Fiscal Policy: Capital Gains&Games Go After Cogan&Hubbard

I went a bit ballistic yesterday when I read some spin from Cogan&Hubbard. It seems that Andrew Samwick – who has joined the Capital Gains and Games gang objected as well:

How might such a change in taxes have been avoided? Perhaps by not ramming through such budget-busting tax cuts in the first place. Perhaps by not letting them persist for so long, running up deficits during business cycle peaks in the intervening years. Until Hubbard and Cogan are willing to commit to a responsible budget policy, of which tax policy is one component, it is impossible to take an op-ed like this seriously … Note that the 18.8% includes the Social Security surplus. So according to Hubbard and Cogan, that money is available to be spent on current government expenditures, rather than used to repurchase government debt, which would make the Social Security Trust Fund a legitimate savings vehicle. (Yes, this is the same Cogan who laments that Trust Fund accounting doesn’t work because the government just spends the money. I wonder whose op-eds they use to justify their reckless behavior.) … Returning to my point about a responsible budget, not only should the budget be balanced over the business cycle, it must be the on-budget parts (i.e., excluding the Social Security surplus) that must be in balance. Not only must there be no trend in the debt/GDP ratio, it must be the ratio of total debt (i.e., including the Social Security Trust Fund) to GDP.

Andrew’s colleague Pete Davis also weighs in:

Glenn Hubbard’s and John Cogan’s Wall Street Journal op-ed this morning seems persuasive until you consider that their premise is wrong, their math is misleading, and they fail to explain the real reason federal revenues have risen as a share of gross domestic product over the past 25 years … Hubbard and Cogan examine only the past 25 years, starting in fiscal year 1983, when President Reagan’s tax cuts first took full effect, driving federal revenues down to 17.5% of GDP from 19.6% when he took office in 1981 … Hubbard’s and Cogan’s math is very misleading. They state: “By historical standards, federal revenues relative to GDP, at 18.8% last year, are high. In the past 25 years, this level was only exceeded during the five years from 1996 to 2000.” It’s Freudian that they left out the 19.8% of fiscal year 2001, the sixth year in the past 25 over 18.8% … More problematic is that federal revenues over the past 25 years averaged 18.3%, only half a percentage point of GDP below last year’s 18.8%. Therefore, last year’s 18.8% is not very high. High is when we hit 20.0% in fiscal years 1998 and 1999 and 20.9% in fiscal year 2000. They fail to note that President Reagan never got revenues below 17.4% of GDP or that President Bush 43 slashed them to 16.5% of GDP in fiscal year 2003 and to 16.4% in fiscal year 2004. President Bush 43 outdid President Reagan by a lot. They also fail to mention that we are headed back down from 18.8% last year to near 18.0% this year. It would be much more accurate to conclude that, last year, federal revenues briefly returned to just above their historical average of the past 25 years, and they headed back slightly below that average right now.

Most excellent! This one surprised me at first:

Finally, Hubbard and Cogan fail to dissect the reason revenues are high. Turn to Historical Table 1.3 on pages 34 and 35 of the President’s FY09 Budget. Take a close look at the composition of federal revenues. In fiscal year 1983, federal revenues of 17.5% of GDP were composed of individual income taxes of 8.4%, corporate income taxes of 1.1%, Social Security payroll taxes of 6.1%, excise taxes of 1.0%, and other taxes of 0.9%. Flip to the next page and check out fiscal year 2007, when federal revenues of 18.8% of GDP were composed of individual income taxes of 8.5%, corporate income taxes of 2.7%, Social Security payroll taxes of 6.4%, excise taxes of 0.5%, and other taxes of 0.7%. Hubbard and Cogan would have you believe that individual income taxes are behind the increase, but that isn’t true. They are almost identical at 8.5% in fiscal year 2007 as compared to 8.4% in fiscal year 1983. The largest increase in 25 years by far is from corporations. Despite lower corporate tax rates, corporations are much more profitable now than they were in 1983, and that 1.6% of GDP increase is the main driver of today’s higher federal revenues as a percentage of GDP. Social Security payroll taxes have inched up 0.3% points of GDP. Federal excise tax revenues have dropped in half by 0.5% of GDP, and other federal taxes have declined 0.2% of GDP. Glenn and John, where is the tax increase?

But then I realized that Pete was comparing 1983 and 2007 whereas my graph was looking way back to 1946. Corporate income taxes were indeed only 1.1% of GDP back in 1983 but this ratio was quite a bit higher before 1983. Pete’s discussion reminds us both that we should look at the composition of Federal revenues as well as its history over time.

I have to say that the Capital Gains and Games crowd do a very good job when it comes to fiscal policy discussions. This is a blog that I intend to read more often.