The Effect of Tax Cuts and Tax Hikes on Economic Expansions
by Mike Kimel
crossposted with Presimetrics blog
The Effect of Tax Cuts and Tax Hikes on Economic Expansions
Right about now, the U.S. economy appears to be recovering from a recession (and a nasty one at that). It’s not smooth sailing though; the recovery is still very fragile, and there are plenty of problems at home and abroad that can still derail the recovery. Depending on which economist or politician or pundit you ask, there are a number of prescriptions for what to do in times like these, but there’s one thing that just about all these worthies agree on, namely that lowering marginal income tax rates (or at least not raising them) is vital.
But the fact that everybody believes something doesn’t make it true. So in this post, I’m going to show three graphs. The first shows the length (in months) of every expansion since 1929. The second looks at the annualized growth in real GDP per capita for each expansion period, and the third looks at the total growth rate in real GDP per capita over the length of the expansion period. In each graph, recoveries are divided into three groups. Group 1 is composed of expansions following recessions in which the top marginal tax rate was cut or for which the top marginal rate was cut within one year of the end of the recession. Group 2 is made up of recoveries for which the top marginal rate did not change during the recession or within a year of the end of the expansion. Group 3 has the expansions that suffered from tax hikes, during the recession itself and/or within a year of the end of recession.
A bit of housekeeping before I get started… marginal tax rates are available from this fine table provided by the IRS’ Statistics of Income. Data on the starting and ending dates for recessions comes from the NBER, purveyors of recession and expansion dating for the U.S. economy. Real GDP per capita comes from the Bureau of Economic Analysis’ National Income and Product Accounts Table 7.1, updated on April of 2010. Real GDP per capita is available annually from 1929 to 1946, and quarterly thereafter.
One more wee bit of housekeeping before we get to the good stuff… for the sake of this post, I am going to assume that the real GDP per capita in any month is equal to the real GDP per capita for the quarter (or if prior to 1947, the year) in which it fits. In other words, the real GDP per capita (in 2005 dollars) for the first quarter of 2008 is $43,997, and I am assuming that the real GDP per capita in any of the three months in that quarter (i.e., January, February, or March of 2008) is equal to $43,997. That assumption shouldn’t cause any major changes in the results and it will keep me from having to go off on tangents about how the data was smoothed.
With that, here we go. The first shows the length of each expansion, in months.
Notice… the expansions that follow tax cuts (either during the recession itself or at the start of the recovery) have tended to be the shortest ones in our sample. And short expansions are definitely not a good thing; we’re all better off with expansions that go on for a while.
What about the speed of the expansion? The annualized growth (i.e., the speed per month) of real GDP per capita for each expansion since 1929 is shown below.
This graph also does not appear to mesh with popular wisdom (not to mention accepted economic theory) in America today. In general, when tax cuts occurred during or just after a recession, the resulting expansion has been slower than when the tax rates are kept unchanged. Expansions associated with early tax hikes are the fastest of all.
Which leads us to the overall growth of the economy during the entire length of each expansion, which is shown in the next graph.
Once again, the theoretical benefits of a tax cut do not seem to match what the data shows, which is that least impressive expansions are those that follow decreases in marginal income tax rates (either during the recession itself or at the start of the recession).
So where does this leave us? Well, simply put, the data and the theory/popular wisdom do not agree. Going as far back as there is official data on economic growth, what we find is that expansions associated with reductions in the top marginal income tax rate have been shorter and slower than expansions that did not involve tax cuts. Which means, simply put, that the theory is probably wrong, and we as a nation continue to buy into it at our detriment.
Graph 1
Notice… the expansions that follow tax cuts (either during the recession itself or at the start of the recovery) have tended to be the shortest ones in our sample. And short expansions are definitely not a good thing; we’re all better off with expansions that go on for a while.
What about the speed of the expansion? The annualized growth (i.e., the speed per month) of real GDP per capita for each expansion since 1929 is shown below.
Graph 2
This graph also does not appear to mesh with popular wisdom (not to mention accepted economic theory) in America today. In general, when tax cuts occurred during or just after a recession, the resulting expansion has been slower than when the tax rates are kept unchanged. Expansions associated with early tax hikes are the fastest of all.
Which leads us to the overall growth of the economy during the entire length of each expansion, which is shown in the next graph.
Graph 3
Once again, the theoretical benefits of a tax cut do not seem to match what the data shows, which is that least impressive expansions are those that follow decreases in marginal income tax rates (either during the recession itself or at the start of the recession).
So where does this leave us? Well, simply put, the data and the theory/popular wisdom do not agree. Going as far back as there is official data on economic growth, what we find is that expansions associated with reductions in the top marginal income tax rate have been shorter and slower than expansions that did not involve tax cuts. Which means, simply put, that the theory is probably wrong, and we as a nation continue to buy into it at our detriment.
Mike,
Why? Why? Why?
As far as I know I am the only person (besides you) who has been saying a little tax raise won’t hurt us, even in the middle of a recession. My reasoning is that there are people who have money, even during a recession, and they are not spending it or investing it. A tax would give the government the opportunity to use that money to hire real people to do real work, or to lend it to real businesses with a real business plan…. without increasing the deficit, which seems problematic.
I don’t see how a tax raise all by itself helps the economy… so i am looking for plausible connections, explained to me by people who know more.
But the “conventional wisdom,” even that of the usual non partisan experts, is likely to be wrong. It often is.
Unless this recession is really different from other recessions — at least of the post-WWII variety.
If this recession is debt-deflationary, then, getting money into the hands of those who must repair their balance sheets is necessary if a recovery is to be sustained. Tax cuts — especially for the middle class — are salutary.
Sample size
I think coberly nailed it in the first paragraph. BTW, I also am in favor of targeted tax increases.
(As an aside, Transocean, the company that operates the Gulf of Mexico BP Oil gusher, moved their headquarters from the Cayman Islands to Switzerland. Evidently, taxes in Cayman were too high for them.)
As to why – it was suggested here some time ago that there might be a Laffer curve for GDP vis-a-vis taxation. if we are on the low-tax side of the peak (which I firmly believe) then raising taxes will improve the economy.
To take a stab at answering Ellen – isnt it true that lots of companies are sitting on rather large piles of cash – and have been doing so for most of the last decade – but still not hiring or increasing investment – at least not domestically?
So, unless I’ve got this all wrong – repairing the balance sheets isn’t much of an issue.
What’s needed is spending – that is what capitalism thrives on – and it doesn’t much matter where it comes from. If entities with money are simply hording, then something has to be done to get it moving. It that means tax and spend, then so be it.
I also believe that the collapse of the M1 money multiplier is a big player in economic stagnation.
Regarding tax cuts for the middle class – at least in terms of federal income tax, the middle class is very lightly taxed as it is, so there is not a lot of room for movement there.
To quote Bruce Bartlett: “According to calculations by the Joint Committee on Taxation, a congressional committee, tax filers with adjusted gross incomes between $40,000 and $50,000 have an average federal income tax burden of just 1.7%. Those with adjusted gross incomes between $50,000 and $75,000 have an average burden of 4.2%.”
http://www.forbes.com/2010/03/18/tea-party-ignorant-taxes-opinions-columnists-bruce-bartlett.html
Cheers!
JzB
Ellen
I don’t really understand what you are saying. But I’d recommend being careful when you arrive at a conclusion that puts money in your hands. It is all too easy to fool ourselves that what looks good, feels good, and is good for us.
Jack
back in the days, I was told that when you know what you are talking about, a sample size of one is sufficient.
I don’t know how many recessions you can hope to look at over a course of time where the “other” variables can be reasonably assumed to be constant, but I would argue that when a careful worker looks at the small sample set of recent recessions (all of them. you see, this is not exactly a “statistical” argument.) and finds no compelling evidence that tax cuts do the magic that is claimed for them, he has told us something we might want to think about. and not dismiss as an artifact of small sample size.
Jazzbumpa,
I can’t go along with your Laffer argument. By itself, the Laffer argument has only to do with the interaction between rates and revenue, not growth. Only when there is a structural deficit and the tax rate is below the Laffer peak does a hike improve…wait a minute…
During a recession excess capital will not be put to use since the capacity for production is greater than demand. A tax hike on the rich with a job program will put the excess capital to use and increase demand. This increase in demand will then cause the rich to put excess capital to use. The government needs to bootstrap the process. The major problem with excess capital is that it fuels speculation. This excess capital must be converted to demand to fuel economical growth. The government is the best vechile for that conversion.
I’d second coberly on the sample size issue. We need to remember which part of the analysis Kimel is doing here. He is not (necessarily) claiming a relationship between tax hikes and recovery. He has started his post by noting the existence of conventional wisdom, and then examined the data. The null hypothesis here is that tax cuts don’t lengthen or strengthen recovery. The null hypothesis. The burden of statistical significance lies in rejecting the null hypothesis, in supporting the alternate claim. In this case, the alternate claim is “tax cuts good”. The fact that the data suggest just the opposite of the alternate hypothesis is funny and serves as a big “shut up” to those who claim magical qualties for tax cuts, but it doesn’t make the null hypothesis “right”. The null hypothesis is null. It is that there is no evidence of the alternate hypothesis, not that there is proof of anything. On its face, the sample size argument can only serve as a critique against the alternate hypothesis – those making the claim are doing so without having enough data to do so.
Shouldn’t ought to toss these terms around without knowing what they actually mean.
I would be with you Coberly for a number of reasons, but I still accept the conventional wisdom because of FDR’s experience in 1937. I would be interested in seeing if there is a correlation between increases in taxes and the start of recessions. Obviously, if we are in an expansionary phase, a tax increase does not cause the expansion to end, but if I understand the graphs they deal with tax changes early on in the expansion. What about tax increases later on in the expansion? Anyway, as to explanations you have set forth a possible explanation yourself whih certainly makes sense to me particularly when the recession is caused by the fall off in demand and threatens to be deflationary. I guess I would go back to the explanation I heard about the Clinton tax increases–they tended to lower real interest rates providing the capital for the dot com expansion. I have also posited that higher tax rates lead to more investment capital by causing people to sock more away in 401K’s. If the government will pay 40% of every dollar I save for retirement rather than 28%, I will tend to put more away. There is also I think a tendency for people to think more long range when tax rates are higher. When rates are low everyone bakes in the expectation that rates will go up in the future. There is a premium on current income–You can see this in the risk that wall street traders will run in hopes of large bonuses, business executives who sell future prosperity for short term profits that lead to bigger bonuses, people who take large lottery winnings in cash rather than over time, sports stars who prefer the highly paid short term contract over the long term lower paid contract although they may never be able to justify any contract with their play, etc. The result of the higher tax rates may be that all kinds of people tke a longer range view of their economic activity which produces better long term results than if their focus was simply on immediate income. Indeed, even the decision to get more education can depend upon take home pay. If tax rates are high, the opportunity costs of getting more education are lower.
To Cactus and the others, Hauser’s Law. “Since WWII regardless of marginal Income Tax rates, revenue stays near 19.5% of the GDP.”
Here: http://politicalcalculations.blogspot.com/2009/12/hausers-law.html
terry
at least you are thinking. and know more than i do. i haven’t got much further than the hypothesis i offered: in a recession there are some people who are still making money. bu they aren’t spending it or investing it. taxing it can put it to work giving people jobs, either direct gov’t jobs, or lending it to real businesses. why this would work better than borrowing or deficit spending is not so clear to me, but i suspect it does have to do with deficit levels and interest rates as you suggest.
i do know that a tax increase has NEVER reduced my willingness to work. If it has that effect on the rich, well, maybe that’s a good thing. Let someone who needs the money do the work.
I think your “premium on current income” is likely to be a factor. money spent for ‘now’ is not always spend wisely. the excuse of the short term thinkers is that you can’t really see what tomorrow will bring, so maximizing your position today is your best strategy… has a degree of validity. but it favors the kind of people who have no foresight at all, and that is not the best way to run a railroad.
The FDR problem in 1937 was a LARGE DECREASE IN SPENDING. The marginal rates for over 100K income were raised from 25 to 55% in 1932. The economy recovered during that period. Rates were bumped from 55 to 63%, not a big increase, but spending was dramatically cut.
People take the wrong lesson from 1937. It was the spending cuts, not the tax increase that halted the recovery. The recovery restarted when the spending was put back in place.
Something else to chew on. The GI Bill (the last of the New Deal Programs) was more spending per decade than the rest of the New Deal spending programs combined.
When demand collapses, velocity is too low. It makes sense to redistribute money that the wealthy are just sitting on (zero velocity) and redistribute it to people on the lowest rungs of the economy that are spending every dime. It makes sense to provide at least a portion of the redistribution as investment in workforce health and training that may be out of reach of those on the bottom rungs, but will pay higher dividends in the future and public infrastructure that benefits everyone.
Redistribution does not hurt the wealth in the end. The wealthy are wealthy because they occupy a position in the economy that allows them to collect money from others. Whatever is redistributed to the bottom will rapidly come back around to the wealthy. Economics does not have to be zero sum.
For those who think a rule-of-thumb (even if called a “law”) is a substitute for data – when the rule suits them –
Didn’t federal income tax revenues (including FICA) amount to 14.8% of GDP in 2009, 17.5% in 2008 and 18.5% after the Bush tax cuts, but before the recession, in 2007? We may find that the total federal tax take climbs back toward 19% over time, but taking the 19.5% rule-of-thumb as a substitute for evidence misses a good bit. Now, one thing the teeny pictures shows is that economic expansions can move the tax take above 19.5%. What they don’t provide is a cyclically adjusted picture so that we can see whether other changes matter. That’s why cyclically adjusted figures are published and why we use regression analysis when we want to understand the effect of individual factors in a complex system.
We might also want to ask whether lax enforcement of tax law had anything to do with what Hauser and, I’d assume, CoRev might see as a remarkable anamoly in the downward divergence in the revenue ratio during an expansion – under Shrub. After all, the evidence of the chart is that downward divergences are associated with recession, upward divergences with expansion. Maybe better enforcement would permanently change that 19.5% figure, since it does not apply in all times nor in all places. Other countries have substantially different tax ratios, and substantially different enforcement regimes. Also notable in the Political Calculations chart is the necessity to annotate the major upside divergences. Seems like a lot of annotating for a rule we are asked to accept as “law”.
Now me, when I see that revenue as a share of GDP can top 20%, and I know that adding 0.5% to 1.0% to Hauser’s average in the medium term could change the deficit outlook substantially, I am not dissuaded by Hauser’s somewhat flexible Law from asking for tax increases.
kharris
i agree, but allow me to insist that the payroll tax is not a tax. if i were smarter i’d find a better way to say that, but in fact the cognitve dissonance might be all to the good, if it led people to think.
a tax is money that goes to government spending for those things governments traditionally buy. the payroll tax goes directly to the people who spend it on those things that people traditionally buy.
the “transfer” is from your young self to your old self. and it has much more in common with “savings” than with “taxes.”
i am sorry that people get confused by the pay as you go aspect of it, but if they thought about that for a while they would see that even that is really no different than what happens to your money when you put it in the bank. someone else spends it. until you need it back. then “your” money comes from some new depositer.
i think it would clarify our thinking about taxes if we just made a point to NOT count the payroll tax.
i know this would make the taxes in this country look even more progressive, and that would be politically embarassing to some, but i’m pretty sure that the keeping clear what we are talking about would be all to the good… even for the poor who do not pay “taxes.”
Thanks bakho–I knew that FDR got concerned with the deficit–sound familiar -and that he raised taxes as a result and the economy cratered in 1937, but did not know that there was a large decrease in federal spending-sound familiar- as well. Now I can agree with Coberly in arguing for at least modest tax increases in this time of national need for more revenue.
the picture would change completely if “social security” were means tested welfare, paid for by general taxes. then the people paying the tax would not generally be the people getting the money… certainly not in the nearly one for one way that Social Security is currently designed.
this, of course, is exactly the reason that payroll taxes are collected separately, and kept off budget, for everyone except congressmen, presidential advisors, and people unclear on the concept.
coberly,
Hauser’s formulation includes FICA, so I include FICA. Chopping up the data in other ways in this case leads to the same result. There is a trend but with swings wide enough to account for running large deficits and modest surpluses.
I would agree that it is useful to look at government revenues ex-FICA, but I would not agree that pasting a label on a certain revenue stream and insisting that label never be violated is likely to lead to good thinking. FICA has been used as a source of funds for general operations. FICA is massively regressive, as you point out. You have your reason for wanting FICA not called a tax, and say that reason is important enough to allow making honest discussion of tax progressivity harder. I would argue that we don’t need to make honest discussion of progressivity harder just to keep discussion of FICA honest. It is dishonest people mostly who try to twist the language of Social Security to their own advantage, and they will be dishonest almost no matter what.
Discussions here make it blindingly obvious that some folks will spout nonsense if not constrained by rigid rules, but whatayaknow, they spout nonsense when they are – well, ought to be – constrained, so I don’t see how limiting our thinking by limiting our vocabulary helps.
If it walks like a tax but doesn’t talk like a tax, they we probably should say that, instead of declaring “tax” off limits in FICA discussions. My guess is, the hacks you are trying to corral by controlling the vocabulary of the debate aren’t going to let you get two words in edgewise, no matter what you try.
It’s a nice article Mike and thanks for posting it. But I think you may be (not are, may be) reversing cause and effect to some extent. What I’m suggesting is that tax cuts/hikes are partially or maybe entirely controlled by the perceived state of the economy rather than the economy being controlled by tax rates.
Thus, if it is perceived that the economy is going to do well but that tax rates aren’t high enough to cover deficits taxes may be increased. If on the other hand it is perceived that growth will be weak, taxes are not increased and may even be cut. The relevance to today is that a lot of bright people including most everybody who called the housing bubble and financial bust sees lackluster growth or worse. Raising taxes immediately might not be a great idea much as I would like to see very high marginal income tax rates once again imposed on our wealthy just to teach them that screwing up ther management of the economy has painful consequences.
But maybe we should keep our hand off the taxes until a recovery is in hand.
You are putting the cart before the horse. The marginal tax cuts/hikes were a result of the robustness of the recovery, rather than a causal factor.
C’mon folks. The term was tax collections or in one word revenue. It did not define any single or subset.
The linked chart shows the percent of GDP taken out of the U.S. capping out with an upper bound of about 20 percent of GDP. Given this chart we really don’t have any data on the effect of federal taxes going up to something like 25-30 percent of GDP.
P.S. If anyone sees a clear trend between federal taxes and who was president at the time please explain it to the rest of us.
From today’s Wall Street Journal:
http://sg.wsj.net/public/resources/images/ED-AL524A_ranso_NS_20100516181943.gif
Coberly,
I tend to agree with you in part, but I suspect there is a bit more to the story. The government can, of course, spend more than it takes in – both FDR and Reagan did that (to take two examples of Presidents with above average growth). Then there’s also the fact that nobody pays the top marginal rate on much of their income – if they did, the Big 4 Accounting firms wouldn’t exist and Warren Buffett would be out a million bucks on that challenge he issued.
My guess is that changes in the marginal rate don’t in and of themselves have any long term effect on the U.S. economy. (Tax burdens – different story, but even then the sign is different from what the Chicago School teaches.) And yes, I’m aware that contradicts what was in the textbooks I was taught. Now, if marginal tax rates don’t really affect the economy but everyone thinks they do, when the folks in charge make changes to the tax rates they probably conclude: Mission Accomplished. That takes away the perceived to actually do anything that might in reality be useful.
“I heard about the Clinton tax increases–they tended to lower real interest rates providing the capital for the dot com expansion.”
That doesn’t sound right. Seed capital came from VC and private equity financing. Then next step is to go IPO if you can.
The dotcoms didn’t goto their local community bank for a loan.
jazzbumpa: “Regarding tax cuts for the middle class – at least in terms of federal income tax, the middle class is very lightly taxed as it is, so there is not a lot of room for movement there.
To quote Bruce Bartlett: “According to calculations by the Joint Committee on Taxation, a congressional committee, tax filers with adjusted gross incomes between $40,000 and $50,000 have an average federal income tax burden of just 1.7%. Those with adjusted gross incomes between $50,000 and $75,000 have an average burden of 4.2%.”
Note the qualification, “income tax”. The middle class pays a good bit in payroll taxes. That’s the tax to reduce, or to give a holiday on.
jazzbumpa: “What’s needed is spending – that is what capitalism thrives on – and it doesn’t much matter where it comes from.”
True. But it does matter in the sense that the lower the economic class, the more people spend what money they get. So cutting taxes at the bottom, and even a negative income tax would provide an effective tax cut stimulus. 🙂
From Wikipedia,
In economics, Hauser’s Law is an empirical observation that, in the United States, federal tax revenues since World War II have always been equal to approximately 19.5% of GDP, regardless of wide fluctuations in the top marginal tax rate. [1]
The theory was first suggested in 1993 by W. Kurt Hauser, a San Francisco investment economist, who wrote at the time, “No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP.”
In a May 20, 2008 editorial by David Ranson, the Wall St. Journal published a graph showing that even though the top marginal tax rate of federal income tax had varied between a low of 28% to a high of 91%, between 1950 and 2007, federal tax revenues had indeed constantly remained at about 19.5% of GDP.
The editorial went on to say, “His findings imply that there are draconian constraints on the ability of tax-rate increases to generate fresh revenues… Like science, economics advances as verifiable patterns are recognized and codified… The data show that the tax yield has been independent of marginal tax rates over this period, but tax revenue is directly proportional to GDP. So if we want to increase tax revenue, we need to increase GDP. What happens if we instead raise tax rates? Economists of all persuasions accept that a tax rate hike will reduce GDP, in which case Hauser’s Law says it will also lower tax revenue… As Mr. Hauser said: ‘Raising taxes encourages taxpayers to shift, hide and underreport income. . . . Higher taxes reduce the incentives to work, produce, invest and save, thereby dampening overall economic activity and job creation.’ Putting it a different way, capital migrates away from regimes in which it is treated harshly, and toward regimes in which it is free to be invested profitably and safely. In this regard, the capital controlled by our richest citizens is especially tax-intolerant. The economics of taxation will be moribund until economists accept and explain Hauser’s Law. For progress to be made, they will have to face up to it, reconcile it with other facts, and incorporate it within the body of accepted knowledge.” [2]
See the wiki article for a critique of supply side argument. However, with regards to the empirical evidence the data speaks for itself. Regardless of who was president and the marginal tax rate Federal tax rates have been mostly topped off at 20 percent of GDP.
Ellen 1910,
You don’t have to agree with me, but right now you have provided only your opinion to contradict the data I put up. If you want us to share your opinion, you might want to provide some evidence to back up that opinion and which contradicts the data I provided.
Sorry, looks like I just repeated your post.
Jack,
This is as much data as there is if I want to be able to look at growth rates with actual data rather than interpolated data someone estimated long after the fact. Perhaps it isn’t much, but do you really want to hang on your hat on “tax cuts are the best medicine in a recession and a nascent recovery, even though all the data for the US economy since 1929 shows no sign of that being true”? Remember, we’re talking about over eighty years of data here.
coberly: “allow me to insist that the payroll tax is not a tax.”
1) The Supreme Court disagrees. You can’t opt out of it.
2) Who cares? A payroll tax holiday will put money in the hands of people who will spend it, increasing demand for goods and services. It will also be broad based instead of benefiting special interests.
bakho,
I like that last paragraph of yours.
CoRev,
In the past I looked at collections (tax burdens as a share of income and gov’t revenue as a share of GDP, and both federal only and federal plus state and local for the latter). Usually by Presidential administration. This time I’m focusing on marginal tax rates. Each time I look at taxes one way, I’m told to pick another way. And I’ve done that, and you’ve read those examples. And the results, as you may recall, always show more or less the same thing with regard to either reduced taxes (by whatever measure) or tax cuts (again, by whatever measure). At some point you have to conclude there’s a story here.
Sorry…. trying to make the transition away from “cactus.”
Sorry… still trying to transition away from my old persona. I guess I’m not cactus any more…
VT,
Cause and effect… theoretically yes, but I don’t think it applies.
Consider the second fastest growth period in the sample… that from ’33 to ’37. If there was ever a time that that just about everybody agreed that “something has to be done” that was it.
And then there’s the fastest growth period, following the ’37 ’38 recession. (And I believe it retains that title even if you leave out the ’41 to ’45 years.) Despite monster growth from ’33 to ’37, the economy still was a mess (gives you an idea how bad the Depression was) and there was a Dust Bowl to boot.
Those two situations were probably viewed as the most dire in the sample at the time (and now), and taxes were either hiked or kept constant. And very, very rapid growth resulted.
Conversely, nobody in 2001 was saying to themselves: “Well, this is the worst situation we’ve ever faced and it calls for extreme measures.” And we don’t reach that conclusion looking back at 2001 from today either.
jmunk,
To repeat what I noted to VTCodger above… I can easily come up with example of a hike, constant tax rate, and tax hikes that contradict what you just wrote:
1. Recovery from the Great Depression
2. Recovery from ’37 ’38
3. 2001
But the rest of ’em don’t fit that story either. For example, if really believe Reagan waited until the economy was running to cut the marginal tax rates I suggest you click on the link I provided for marginal tax rates and compare that to this data on growth from the BEA. (http://www.bea.gov/national/xls/gdpchg.xls) Check out the Bush Sr. recession while you’re at it.
Min
so after you have given the poor middle class a “tax break” by cutting their Social Security “tax,” how do you pay for their retirement benefits? or for the current spending that SS benefits inject into the economy?
kharris
i hope i am not trying to control the vocabulary of the debate. i am trying to call attention to how a blind use of that vocabulary misleads us.
for example, if you take FICA out of the “tax” category, then how far below the “optimum tax rate” are we really?
CoRev
when I pay my water bill, is that a tax?
Cardiff,
Nobody is arguing that Hauser’s Law (if you want to use that term) is wrong. I’ve pointed out that tax revenues as a percentage of GDP have been relatively flat myself many times. But this post is about marginal tax rate cuts and economic expansions. If you feel that Hauser’s Law applies, please explain how. Otherwise, you might as well be linking to an article about Ferraris or Peruvian softdrinks.
Min
try to pay attention to the details. the payroll tax is a tax. had to be. that’s how SS passes constitutional muster. the payroll tax is not a tax. you get your money back. i am sorry if this strains your brain, but i don’t know an easier way to make the point.
a payroll tax holiday will take money out of the hands of people who will spend it, unless you replace the money with welfare, which will destroy Social Security. You could take the engine our of your car and replace it with a salad bowl, but it would no longer be a car. Though there are plenty of people who would keep calling it one.
I can’t opt out of my water bill. Is that a tax? Should I give people a holiday on their water bills? How will I pay for the water plant then? Maybe a bake sale at the school? Or we could sell the rights to deliver water to Enron, who would no doubt provide it at a cheaper price to Grandma Milie than the bad old government can.
“so after you have given the poor middle class a “tax break” by cutting their Social Security “tax,” how do you pay for their retirement benefits? or for the current spending that SS benefits inject into the economy?”
Their benefits remain the same. Only the tax is cut. (And I think that a holiday of a year or two is all that would be required.)
Cardiff
shows you can read if not think. Kimel has shown that those tax increases did not reduce GDP. that is the point here.
and i have never found that higher taxes reduced my incentive to work. but then i go to a different church than you do.
however, if you mean that corporations will migrate to countries where taxes are lower, if they don’t face tarrifs when they try to sell their products back in this country, i’d be inclined to agree with you.
nevertheless, i don’t think anyone is going to up and move just because his taxes go up two percent.
Cactus, my question is do you dispute Hauser’s findings? I find them interesting in that he may have identified the natural sweet spot for total Fed tax revenue.
Have we really been shown a Jello-based tax code. Raise this side then less is collected on another?
If so what’s that do to your tax collections/enforecments theory. Just some grist.
Dale, have you cut back on your meds again?
Dale, have you cut back on your meds again? 🙂
Cactus said meanly: “Otherwise, you might as well be linking to an article about Ferraris or Peruvian softdrinks. ” Now that tone is uncalled for.
And also said: “But this post is about marginal tax rate cuts and economic expansions. If you feel that Hauser’s Law applies, please explain how.” Hauser’s findings obviates much of what you theorize re economic impacts of Party/Presidential tax policies. Couple that with Codger’s comment: “What I’m suggesting is that tax cuts/hikes are partially or maybe entirely controlled by the perceived state of the economy rather than the economy being controlled by tax rates.” Might very well explain what is going on to the tax policies.
So we have one theory, Hauser’s, that shows that the ratio between Fed Tax Revenue versus GDP nearly constant regardless of Party tax policy and tax enforcement policy. Plus we have an explanation that is easily tested that shows tax policy is reactive to economic conditions instead of the other way around.
My $.02.
CoRev,
I’ve had several posts that noted that the range of tax collections hasn’t differed all that much since 1952 though marginal rates are all over the board. If that’s what Hauser is saying, of course I’m in agreement having shown the same thing myself.
But what does this have to do with the post? The post notes that people keep talking about the need for marginal rate cuts for growth, and that the calls for these tax cuts seem to be louder during and just following recessions. The post then breaks apart expansions into three groups, based on whether they started with marginal rate cuts, marginal rate hikes, or constant marginal rates.
Now… what does that have to do with Hauser? Because I’m not seeing any relationship between people insisting that cutting marginal rates is needed to get the economy running and the observation that government revenues as a percentage of GDP have stayed in a much narrower corridor than marginal rates. This isn’t apples and oranges, its apples and four minutes from some movie in Finnish playing in an art house cinema downtown.
CoRev,
1. This post is on recessions, expansions, and marginal tax rates. Not Presidents and parties. If you’re appealing to Hauser’s law to argue against something I wrote in some previous week, please be clear that is what you are doing. If something I wrote needs revisiting, I’d be happy to revisit it, but I did not realize you weren’t referring to this post when you brought up Hauser’s law.
2. I’ve already addressed VTCodgers point. In this particular instance, the facts do not fit the potential explanation he suggested. To use two obvious examples, Reagan’s tax cuts, and GW’s, didn’t come because the economy was doing very well, or because the economy was doing very poorly. Both of them were in favor of cutting taxes regardless of the situation long before they even thought of running for President.
3. As noted previously, I’ve also had multiple posts showing that federal tax revenue falls within a narrow corridor no matter what the marginal tax rates are. (You’ve read ’em and commented on ’em.) I’m very comfortable with that fact, but then I’m not the one who believes that marginal tax rates have an effect on the economy. I wrote this post to test whether a popular held view (not one I hold or have held within my adult life) is true.
4. My preference, as I’ve stated multiple times, including in this thread, is for using the tax burden – that is, the share of personal income going to the government.
Min:
$40,000 to $50,000 in income (dependent upon household size) is not middle class. Middle class income drifted upward abandoning many people in its wake. They may believe they are middle class; but, I would beg to differ.
kharris:
The statistics can only point in a direction and only show whether the stats are a normal or non-normal distribution. It appears that tax increases may be good. It also appears that tax cuts may not spawn a huge economic expansion or any expansion at all.
coberly:
I kind of have to agree with you . . . kinda. Reducing SS Payroll Withholding on $40,000 will net ~$2400. That is not a lot especially if you are not working. The issue still remains job creation and meaningful wages. Both would have a great impact on tax revenues, oosts, and SS withholding.
Mike:
Why would you like that statement? I don’t believe it is about collecting money from others. I tend to believe it is more about capital appreciation and the skewing of productivity gains towards capital over labor.
Mike
i think you put your finger on an important point. i was about to speculate that when the stockmarket goes up, people start putting their money in stocks instead of buying things that are useful, or that require useful work to make. this depresses demand and reduces the rate of growth. this would seem to be the same as your “takes away the perceived ned to actually do anything that might in reality be useful.”
it would be much the same if, just saying, under a republican, low tax, administration people started seeing ways to make money by doing bad.
Min
where does the money for the benefits come from?
run
thank you for pointing out that tax cuts only help the people who are working.
i am not disputing that extra money in the hands of the lower income folks would help them, or even that it would help the economy. i am trying to get people to understand they don’t have to mess with something they don’t understand (Social Security) if they want to get money to lower income folks.
getting them jobs for example. there is plenty of useful work to do. giving them welfare, even. just DO NOT CONFUSE SOCIAL SECURITY WITH WELFARE. You will kill the best deal that workers have ever had.
run
i think his point is that when the poor have money, they spend it. and then the rich have money.
this is so obvious that it wouldn’t need to be said except that “the rich” get that way by grabbing everything on the table. they can’t see further than their snouts.
CoRev
after your crack about my “meds” you are hardly in a position to be complaining about somebody else’s tone. at least try to see yourself.
Coberly:
Cuts in taxes, wages, etc is a race to bottom or “how low can you go.” Pretty soon we will be living in corrugated shacks with linen windows the sam as what one would find in Manila, Bangkok, Pitsanlouk, Beijing, Shantou, Hong Kong, etc. Direct Labor Wages are not the prime issue to be argued. Bennies are and that is only if you wish to live like the natives in the cities I have mentioned.
coberly:
My point is the rich are rich because gains are skewed to them and their income is not taxed in the same manner as payroll wages. Tax CDS, etc, capitals gains, etc. as that appears to be the growth in income.
Damned interesting post. It adds a tad to my confidence that the cut-taxes mantra is generally bunk. (In prosperous countries, taxing within the range that prosperous countries have taxed over the last five or ten decades.)
But we know from a previous post of Mike’s and much other research that for once intuition is correct about something: recovery speed is correlated with the size of the preceding recession.
So I would like to see those same bar charts, but with the bars scaled according to the depth (GDP drop) of the preceding recessions.If the preceding recession was very deep, the recovery bar would be shorter because you’d “expect” it to be a big recovery.
It’s not going to give some kind of perfect measure, of course. But it would give me more confidence in whatever results turn up. (Sorry, Mike. I’m just eternally curious…)
On marginals versus revenues: the cut-marginals argument is that “the most productive members of society” are discouraged from working more. So it doesn’t matter what total revenues are under that theory. The impact is on those at the top.
Also that theory assumes there is a substitution effect but no income effect, or at least that the former dwarfs the latter.
Sorry, kind of a random collection of thoughts. Didn’t have time to address carefully. Perhaps in the next day or two.
run
i tend to agree. but i agree even more with mike that without tax advantages, the “rich” will still ultimately get the money.
i don’t think that is necessarily a bad thing. what is a bad thing is the rich skewing the economy through tax games while claiming that they don’t believe in government “interference.”
another way i like to put it is that we need the short sighted greedy little bastards. we can even afford to see that they get more money than oridnary people. what we can’t afford is to let them make the rules.
Roth
I can’t take the Atlas Shrugged effect seriously. No rich person is going to refrain from flying to Chicago and negotiating a 5 million dollar deal because he only gets to keep 4 million.
On the other hand, if he does, I can find ten others who would be glad to do it for 4 million.
There are two fallacies embedded in this. the first and worst is that rich people are like rare geniuses and if they don’t do the “creative” work, no one else can. bunk.
the second is that the work that rich people do is “hard.” bunk.
really creative people can’t help working. they love it. the rich who will sulk in their beds because the government gets a cut of “their” money are only creative at cutting themselves good deals, not least from the tax man.
Hey coberly I’m not agreeing with the argument (substitution effect says the opposite). Just clarifying what it is and pointing out that the total revenues argument is a red herring here.
I’ll dispute Hauser’s findings. Ed Lazear, in an amazingly inept WSJ editorial suggests a sweet spot of 18% or less. He thinks having a higher ratio is a bad thing. His reasoning is a startling mix of bull shit and idiocy.
http://online.wsj.com/article/SB10001424052748704094304575028930349664448.html
Anyway, in the U.S, tax reciepts/GDP has only been equal to or greater than 19% duiring about 12 scattered years out of the last 60. Clinton had 4, Reagan three. the last was 2001. The average over that period is less than 18%.
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=200
The table doesn’t make it clear if FICA is included or not. I’m assuming so.
Cheers!
JzB
Ah… one other thing… there are three alternative scenarios – constant tax rates, tax cuts, and tax hikes. It may be a small sample size, but should you really be banking on the option that came in a distant third in the real world? I mean second barely beat out by another is one thing, but a distant third out of three?
Steve Roth,
“So I would like to see those same bar charts, but with the bars scaled according to the depth (GDP drop) of the preceding recessions.”
Hmmm…. I have to give some thought as to how to do this. There are two problems with breaking things up into too many categories. One is that the data is limited, and going 2 dimensional with categories is going leave me with very, very few observations per group. The other is showing the results. While my career in the real world has typically required me to build some cool statistical tools for forecasting, for the purpose of understanding what is going on I like to stick with graphs, and I certainly have no choice in the matter when it comes to blogs.
Let me chew on this and think about how to do it. (Bear in mind… I think there are cross-effects that would be interesting to see in the exercise, but we might not see them if several of our categories have no observations in them.)
Min –
I don’t think you’re disagreeing with me. I certainly don’t disagree with what you said.
Steve,
Total revenues argument is a red herring here.
Money is a red herring?
Coberly,
I don’t like your tone. You’re rude and have a low understanding of economics.
By the way, on computing the return on social security since there are cash flows involved you should have done and internal rate of return calculation. This is what I came up with when I thought about my question. Your input usually does not add value to on insight to any of the issues discussed here.
Mike,
I think Hauser’s Law is more an empirical obseration. Sort of what you do with data on GDP, tax rates, and presidents. I don’t see your observation in this data. The data to me shows that the high marginal tax rates were like a dance that nobody paid. Historically it seems that rates were raised largley to control and steer investment into areas where corporate lobbyists created tax shelters.
One thing for sure is that your story about presidents and GDP do show itself in the chart that I posted. I think your analysis and book don’t provide any insight into economic history and the graph sort of mocks what you have done.
Nobody is arguing that Hauser’s Law (if you want to use that term) is wrong. I’ve pointed out that tax revenues as a percentage of GDP have been relatively flat myself many times. But this post is about marginal tax rate cuts and economic expansions. If you feel that Hauser’s Law applies, please explain how. Otherwise, you might as well be linking to an article about Ferraris or Peruvian softdrinks.
But at a second remove, money is money. That’s how central banking works, and central banking uses credit markets as a conduit. Borrowers don’t generally use the overnight market for funding, but lenders do, and that allows the Fed to influence the cost at which borrowers borrow. If rates were lower for everybody, then money was more plentiful everybody – more or less.
Yup. The is eye-ball evidence that the US ratio of federal revenue to GDP holds wthin a 14.5%-20.5% range. Whenever there are bounds to a series, it is possible to indentify a central figure that seems like the “right’ one. Hauser says 19.5%, but in the anti-tax period, the average has been lower. It is not all that surprising that in that same period, we have had a structural deficit most of the time. What fans of Hauser seem to be arguing is that 19.5% (or whatever) is inevitable, so relax and enjoy it, or even that it is inevitable because it is “right”. There is no evidence for either notion.
Roth
i understood. i was just offering the argument against the Atlas Shrugs argument. Offering backup.
BTW, and however off-topic it may be, since rcpts/GDP is a ratio, it is influencwed by changes in the numerator and denominator. Either higher rdpts or lower GDP can make it larger. As such, it’s not at al clear what knowledge value this abstract number has.
From the data in the taxpolicy center link, the avg of 1946 to 2009 is 17.8. From ’46 to ’93, when Hauser proposed his “law” it was 17.7. Maybe he used a different data set.
Also FWIT, this ratio has peaked at the end of every Dem Pres admin, and fallen to a below average value within the first 2 – 3 years of the following Rep admin.
Cheers!
JzB
Oh please.
Mike, I’d feel a lot more comfortable with your analysis if you would find references for your following statement: “but there’s one thing that just about all these worthies agree on, namely that lowering marginal income tax rates (or at least not raising them) is vital.”
From this statement the analysis does not necessarily flow. It might just be that it is too broad to make specific conclusions meaningful. Furthermore, your conclusions are not confirming or disproving the statement.
I think tightening up the writing may make for a better presentation. For example when you used “vital” to what were you referring? Per capita GDP? GDP growth? GDP trend line changes? Changes in recession directions?
Cardiff
you might want to try to think about whether agreeing with your take on economics is the same as “understanding economics.” and you might want to look back at this very thread to see if everyone shares your opinion about my “insight,” or if the failure to add to yours is my fault or your problem.
i have done a number of computations on social security return… though i don’t know what you mean about “internal rate of return”… and i find two things that you don’t seem to understand: first, an “average” is quite meaningless, second, social security is not an investment but insurance, and third, the “returns” are quite comparable to those of “investments”, especially when you understand the risk factor, and the insurance effect.
then of course you might want to ask yourself why it is that i am rude to you.
Coberly,
i have done a number of computations on social security return… though i don’t know what you mean about “internal rate of return”
In the age of the internet with all its resources I don’t accept your saying that you don’t know what I mean. Here is a wiki source.
http://en.wikipedia.org/wiki/Internal_rate_of_return
Since this is a mainstay of finance and you are doing a financial calculation you ought to learn how to do it.
The chart below also shows that Mike’s analysis linking presidents tax policy regimes is essentially meaningless. Since the depression you basically have to regimes for the top marginal rate, one high and one low.
In the high tax regime you have: FDR, Truman, Eisenhower, JFK/Johnson, Nixon, Ford, and Carter.
In the low tax regime you have: Reagan, Bush 41, Clinton, Bush 43, and Obama.
The significant tax increasers moving us into the high tax regime were made by Hoover and FDR. Kennedy/Johnson cut taxes in the high tax regime but not enough for a regime change.
The significant tax cutting to the back to the low tax regime was Ronald Reagan. Clinton tax hike was the most significant but again not enough to go back to the high regime. Bush 43 looks like he backed out roughly half of Clinton’s hike.
Anyway, the post war history is one of tax cuts with the trend overall being downward. Again, Mike’s analysis looks silly in the face of this data.
http://en.wikipedia.org/wiki/File:MarginalIncomeTax.svg
Cardiff
try reading the whole paragraph. connect the words. consider other meanings than the first thing that pops into your mind.
i said i had calculated a number of rates of return. they depend on such a large variety of factors that no one rate, or average, is meaningful.
now tell me what YOU mean by”internal rate of return.”
The tax multiplier on the wealthy is apparently more than one. That is when you raise taxes on the wealthy, more money is spent by the government in the economy than the wealthy would have spent, (it is taken out of their savings,) and when you lower taxes on the wealthy, less money is spent (it goes into savings.) So raising taxes on the wealthy is stimulatory, lowering them is ah..depressionary.
I believe the increasing concentration of wealth we are experiencing, coupled with stagnating income for the rest of us is, along with the trade deficit, one of the greatest current drags on economic growth. Money is not going in to the hands of labor, which is where the demand would be.
2008 median household income in the U. S. was $50,000+.
Sorry, I did not mean to agree in a disagreeable manner.
coberly: “ i am sorry if this strains your brain, but i don’t know an easier way to make the point.”
My brain is not strained, even if it is the consistency of Jello. 😉
“a payroll tax holiday will take money out of the hands of people who will spend it,”
Nope. It won’t take any money away from anybody.
“The quantity of money is not constrained.” — Moi
🙂
Min
pardon my testiness.
if you take away retirement benefits, you are taking money out of the hands of people who will spend it. if you are giving a payroll tax holiday without taking away retirement benefits, you have to get the money for the benefits from somewhere.
if you just print it, then you turn SS into welfare, which is a very bad idea. and i remain unconvinced that you can “just print it” without effectively taking money away from everyone… except under special circumstances not carefully spelled out here.
If we took out the FDR years, which I believe is reasonable, due to the chaos of the times, the ramp up to war, etc….Then the premise can be switched. The FDR years dominate the data, and it appears to me that Cactus’ conclusion should be exactly opposite of what it is.
Jimi,
“If we took out the FDR years, which I believe is reasonable, due to the chaos of the times, the ramp up to war, etc….Then the premise can be switched. The FDR years dominate the data, and it appears to me that Cactus’ conclusion should be exactly opposite of what it is.”
That’s an interesting assertion because when I run the data without the FDR expansions, here’s what happens to the medians:
annualized growth, no tax change = 3.6%
annualized growth, tax hike = 3.8%
annualized growth, tax cut = 2.8%
total growth, no tax change = 16.9%
total growth, tax hike = 23.11%
total growth, tax cut = 9.1%
expansion months, no tax change = 57
expansion months, tax hike = 46.5
expansion months, tax cut = 37
It kind of seems you simply made something up and then stated what you made up as if it was a fact.
Cardiff,
“The chart below also shows that Mike’s analysis linking presidents tax policy regimes is essentially meaningless. Since the depression you basically have to regimes for the top marginal rate, one high and one low. “
Once again, you seem to be responding to something I wrote in a different post. I cannot respond back without having any idea what you’re talking about and what the issue is that has you riled up.
CoRev,
After all the discussions we’ve had, its odd to hear you of all people stating that its not orthodox economic theory (classical, keynesian, austrian and pretty much that follows from any of them) that in times of economic weakness, raising taxes can derail the economy. Off the top of my head, about the only big name economist I can remember stating that raising taxes in times of economic weakness can be helpful.
Mike, from that analysis I can conclude that tax cuts are used during or at the start of recessions more often than tax hikes and staying the course are used at those periods.
Mike, when did I say that?
Coberly,
now tell me what YOU mean by”internal rate of return.”
I just gave you link. Consider it a homework assignment.
Cardiff
you really are too stupid to talk to.
your link tells me what Wiki means by internal rate of return. i asked what YOU mean. in the context you would have to show why what you mean is more relevant than what i mean. so let me say again:
i calculated a number of “rates of return” for social security. they depend on too many variable for an”average rate of return” to mean anything. they range from about 10% real return (comparable) to about 2% real rate of return (comparable). that’s mostly because social security is not an investment, but is insurance.
the tragic fact here is that i know what i am talking about and all you have is a silly ass game of pointing to something you read in a book and completely failing to understand that there are complexities that change what it “means” according to how you look at those complexities.
Per Capita?
Cactus,
We must be looking at the data differently, because that not what I’m seeing. How exactly is the data arranged in the claims you have made above?
Mike,
Your posts all have a general theme of misreading the data to make a case for democrats.
My recent post was actually pretty simple to understand. Since the depression we essentially have two top marginal tax regimes, one high and one low. The high one coincides with 5 democrats and 4 republicans, and the low one covers 3 republicans and 2 democrats. So your lining up presidents with tax regimes and economic growth does not coincide with the major trends in the data
Jimi,
Its easy to tell from the graphs. Take the third graph as a for instance.
Knock off the two FDR periods – the two fastest growth periods. (One of tax cuts, one with taxes held constant.) That doesn’t change your tax cutting. Of the 11 remaining expansions, tax constant accounts for the first, fifth, and eighth fastest growth periods.
There are two tax hike periods, and they are the third and fourth fastest remaining periods.
What is left are the tax cuts… and they are the second, the sixth, the seventh, the ninth, the tenth and the eleventh fastest growth periods. In other words… among the tax cut groups, there’s only one that’s fast, a few medium, and most are slow.
aaron/catab/cardiff,
“Your posts all have a general theme of misreading the data to make a case for democrats.”
“So your lining up presidents with tax regimes and economic growth does not coincide with the major trends in the data”
Not to harp on small details, but I don’t think this post mentioned Democrats, Republicans, or presidents.
CoRev,
Mike, when did I say that?
Perhaps I misinterpreted what you meant by this:
“Mike, I’d feel a lot more comfortable with your analysis if you would find references for your following statement: “but there’s one thing that just about all these worthies agree on, namely that lowering marginal income tax rates (or at least not raising them) is vital.” “
BTW… a response to:
“Mike, from that analysis I can conclude that tax cuts are used during or at the start of recessions more often than tax hikes and staying the course are used at those periods.”
Yes. But being used more often doesn’t mean they work.
Cactus,
I have spreadsheets with all the data you typically use, along with data including Military Spending, Entitlement Spending, and Revenues, so I play around with the numbers the way I see it should be analyzed. Hence, your getting comments from me that obviously you feel are totally unfounded, some of which is due to the fact that most of the people here at AB feel no need to question you about any of this, because the conclusions fit their ideology.
Not going into too much depth with your graphs, I can see why you are drawing some of the conclusions your drawing, doesn’t mean I agree with them, just means the arguement has never been over the data. The arguement is whether the data can be isolated into categories, and then conclusions drawn that represent the entire picture.
I’m not questioning whether or not your work and analysis is valid, I’m questioning whether or not the conclusions represent the reality of solving problems in the future in the most efficient manner.
I still believe that their has not been enough analysis to answer the question this country needs to be answered. Exactly when and how much do you raise taxes, and exactly when and how much do you lower taxes to recieve the most efficient growth and debt management.
We all know, or should know, that correlation does not mean causation. Two phenomenon occurring at a similar time, seemingly in tandem with one another can be the result of any number of other additional variables. The economy continuously goes through its ups and downs and the economists note that we are in a recession or a recovery or some point along the continuum of the cycles. The Congress manipulates the tax codes from time to time trying hard to help their financial supporters avoid paying too much, if any, taxes. These phenomenon take place over time and share that characteristic. There is only one time period at any time in an era and these activities occur within those periods as they occur. Some times these two gross phenomenon cross paths while traveling along their respective time lines from period to period. They’re like ships in the night, crossing over a narrow band of time. So some times they seem to occur in tandem and some times they don’t. Why even try to guess at the effect one has on the other? Economic activity is far too complex for any one phenomenon to have a major effect on the ups and downs of that activity. Taxes are a necessary part of the social contract that makes a political state. Pay your taxes and stop trying to weasel a way out by searching for correlative relationships. Any one who may think that the Congress, which is made up of politicians, has the economy’s health in mind when playing around with the tax codes is nuts. They monkey with the codes so that some group or another can get away with paying less of their share of the necessary tax. The benefiting group is not likely to be one that is less than very wealthy. That’s the way our Congress works, so it seems. Our group often makes poor choices. Taxes are necessary and economies go up and down. Get over it!!
jimi
if i may, about another question..
as good conservatives, shouldn’t we let growth take care of itself and not try to manage the economy. what would Hayek say?
just tax enough to pay the bills. okay to borrow from time to time prudently, but not, i would think, all the time. that just sets “borrowing” into the “business as usual” equation and that would create forces that might make the economy unstable.
but again… “taxes to recieve the most efficient growth” sounds to me like a delusion.
jack
i think you and i may be the only true conservatives around this place.
i would not go quite as far as to say correlation had nothing to do with causation or words to that effect (i don’t think you are saying this, but others not far away have said it), because I suspect that Mike is right… the high taxers have brought us the better economies. and there may be a point at which taxes are “too high” and businesses get so busy looking for ways to avoid them, that business gets a little crazy. but i don’t think we are at that point, or anywhere near it. meanwhile looking for an “optimum tax rate” is a fools errand.
especially when the fools count Social Security as a “tax.”
coberly: “if you take away retirement benefits, you are taking money out of the hands of people who will spend it.”
Right. Retirees spend money. 🙂
“if you are giving a payroll tax holiday without taking away retirement benefits, you have to get the money for the benefits from somewhere.”
What is the ultimate source of money?
coberly: “if you just print it, then you turn SS into welfare”
Nope. SS benefits depend upon money earned over, IIRC, 30 years. That’s not welfare. I would not argue with the word, “pension”, or even “tontine”, since the survivors collect benefits.
coberly: “ i remain unconvinced that you can “just print it” without effectively taking money away from everyone… except under special circumstances not carefully spelled out here.”
If you create money by borrowing, then you are, in effect, taking money away from everyone and giving it to the creditors. If you create money without borrowing, you are not taking it away from anybody. Under some circumstances, which do not seem to be the case now, creating money is inflationary. Inflation, in effect, takes money away from creditors and people on a fixed income. Under the current circumstances we need to put people back to work. It is, IMO, unconscionable to siphon hundreds of billions of dollars to the rich and then allow millions to suffer. If it takes “printing money” to get the job done, then print the damn money.
Jimi,
Thanks for clarifying. I’ve noted a few things before:
1. a theory where every observation is a special case is not a good theory.
2. its widely believed that lower tax burdens or cutting tax burdens produces more growth
3. going back to 1929 (which is as far back as there is official more or less contemporaneous data) economic growth tends to be faster in administrations (or, in the case some posts, such as this one, situations rather than administrations) when tax burdens are higher or raised than when they are lower or reduced.
All I can conclude is that the current prevailing wisdom among just about all groups of economists is wrong or for some reason the past eighty some odd years in this country are in their entirety a special case. I tend to believe the former.
Mike, not sure I understand. I wasn’t suggesting more slices — just scaling the existing bars.
run75441: “Reducing SS Payroll Withholding on $40,000 will net ~$2400. That is not a lot”
Oh, it’s not a lot per person, but you have to include the employer’s portion, as well. So what is the ballpark figure overall? A stimulus of $150 – $200 billion?
Min:
So what . . . the median is the mid point for a distribution of numbers. It does not necessarily mean (not the average) or may not be reflective of a true middle class.