tax cut myths

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Discuss.

http://www.cbpp.org/cms/?fa=view&id=692

I agree with most things said. It must be recognized that deficit financed tax-cuts are not likely to improve growth given that they drain capital from the economy in the beginning due to the need to finance a deficit.

Given that we haven't had a budget surplus in a decade, wouldn't all tax cuts be deficit financed?

Considering we're running with fiat money, I fully agree: deficit financed tax-cuts are completely moronic.



So....can we get back up to the 90% or so tax that the upper class was paying previous to Nixon starting the general decline of responsibility for the upper tier?

In some sense, yes. Note, one could cut taxes and spending at the same time, or even redistribute tax burden and that could possibly have beneficial effect, but that's not the same as a pure tax cut.

Note: I am not arguing against the Keynesian idea of stimulus through deficit financing, only against supply side ideas. I just want to make that clear in case someone will extrapolate too far. I do not know the point of Orwell's comment. (I would think the problem I am getting at is somewhat obvious to him)

Government spending boosts GDP. The silly argument for tax cuts can easily be made for increasing government spending - in fact, the multiplier for government spending is greater and therefore it is more efficient in terms of an economic boost.

The point is that, according to your post, any tax cut would be draining capital from the economy—quite the opposite effect that tax-cut proponents intend.

Well, yes. That's why these tax cuts are kind of ridiculous. The incentive effects that proponents propose for labor are inconclusive(people also often will work less if their financial well-being is secure), and the promotion of capital is quite questionable, as investment will have to be drained from the global economy to sponsor this, as well, there is not much reason to think that the amount of investment spurred on by these tax changes will come close to picking up the slack. (income tax changes being sucked into both investment and consumption, even among the rich)

I think the problem and the solution are a lot more complicated. Thats why we are having this debate.
The bottom line is to figure out the best way to spend or not spend your dollars. The answer to that question is dependent on a large number of interacting variables.

- how will the subjects react to the cuts?
- how would they react to a spending program?
- what is the effect vis a vis the international economy?
- Is controlled spending by the government on chosen areas of the economy more or less efficient than letting the free market do the allocation?

There will certainly be situations in which tax cuts would be the most effective allocation of limited resources. I just don't believe they will work effectively when applied to the current US economy.

I could imagine that creating a new deal plan aimed specifically at the energy situation and the post-oil economy might be a much more efficient way to spend the money than cutting taxes.
The free market may not move fast enough to deal with the energy crisis that is already starting.

My default anwer to a question like this would normally be that the free market is more efficient. However, in the context of tax cut discussions, "the free market" is often a euphemism for "multinational corporations and the super-rich," and I would guess that they are less likely than the government to spend money in ways that will benefit the economy.

I think I am in agreement with your comments about energy programs.

And some times it is the name for the aggregate of small and medium size business firms who employ over half the people employed in the United States.

ruveyn

It is precisely these businesses that are not beneficiaries from most tax cut proposals.

The tax cuts that truly put more money into the marketplace are extensions of basic exemptions (i.e. the threshhold below which you are not required to pay taxes, and the products that are zero-rated for value added taxation), and reduction of the marginal tax rate for the lowest bracket.

But even these cuts are a net drain on government revenue. Suppose that the overall tax take is 20% of the economy. For a $1 tax cut to be revenue neutral it must generate $5 worth of taxable economic activity. That's a pretty astounding expectation.

There is a cure for that. Less government.

ruveyn

I certainly agree that a primary question in any policy discussion should be: "Is there a proper role for government here?"

But it is not enough to merely repeat the mantra, "less government." That strikes me as an uncritical phrase that does not explore the proper function of government in a free, democratic and capitalist society.

I am quite prepared to see activities currently performed by the government handled by private actors, provided that the equivalent public good can be demonstrated. But equally, where private actors cannot assure the ongoing public good, then the government is woefully remiss in abdicating authority. For example, we have had ample demonstration that the financial market cannot be trusted to regulate itself in the best interests of either investors or consumers, so a role for the public sector remains essential.

So where does government currently act without a proper role?
What are the true tax savings that would result from cessation after consequential costs are accounted for?
Would that tax savings have to be taken up by new taxes at another level of government (i.e. States assuming responsibility for a matter abandoned by the federal government)?

While I am sure that there are a myriad potential replies to the first question, I suspect that the second and third questions will prove to provide the real meat of the debate.

It is easier to ask where doesn't the government act without a proper role. Because of a perverse interpretation of the Interstate Commerce Clause upheld by the courts since the New Deal, the government regulates every aspect of our lives.

See http://en.wikipedia.org/wiki/Wickard_v._Filburn

ruveyn

Excessive military/defense spending. The drug war. Surveillance of US citizens and violations of civil liberties.


From the first two, a whole lot.


Nope. We could spend a fifth of our current military budget and still be easily the most powerful nation in the world.