Taxes and Private Sector
Regular readers know that (together with a currently un-named co-author) I recently wrote a book looking at how Presidents performed on a wide range of issues, everything from abortion to the economy. The book is currently scheduled to come out next year (more info as it becomes available), and I’m playing with ideas for a second book right now. Not a sequel since what I have in mind is very, very different, but I think there’s something to be said about looking at how things change over the length of a presidential administration as it kind of smoothes out bumps.
Think of it this way – even the most law and order president might decrease spending on law enforcement from, say, year five to year six of his administration, but you can bet that such spending over the length of his administration will increase. Even Reagan raised some taxes, after all.
And since I mentioned St. Ronald, I’d like to focus this post on an issue near and dear to the heart of folks who like to invoke his wisdom – the importance of taxes when it comes to providing incentives to the private sector. See, raising taxes causes the producers, the folks who make things happen (as opposed to losers like you and me) to retreat, armadillo-like, into their underground Galtian burrows in the sky. The end result is that the economy tanks and we all starve to death. That’s why economic disasters never start during Republican administrations.
So let’s take a jog with this puppy, shall we?
And before we lace up, a note – everything you’re gonna see below is in a Google spreadsheet you can access here. It also contains links to all the data I’m using, which come from a few Bureau of Economic Analysis (BEA) National Income and Product Account (NIPA) tables and a CPI table provided by the Bureau of Labor Statistics (BLS). I’ve also included links to all the data sources used in this post directly below.
A second thing to note before we set out – it’s easy to cheat on GDP. GDP includes Government Spending, so an irresponsible administration can artificially goose GDP simply by borrowing a fortune (thus making the national debt explode) and spending the money. In the past, I’ve dealt with this a number of different ways, but today I want to focus on the private sector.
We can pull the government consumption and expenditures (NIPA table 1.1.5, line 21) out of GDP (NIPA table 1.1.5, line 1), giving us something we can describe as the “private sector component of GDP.” Next, we can divide the amount the government collects in taxes (NIPA table 3.1, line 2) at all levels – federal, state and local – by the private sector component of GDP. (Both the private sector GDP and the tax collections are in nominal dollars, and all we’re interested in is the percentage, so this is tres kosher.) That gives us the percentage that the private sector (at all levels, from the lowliest panhandler to the most magnificent maharajah in the business world) pays in taxes in each year. If it isn’t obvious, there’s no point in including the government portion of GDP there since the government doesn’t pay taxes.
Since we’re interested in growth, we can adjust the private sector component of GDP for inflation – might as well put it in 2005 dollars, since when the BEA adjusts for inflation, these days that’s their base year.
With all of that, we can produce the following graph. (A reminder – all the data is in the referenced Google spreadsheet.)
FYI, since Ike took office, only three administrations (JFK, LBJ and Clinton) increased the percentage of the private sector GDP that goes to taxes; they make up three out of the four administrations with the fastest increases in the annualized real private GDP. Regular readers also may recall those are the three administrations with the fastest annualized increases in real GDP per capita, including the government portion of the festivities. (Regular readers may also recall I get very irritated when someone starts blathering about the “Kennedy tax cuts” without a. realizing that the so-called Kennedy tax cuts occurred while LBJ was in office, and b. one can cut marginal rates and increase enforcement at the same time, which is what happened. If you’re going to argue something in comments about the Kennedy tax cuts, please stick to what the data says and not what Glenn Beck tells you.)
The annual average increase in real private GDP is about 2.4% for administrations that cut share of private sector GDP going to taxes, and 4.2% to the administrations that increased it.
Go figure. Now, I dislike paying taxes as much as a Glenn Beck does, but the story line about big bad taxes choking off the private sector doesn’t add up. The “biggest government” president in our sample was LBJ with his Great Society and War on Poverty, and he’s the guy under whom the private sector grew the fastest. JFK was second on both counts. The reason is, without the government, and the taxes that fund it, there is nobody to build roads, provide a decent legal system or combat epidemics, and without things like this, the private sector grinds to a halt, the efforts of Anthony Mozillo and Paris Hilton notwithstanding. Which brings up one other thing – the argument you often hear is that the private sector is more efficient because of the profit motive and the fact that inefficient private parties go bankrupt. Of course, in the real world, inefficient private parties peddling silly ideas can do as well or better than their quality counterparts. The graph above contradicts everything you will ever hear or read in a Rupert Murdoch owned property, but Murdoch is in no danger of going under. Nor will his great, grand-children, even if they continue selling something that isn’t true for generations.
Now, in case you’re wondering, I generally start these sorts of analyses with Ike though data runs to 1929 because events like the Great Depression, World War 2, and the recovery from World War 2 tend to distort things. For instance, during World War 2, the private sector’s share of the economy was (purposely) reduced dramatically given that fighting the Nazis and the Empire of Japan was the main preoccupation for most people. Conversely, during Truman’s term, the pent up private sector demand bounced back.
However, if you’re interested in what that looks like, I’ve included the data going back to 1929 (as far as it will go) in the spreadsheet, and I’ve done the analysis going back to FDR’s first term. The analysis for the growth in real GDP itself (i.e., not just private GDP) is there.
Reminder: the spreadsheet is here.
Current Tax Receipts: NIPA Table 3.1
GDP and the Gov’t piece of GDP: NIPA Table 1.1.6
CPI – U: BLS Table
Well, that’s it for now. All y’all shalom ‘til next time.
Being old enough to have been in practice in the 70s, it is my perspective that really high marginal rates tend to protect established companies (ATT, ITT, GM, blah blah) from entrepreneurs and innovators.
Also, high marginal rates at some point feed some crazy tax avoidance behavior (tax evasion is always with us).
Now, I do not swallow the entire supply side doctrine, largely because there are so many variables at any given time, but I am certain at some point high marginal rates are destructive to the economy. And a simpler IRC would be better for business.
I would read the following if you’re considering writing another book. Might change everything if it happens. Otherwise, we can be thankful that the scenario didn’t (doesn’t) unfold.
Société Générale Worst Case Debt Scenario Fourth Quarter 2009
Released to clients in Nov 2009
If LBJ hadn’t screwed the pooch with Vietnam he would likely be on Mt Rushmore today. But I’m biased.
Disagree with your comment about Rupert Murdoch not being in any danger of going under. Murdoch’s business model is not sustainable over the long run and a lot of his businesses are bleeding red ink. Hey, how about that Fox Business Channel…that was a real success!
If LBJ hadn’t screwed the pooch with Vietnam he would likely be on Mt Rushmore today.
So who would you sand down to make room for LBJ. Washington, Jefferson, Roosevelt, or Lincoln? Jesus, they put Lincoln on the penny. Don’t tell me you want to sand down Lincoln, they put the great emancipator on the penny, yeah, we’re post racial.
I was hoping the next book would prove A) Correlation proves causation and B) Covar(a,b) = 0 implies a and b are independent.
Also, don’t forget to put a few intentional mistakes in your first book, so you can come out with a higher priced 2nd edition within a year of releasing the original.
High enough marginal rates can cause problems – no doubt. The question is, have those rates been that high for very long at any point in reality? Does anyone actually pay that rate?
I make a lot more money now than I did in college. But a lower proportion of it is taxable (think Roth IRAs). Go figure.
Thanks. I’ll look at it. FWIW, we cover the debt in the first book.
Low marginal tax rate leads to speculation which leads to depression. Tax rates should not be based on unproven ideas because the results can be real bad. Basically if the tax rate on the rich is too high there will be less capital available and interest rate will rise causing inflation. What is need then if to lower the tax rate on the rich 5 to 10% to increase capital and increase it on the middle class. This will increase capital and decrease demand for that capital. If the tax rates on the rich is too low then interest on capital is too low and you get flight to risk which causes a bubble which will bursts. If this case increase the tax rate on the rich and lower it on the middle class. This will decrease capital and increase the demand for it. Having lower tax rate on stocks also help to increase speculation. We need tax rate on interest to be the same as tax rate on stock. Tax rates should be control by something like the FED. It needs to be taken out of the politicians hands because they use as a way to get elected without regards to the consequences.
If Fox News Channel goes under, Rupert will still be fine. I believe The Donald when bankrupt twice and still suckers line up to pay for the privilege of hearing him explain how you can be a business success.
There’s a line in “Born Rich” where one of his daughters says she passed a homeless guy in the street and thought to herself (I don’t remember the exact quote): “This man owes a billion dollars less than my father does.” She went on to explain how proud she was that her father had come back. But nobody in a family that loses $1 billion is in danger of sleeping on the street.
2nd ed – well, new data comes out all the time. We don’t need to insert mistakes.
Correlation and causation – actually, we do things the right wing way, which is to show that even though the correlation between low taxes and faster growth is negative, that (together with the blessed memory of St. Ronald) is proof positive that low taxes create faster growth every time with no fail, world without end, and anyone who refuses to believe it craaaaaazy.
I’d have to think a bit more about the mechanisms and outcomes you describe, but I definitely believe there is plenty of evidence that there is an optimal range of taxation – tax too much and you slow growth, and tax too little and you slow growth. The trick is to find that range. We can look at past history to try to find some guidelines of what that optimal range is.
Oh yeah, I forgot to add in that taxes are unconstitutional and roads pay for themselves. How unpatriotic of me.
When you’re a consumer the more they tax your personal income the less you have to spend. If you’re a business the more they tax your profits the less you have to distribute investors and owners. If you’re an investor looking at an investment project taxes lower cash flow that makes it less likely that you projects internal rate of return will exceed your cost of capital or that it will have a positive net present value. Moreover, because of deadweight loss when the government taxes products the revenue raised is less then what what’s lost to the economy, so this is like the economy throwing away money and getting nothing back in return.
Life got pretty good for the consumer during the 1980s through the 2000’s. Things were pretty bleak for many parts of the country in the 40s, 50s, and 60s. I would much rather have the 1980s and 1980 post economy with the focus on the individual then prior to this time. The liberals don’t care about the majority of Americans. They want to increase the power of the government and then tell us we ought to like it as they shift spending out of our projected to wasteful government extravaganzas — like healthcare reform.
No links to establish the points with data,,,a priori truth? I trust the point about your personal preferences Cantab, but you fail to establish your notion of liberals vs. something, and provide no real context, and still simply say ‘taxes bad’ most of the time. The one to one loss from taxes is much too simple minded for your intellect.
If one denies any good coming out of government then you reinforce the belief with the mantra. If you think AB is not cognizant of the dangers and potential dangers of government please google some posts. But I know you can get to the data and present something…not everyone can.
Cantab wrote —
“Moreover, because of deadweight loss when the government taxes products the revenue raised is less then what what’s lost to the economy, so this is like the economy throwing away money and getting nothing back in return.”
OK, first the easy part. Revenue less than deadweight loss does not equial getting nothing back in returm. So even based on your own (incomplete) analysis, your conclusion is simply wrong. Second, this is one of those situations in which looking only at one chart from the undergrad text leaves out a lot. Granting there is a deadweight loss from taxation on one side of the analysis, we still have to look at government output to determine whether the economy is better or worse off after government taxes and spends. Given the reasonable chance that at least somebody (rich people stand out here as likely candidates) would be willing and able to pay more for government services than they pay in taxes, there is probably a consumer surplus in the market for government goods and services.
I realize there is an ingrained bias among people who hate a large part of this country (the part that ‘s government-provided, protected and encouraged) to ignore the good side of the ledger when it comes to government activity. That, however, is not how real analysis is done. Not very honest, either.
In the past, you have sliced the data in a variety of ways, in order to show that objections to your analysis didn’t hold water. Here, I think there may be another way of dealing with the data, too, though I haven’t thought it through. Taking out “government” is to take out direct government activity, but to some extent leaves in the impact of government activity. Private contractors, the budget cost of mortgage deductions, and a whole bunch of other stuff that ends on in the “private” side of output is the result of government money. That’s without diddling around with a fiscal multiplier. I don’t know how you’d account for that.
“…so this is like the economy throwing away money and getting nothing back in return.”
Except for the consumer surplus on publicly provided goods and services.
Oh, and except for public goods. Which is a class of goods from which the returns are generally very large. In theory, at least, returns to public spending can be infinitely higher than if the private sector were left to undertake the activity, because the private sector would not undertake it, at all.
If I think of anything else, maybe somebody could help me turn this into a Monty Python sort of thing. “Resolved, the Romans never did anything for Palestine…”
No links to establish the points with data,,,a priori truth?
But I think you agree with everything I said. Income taxes reduce after tax income. Business taxes reduced profit and throw investment projects from go to no go. Sales taxes create a deadweight loss to the economy (and I have posted links to this analysis before).
You and the other tax raiser want-to-bes have to sell the fable that raising taxes and shifting money away from individuals to the government in the end will collectively make us happier. Good luck with that one.
By the way you might want to read Brooks today. He’s identifying the trade off between security and vitality. For my preferences I think we already do a good job on security and trading away more of our vitality is heading down the wrong track.
Every single penny of the deadweight loss is a total loss to the economy. Why do you think they call it deadweight loss?
And please don’t play at false precision like you did with deadweight loss since it comes across as dishonesty.
Flip the graph on the vertical axis and the distinction you’re trying to make fades. LBJ’s runaway numbers look more and more like it may be linked to those tax cuts you kvetch about. Clinton doesn’t look that much better than Reagan. JFK’s rates look like Ike’s. You really know how to lie with statistics. Between this post and Ken’s earlier one on so-called deficit reduction, I see no reason to continue reading this blog. Have a nice day.
Actually, I think LBJ’s numbers have a lot to do with his guns and butter policy, the entecedent to a whopping burst of inflation.
And you won;t be missed, go snear somewhere else.
My continuing beef with economists is the apparent inability to see decisions from an entity level, due to looking at the economy from the 30,000 feet view.
(Most accounting PhD candidates are required to study economics, I don’t think most economists study accounting much.)
Good junior level courses in managerial accounting and finance provide background on what tax rates do to business decisions making. Business decisions are really what drives investment and jobs. The nature and rates of taxation drive those decisions (assuming intelligent decision making, which we all know does not always happen).
We need to understand more about what the tax system and rates do at the entity level.
So you’re proposing a version of the Laffer curve, with growth instead of revenue as the y-axis?
I’m not an economist, but I thought this issue was interesting the first time I read it, and I’ve glanced at work on effective marginal taxation rates from time to time. I’m curious if there’s a difference in the results between regressive tax policy changes and progressive tax policy changes. My belief is that effective marginal taxes have no effect on incentives past a certain threshold, similar to Robert Waldmann’s argument about what’s going on. At that point, the inefficient spending of the rich on frivolous items becomes the main driver. This can be summed up in the phrase: “more money than you know what to do with.” If I’m correct, then making taxes more regressive should reduce growth, and making taxes more progressive should increase growth.
I think john’s feelings were hurt, since he never looked at the stats based on his comment.
Cantab, when I put the problem right in front of you – that you only looked at the cost side and not the beneift side – I’m not sure why you’d want to fall back on your original assertion. But you did.
So, once again. There is a deadweight loss to taxation. That’s why I wrote “Granting there is a deadweight loss from taxation…” So you can stop pretending that the point about deadweight loss is at issue. The points I raised are on the other side of the ledger. You can’t do cost-benefit analysis by pretending only costs matter, no matter how many time you repeat the effort.
I’m not surprised you are trying to divert attention away from benefits, since your initial effort was to claim that we get “nothing back in return”, but the fact remains, there are benefits to government activity. Your initial statement was a fantasy.
When I talk about deadweight loss i’m insisting that the true cost of taxation be considered. This is basic stuff for anyone with an economics education.
This moral of the story is that since raising taxes imposes a deadweight loss on the economy then you better have a very good reason for making something a government priority and raising revenue it; and these reasons need to be under constant review. That’s government accountability, can you handle it?
I wonder what the correlation is between stock market volatility and tax rates. This argument would presumably mean that there is more variance during periods of low taxes. Just glancing at the data ( http://finance.yahoo.com/q/bc?t=my&s=%5EDJI&l=on&z=m&q=l&c=&c=%5EGSPC&c=%5EIXIC ) it certainly seems like Republican Presidents presided over periods with more volatility, but although Carter and Clinton had little volatility during their terms, JFK and LBJ had lots of variance in the market during their terms. Also, the period from 1980 to 2000 had lower taxes than the period from 1960 to 1980, but 1980 to 2000 has less volatility.
The moral of the story is that you are unwilling to and apparently incapable of doing anything but repeating the same thing over and over. I realize that’s how propoganda is done. It is not how honest argument is done.
For the third time – you are insisting on something that pretty much everybody has already agreed to. Taxes affect behavior. Taxes affect welfare. Nobody is disputing that, which raises question about why you insist on repeating it, over and over. The problem with your intial statement, beyond that silliness about “getting nothing back in return”, is the insistence on a purely one-sided analysis. Your claims about the impact of taxes ignore the benefits.
You are behaving as if the rest of the world is refusing to acknowledge that there is a cost to taxes, when the rest of the world is fully aware there is a cost to taxes. You then behave yourself as if there are no benefits paid for with taxes.
Now, I realize you may once again pull a schoolyard “no, you are” rebuttal, but the argument you have mounted and repeated is simply dishonest. It doesn’t rise above the level of propoganda. It’s Kudlow on a bad day.
You seem to be confusing “deadweight loss” and total loss. The deadweight loss is the component of total net gain (or net loss) that does not end up being a gain to anyone. kharris’ point is that there are many instances in which there can still be a net gain even after accounting for deadweight loss. Public goods are the most obvious example. For example, if it would cost each of us $1M to obtain some public good, but the value of that good is only worth $1000, then if left up to the private market the good would not be obtained. If there are 1,000 people each willing to pay $1000, then at the margin it would make sense obtain the public good assuming zero transaction and deadweight costs. It’s perfectly fair to insist that transaction and deadweight costs go into the calculation, for example, raising the breakeven point to $1.2 million and requiring 1,200 people. The point is that even after accounting for deadweight loss the net benefit can exceed the costs. It’s also easy to show that shifting benefits from producer surplus to consumer surplus has equity and fairness benefits that may exceed the deadweight cost of enforcing such a redistribution. The point of analyzing deadweight costs is not to argue against any and all government spending; that’s an analytical abuse. The point of examining deadweight costs is to find ways to minimize deadweight losses given that in many cases government spending and redistribution are appropriate.
BTW, one of my personal pet theories is that blue states are blue partly because of population densities, and higher population denities exert more effective demand for public goods because the private demands are summed vertically. People in Montana don’t see the need for public goods in quite the same way that people from New Jersey do.
LBJ also raised taxes…remember the 10 percent surtax.
One of the things that stands out with the 1964 tax cut is that it was very much the idea of actual economists rather than politicians. Real economists like Heller and Okun. They didn’t just create ex post facto economic rationalizations for a policy dreamt up by politicians. They actually played a meaningful role in the policy development.
Yes. I had some posts on that a couple years ago. Sadly, a hard drive crash means I don’t have the links at my fingertips.
FWIW, things get a bit more complicated, in that the optimal point changes over time.
I did this one… it covers a bit of the same bases you mention, though not all.
As to taxes, be careful… there’s a difference between marginal rates and the percentage of income actually collected, which is one of the points of this post.
“I would much rather have the 1980s and 1980 post economy with the focus on the individual then prior to this time. “
What does this mean? The ’80s, for instance, had slower growth than in the 60s. How exactly is that better for the individual? And yes, there were problems in the 60s. But the same is true of the 80s. Remember that raft of movies about farmers losing their farms in the 80s?
In response to this: “getting nothing back in return”.
I don’t know what your point is, when you lose something to deadweight loss you get nothing for it. That’s why they call it deadweight lose.
Let me try to help you out. Make a box from from 0 to 10 on all sides and draw a downward sloping supply curve on one diagonal and an upward sloping demand curve on the other diagonal. In the box price is on the vertical axis and quantity demanded in on the horizontal axis:
Without the government you get the following equlibrium conditions:
Quantity Demanded: 5 units
Consumer surplus: $12.5 dollars
Producer surplus: $12,5 dollars
Tax revenue: $0
Benefit to society over cost: $25
Now add a $1 dollar tax paid by the producer, the new equilibrium values are the following.
Quantity Demanded: 4.5 units
Consumer surplus: $10.1 dollars
Producer surplus: $10.1 dollars
Tax revenue: $4.5
Benefit to society over cost: 24.75
Deadweight loss: 25-24.75=.25
So what you have at the end of the day is a deadweight loss equal between 5 and 6 percent of the revenue raised. And as a consumer you lose $2.37 in consumer surplus or 19 percent of your pre-tax consumer surplus. The producer loses the same.
So is it too much to ask that we hold the government accountable to how they spend our money and how much of our money we let them take from us?
What if I don’t value the public good like you do? How does the analysis handle it if I place a zero or close to zero value on the public good?
By the way, its pretty clear the the global warming scientist like the marketing department in some Acme fly by night outfit are trying to jack up the value to fighting global warming. The left has turned our scientist into snake oil salesmen with outstretched arms waiting for another wad of sweaty grant money to be handed to them for their “scientific” findings.
“You and the other tax raiser want-to-bes have to sell the fable that raising taxes and shifting money away from individuals to the government in the end will collectively make us happier. Good luck with that one. “
Um, did you look at the graph. It shows that raising taxes and shifting money away from individuals to the government in the end does not collectively cause us to have less money. That’s not my opinion. That’s data. I provided the links to it. Feel free to check the data yourself, because you can replicate it. I, however, cannot replicate your opinion.
Did a bum or someone from the working poor ever offer you a yuppy high paying job?
Your points are acknowledged. All I can say is that over the years, I’ve approached this many different ways. And what never comes up is any reason to believe that low taxes lead to faster growth than high taxes.
1. you miss the distinction between marginal rates and the burden imposed on taxpayers. Whatever LBJ did to marginal rates, he collected a greater share of each person’s income. Not exactly what a rational person would call a tax cut, but your mileage apparently varies.
2. To quote myself, “The annual average increase in real private GDP is about 2.4% for administrations that cut share of private sector GDP going to taxes, and 4.2% to the administrations that increased it.”
Feel free to squint and stand on one leg if it helps, but that detail won’t change. Nor is it going to contradict anything else in the post.
“We need to understand more about what the tax system and rates do at the entity level.”
I agree fully. But I don’t have the data to do that, at least not right now. I do have the data to look at a high level and note that removing more money from the entire economy through taxes hasn’t exactly caused the apocalypse in the past.
I agree, to a point. There is a happy medium somewhere, and my guess is that if you get “too progressive” you’ve raised taxes “too high” on those at the top, and things will come crashing down. Its just that the level that is “too high” is not one we’ve observed yet.
A point that has come up in a lot of these posts I’ve written… marginal taxes and the tax burden are two different things. Its possible to lower marginal rates and simultaneously raise the tax burden (think the “Kennedy tax cuts”) and its possible to raise marginal rates and simultaneously reduce the tax burden (Bush Sr. did it). My guess is that that is a matter of the degree to which the President appoints people who believe in enforcement.
Easy. You just include a zero in the vertical summing. You should know how to construct a demand curve for public goods.
Using the national income & product accounts below are the the percentage we pay to the federal government in relation to GDP
To my eye this seems pretty constant over the decades. An even looking at the Clinton years hitting over 19 percent this is an artifact or the stock market bubble and the capital gains they generated.
Another thing from these numbers is who really believes the rich as a group were ever paying those 70+ percent top marginal rates in the 60s and 70s. Maybe the high rates were never intended to raise revenue but rather to create a system of high taxes and tax breaks to channel private money to areas chosen by the lobbyists and their people in Washington.
I don’t see how public goods would win on most cost benefit analysis that way.
Cactus says: ” And what never comes up is any reason to believe that low taxes lead to faster growth than high taxes.”
Actually, there is “A large body of research indicates that high marginal tax rates reduce economic growth. Two studies completed by Fabio Padovano and Emma Galli (2001,2002) confirm the negative effects of high marginal tax rates on economic growth. Using data for 23 OECD countries from 1951 tp 1990, Padovano and Galli found that high marginal tax rates and progressive taxes tend to be negatively associated with long-term economic growth”
There are 16 other studies referenced in this article. Your data is the counterintuitive outlier.
Cactus can’t really show what high or low government tax revenue does to growth since federal taxes as a percent of GDP has remained constant since the 1960s. The current crop of democrats want to take taxes to something over 30 percent of GDP. I wonder what cactus makes of that.
Yes cactus. Your study is (D) = better growth. Now you are venturing into causality with taxes. Dubious. I have always thought “Expectations” was your best hypothesis. It’s also tougher to refute 🙂 .
For another perspective on high taxation, read the 1960s updated preface to Berle & Means classic The Modern Corporation and Private Property. Since a huge part of our national wealth is held by government chartered collectives with unclear ownership in any traditional sense and generally unfettered management, high corporate taxes effectively make the public collective a partner of the private collectives It’s an interesting analysis, and it points out how exotic our modern corporations would seem to someone like Adam Smith. It is quite likely that the much cited “invisible hand” only works when the economic players actually have hands, and are not modern authoritarian collectives.
Oy. I’ve had three years of posts on one topic and I’m back to square one.
1. Only the private sector pays taxes. Try looking at this as a percentage of personal income. Or the private component of GDP. Or something.
2. Over a decade you have more than one Pres and more than one policy.
3. Averages are nice but miss the dynamics. If Clinton raises tax burdens, and GW cuts them by the same amount, the average tax burden throughout both their terms is the same. I assume nobody on earth thinks Clinton and GW had the same tax policy.
There is a difference. We’ve had many posts here at AB about some articles that state what those do. And there are just as many pointing the other way.
But… all those require some fairly complicated stats. And some assumptions are needed to make them run. Several of us regulars here at AB can do that – we do that for a living. So we know that if you’re going to lie or mislead with complicated stats, its easy – and the easiest way is with the assumptions in the stats or in the data.
Here, I’m doing something different. The method is simple – just graphics. And the data is transparent. I’ve provided it to you. Or you can believe I’ve fudged the data, in which case I’ve also provided the links and the line numbers in the tables for the data. You can do it yourself in thirty minutes or less.
But even if you’re an expert, it will take you many, many times that to replicate the results in the articles you mention (both pro and con). And longer than that to spot which are the dodgy assumptions.
Now, I have the skillset, if I feel like it, to take the high taxes and high growth rate in the Kennedy years, and the low tax and low growth rates in the Bush 2 years, and use that to “prove” that lower taxes = faster growth. It would take someone who knows what he/she’s doing hours to spot the flaw. Heck, I could “prove” GW was more fiscally responsible. I’m not unique in that regard – anyone who does what I do for a living could do the same, and it would take me a while to spot their bamboozle.
Now, I don’t do that. But a lot of people do. Hence, you get “experts” on both sides of an issue. Sometimes its honest. But on some issues, its not. Which is why so many people are exasperated by this debate – its not honest. But the guys who aren’t honest write very well.
What we’re trying to do here at AB is present things in a simple way that doesn’t allow conclusions to be hidden. Like I said, you can replicate what I did. No complicated assumptions are needed. And if there’s a problem, you can point it out. You don’t have to be a statistician or an economist.
Now, I presented some data. Tell me – how does the graph I have indicate anything at all like cutting taxes = faster growth. Or tell me why its the wrong way to look at things. But don’t appeal to someone whose methodology you don’t understand, because if you don’t understand what they’re doing, you have no idea if they’re bullshitting you.
Excuse me – where is the causation in the post? All I noted in the post is that there doesn’t seem to be evidence that cutting taxes leads to faster growth, and that in fact, the admins that raised taxes had the highest growth.
The numbers average out to be somewhere near 18.5 percent. They don’t move that much, that’s just the way it is.
Clinton had a booming stock market that created increased capital gains revenue. When you look at the numbers during the Clinton administration the rising revenues collected correspond with the late 1990s and the rapidly rising stock market. The stock market is how he got to 19.3.
Sorry, but i’m not into data mining (I don’t want to crowd you). I just picked federal tax receipts and GDP. I stand by it.
We seem to be reading different posts at times.
But your not making any kind of analysis about the lagging effects of desicions. Each administration recieves benefits and problems from the previous.
It looks to me your making a backhanded play at the Laffer Curve. Let’s see a timeline of where changes took place in captial gains and marginal tax revenues as a precentage of Real “Private” GDP?
The problem I have is that your trying to sell Reaganomics as wrong and a fraud, and sell the Great Society as the correct action that produces the best results. The truth is that every president since Ike has contributed to lowering taxes rates with an overwhelming steep trend line downward, with the exception of a couple of bumps in the road.
If the overall trend has been downward but revenues have stayed constant with the growth, then your conclusion that raising taxes produces the most growth isn’t computing.
GDP – Line 1, NIPA table 1.1.5
Current receipts – line 1, NIPA table 3.2
Figures below in billions.
for the year 2000, current receipts / GDP = 2,057.1 / 9,951.5 = 20.7%
for the year 2008, current receipts / GDP = 2,475.0 / 14,441.4 = 17.1%
So, now say you want to collect the same percentage at the end of GW’s last year as in Clinton’s last year.
In other words, you want to collect 30.7% of 14,441.4, which is equal to 2,985.
Well, 2,985 is 20.6% greater than 2,475, the amount that was collected at the end of 2008. Put another way – to increase the same percentage of income in 2008 as in 2000, you would have to increase collections by 20.6%.
As a percentage of GDP the differences seem small, but you’re looking at things the wrong way. And that’s ignoring the whole GDP includes the government portion, which isn’t taxed issue.
As to the stock market thing being responsible for the greater percentage of GDP being collected in the 90s… that would imply that the tax rate on capital gains is greater than the tax rate on other income. I suspect most tax accountants would look at you askance if you told them that was the case.
As to your final point, I can’t imagine what any of this has to do with data mining.
“But your not making any kind of analysis about the lagging effects of desicions. Each administration recieves benefits and problems from the previous. “
I’ve had that post before.
“It looks to me your making a backhanded play at the Laffer Curve. Let’s see a timeline of where changes took place in captial gains and marginal tax revenues as a precentage of Real “Private” GDP? “
I’m specifically trying to avoid marginal rates. They don’t capture how much people actually pay. I’ve had post after post about this. But it should be obvious here – LBJ cut marginal rates, but he raised the percentage of people’s income he collected in taxes. Bush Sr. raised marginal rates, but he lowered the percentage of people’s income he collected in taxes. Enforcement matters.
“The problem I have is that your trying to sell Reaganomics as wrong and a fraud, and sell the Great Society as the correct action that produces the best results.”
I’m putting up a graph. It shows something. That was also evident in a bunch of other graphs using a lot of other data I’ve put up in the past. You don’t like what the graphs show, but its nothing but data. I haven’t done anything fancy to the data. I’ve pointed to where it originates and put it all in a spreadsheet – you can play with it yourself, either from the spreadsheet or use the links I provided to go to the original source of the data.
If you don’t like the results, that should be an aded incentive to play with the data.
“The truth is that every president since Ike has contributed to lowering taxes rates with an overwhelming steep trend line downward, with the exception of a couple of bumps in the road. “
Again, that’s marginal rates, not actual tax burdens.
“If the overall trend has been downward but revenues have stayed constant with the growth, then your conclusion that raising taxes produces the most growth isn’t computing. “
I assume you object to this statement: “The annual average increase in real private GDP is about 2.4% for administrations that cut share of private sector GDP going to taxes, and 4.2% to the administrations that increased it.”
Your sentence may be true, but it has nothing to do with what seems to be what you’re finding objectionable, which is also true.
As an analogy, you are stating “if the sun arises in a given direction, then that direction must be East. Therefore, your statement that you are currently facing South is incorrect.”
Yikes. Guest is me.
I think you “played” with the numbers enough that you ralized that you can show growth when instead your only showing value.
You keep up the same mantra that an increase in the burden is going to produce more revenue, and you have yet to explain how punishing behavior encourages more of that behavior. It’s Kung-Fu Calculus, and I don’t believe for one second that you think increasing the tax burden increases tax revenues and growth.
An increase in the Tax Burden (Overall) causes inflation and “Private” GDP will have more value, but it doesn’t mean that it is growing!
“I think you “played” with the numbers enough that you ralized that you can show growth when instead your only showing value. “
I think you’ve been reading AB for a few years so you were aroudn when we went throught he exercise of my writing a post about growth, then being told: “well, if you lag it, it doesn’t happen.” So I lagged and it happened. Then I was told it was Congress. So I checked, and it wasn’t Congress. Then I was told if I used some data other than real GDP per capita (which is where I started). I did a number of other series. Then I was told – well, go back to FDR and its not true. It was more true. Etc. Each time, I wrote a post in response to something someone who didn’t believe the numbers insisted was the explanation, and it didn’t change anything. And each time, I’ve been open about where the data came from.
“You keep up the same mantra that an increase in the burden is going to produce more revenue, and you have yet to explain how punishing behavior encourages more of that behavior”
Jeez. CoRev kept doing this to me, insisting time and again that wasn’t providing an explanation or mechanism when one was sitting in the post. Granted, this time I kept it abbreviated:
“The reason is, without the government, and the taxes that fund it, there is nobody to build roads, provide a decent legal system or combat epidemics, and without things like this, the private sector grinds to a halt, the efforts of Anthony Mozillo and Paris Hilton notwithstanding.”
Say the government abolishes the Centers for Disease Control. It might not have an effect in year one, or year two. But sooner or later we’ll get an epidemic we wouldn’t otherwise get. What does that do to growth?
You may find it shocking beyond belief, but the research that led to the creation of the internet was paid for by the US government and European governments. I assume you think the internet has had a positive effect – I see some evidence that you actually use it.
And then there are roads. You don’t really think a private company would have built the freeway system we have, do you?
“It’s Kung-Fu Calculus, and I don’t believe for one second that you think increasing the tax burden increases tax revenues and growth. “
I believe the evidence shows that up to a point, it does.
“An increase in the Tax Burden (Overall) causes inflation and “Private” GDP will have more value, but it doesn’t mean that it is growing!”
Which is why in every one of these posts, when I look at growth, I adjust for inflation. I’m not Thomas Sowell for crying out loud.
prefers the idea that no correlation at all proves causation. that’s why no correlation between high taxes and bad economy proves that high taxes are bad for the economy.
i disagree with you here. the economy will take care of itself. we need taxes that are high enough to pay for the government services we need, allowing for reasonable growth to take care of a reasonable deficit.
trying to fine tune the taxes for maximum growth is folly.
here you are back to zero sum. higher taxes no doubt reduce your income at the moment you pay the tax. but assuming the government doesn’t drink up the money and piss on the rug, we might guess that they spend it on things that will increase your net income down the road. as, say, for example, not having to buy a russian dictionary to figure your tax bill.
or an armored car to get through the streets full of desperate people who will cut your throat for a dime, after your friends who understand markets have reduced them to starvation.
here you are being a fool and not worth even trying to talk to.
you give away too much to str here. the accountants will find a way to make their investments if the investments make money. the tax rate doesn’t have much to do with it unless there are different rates for different investments… and for their competitors. “accountants” may read economics books, but they don’t understand economics any more than the economists do.
Jimi – see next week’s post.