This suggests that tax cuts for the middle class are probably more stimulative than tax cuts for the rich, and that a high top income tax rate might be better for the economy (assuming the government spends the money in useful ways).

 

(3) Some people have stated that it's possible that people will choose not to work as hard if the tax rate is higher. Obviously if you go to some extreme (like a communist system or whatever) where the top tax rate is 100% it seems clear that people will choose to take some time off rather than working only in order to pay more money to the government. But at a more modest rate, it's possible that people will actually work harder with higher taxes! For example, suppose that I think my family needs $500,000 a year to live "in the style to which we are accustomed." Most likely I'm going to put in as many hours of work as I need to obtain this level of income... and not necessarily all that much more. So higher taxes give me incentive to make more money, in order to maintain my "take-home" income at the level I'd like. Again, it's easy to imagine frustration if the tax rate is close to 100%, but if taxes were raised from 30% to 35% you might see people deciding to take a week less of vacation in order to equalize their take-home income, rather than taking a week more of vacation because they're so frustrated about the tax rate.

[PassedOut]

Interesting post.

 

I always found it counter-intuitive that in real life higher US tax rates have been associated with higher growth, but I didn't think to consider how the higher tax rates might accomplish that favorable result. I always looked at other factors that I figured must have outweighed those higher rates. Now I see that I was (perhaps self-centeredly) overlooking some serious possibilities.

[tomlgoodwi]

Some people have stated that it's possible that people will choose not to work as hard if the tax rate is higher. Obviously if you go to some extreme (like a communist system or whatever) where the top tax rate is 100% it seems clear that people will choose to take some time off rather than working only in order to pay more money to the government. But at a more modest rate, it's possible that people will actually work harder with higher taxes! For example, suppose that I think my family needs $500,000 a year to live "in the style to which we are accustomed." Most likely I'm going to put in as many hours of work as I need to obtain this level of income... and not necessarily all that much more. So higher taxes give me incentive to make more money, in order to maintain my "take-home" income at the level I'd like. Again, it's easy to imagine frustration if the tax rate is close to 100%, but if taxes were raised from 30% to 35% you might see people deciding to take a week less of vacation in order to equalize their take-home income, rather than taking a week more of vacation because they're so frustrated about the tax rate.

 

Wouldn't a retrogressive tax structure -- the more you make, the lower percentage the government takes -- accomplish just as much? In such a system, if you are in a low-income/high-tax-bracket group, you will just have to work twice as hard (or twice as long) to increase your income and escape into the next (i.e., lower) tax bracket.

 

There is of course a fallacy here, but it isn't much different from the fallacy in the quote.

[awm]

Wouldn't a retrogressive tax structure -- the more you make, the lower percentage the government takes -- accomplish just as much? In such a system, if you are in a low-income/high-tax-bracket group, you will just have to work twice as hard (or twice as long) to increase your income and escape into the next (i.e., lower) tax bracket.

 

There is of course a fallacy here, but it isn't much different from the fallacy in the quote.

 

The point isn't that raising taxes will necessarily cause people to "work harder" -- in some cases it might, in some cases it might not. The point is that raising taxes from a marginal rate of 30% to 35% will not necessarily cause people to work less. Obviously the same logic does apply to raising taxes on poor people. The difference is that poor people spend most of the money they make (and so are more efficient in stimulating the economy per dollar of their meager paychecks than the wealthy) and that poor people typically have a lot less control over the number of hours that they work (when compared to wealthy people who are more often self-employed etc).

[mike777]

Havard Economics Professor: I Can Afford Higher Taxes. But They’ll Make Me Work Less

http://mainstreet-ct.com/marl/2010/10/11/havard-economics-professor-i-can-afford-higher-taxes-but-they%E2%80%99ll-make-me-work-less/

 

"Taxing behavior reduces that behavior. Taxing work causes people to work less."

 

 

 

 

Interesting idea that some posters think the opposite, higher taxes will make you want to work more not less.

 

Keep in mind another effect of higher taxes is a larger blackmarket, see Italy and Greece.

 

 

"Milton Friedman: I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible...."

[luke warm]

Havard Economics Professor: I Can Afford Higher Taxes. But They’ll Make Me Work Less

http://mainstreet-ct.com/marl/2010/10/11/havard-economics-professor-i-can-afford-higher-taxes-but-they%E2%80%99ll-make-me-work-less/

 

"Taxing behavior reduces that behavior. Taxing work causes people to work less."

 

 

 

 

Interesting idea that some posters think the opposite, higher taxes will make you want to work more not less.

 

Keep in mind another effect of higher taxes is a larger blackmarket, see Italy and Greece.

 

 

"Milton Friedman: I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible...."

but this is harvard and the univ of chicago (throw out the nobel prize, it occurred too long ago to matter)

[hrothgar]

Havard Economics Professor: I Can Afford Higher Taxes. But They’ll Make Me Work Less

http://mainstreet-ct.com/marl/2010/10/11/havard-economics-professor-i-can-afford-higher-taxes-but-they%E2%80%99ll-make-me-work-less/

 

What a load of crap (Its par for the course for a member of the crack economic team that cratered the economy, but even so)

 

The author starts by assuming a hypothetical rate of return and then subtracts away all the grossly unfair losses to to taxes...

 

I wonder whether the company that he invested in would be able to generate that nice 8% return without functioning infrastructure, without an educate workforce, with an economy collapsing down around it, without all the nice benefits of a civilized society that he just takes for granted...

[hotShot]

Lets assume for a moment, that people would work less, if the taxes go up.

 

This would mean, there is work left to do and you could get paid for it.

I would call that a business opportunity for someone else.

 

So higher taxes would get more people into well paid job and more entrepreneurs would emerge to fill the gap that others left by working less. That has to be good for the economy ....

[helene_t]

hotShot, there is always work left to do. People working less is bad for the economy. Of course it could be a good thing for a particular person to work less. But if the tax system give people an artificial incitement to work less than they otherwise would it is a bad thing. And I say this as someone who generally is cool with high taxes, although I think the reasons Adam mentions why high taxes might lead to higher growth are largely short-term effects.

[kenberg]

Is there a typo in the headline or is there a school called Havard (as opposed to Harvard)? The caption on the picture says Harvard but it is odd. Usually a caption actually gives the name of the person. Taken at face value the article quotes an unidentified professor at Havard and shows a picture of an unidentified professor at Harvard.

 

Then we go on to the content.

 

The whole think looks like a spoof article, something the Onion would probably reject. At any rate, if higher taxes would result in this gentleman not publishing anything else, I say let's hear it for higher taxes.