How the Internet Can Make You Smarter, Today’s FT Version
Today’s Page 1, above-the-fold, biggest type headlines for the FT:
- US PDF edition: “Obama proposes corporate tax rate cut: System ‘outdated, unfair, and inefficient’
- US Print edition: “Obama and Romney unveil rival tax plans: Proposals show strong support for reforms”
The latter piece waits until the 7th graf to Tell the Truth and Shame the Romney (as Rick Santorum might say):
Mr. Romney’s advisers said that their plan would not widen the deficit, but they relied on so-called “dynamic effects”, which assume that the lower rates mean greater economic growth and therefore more revenue. They did not say which tax breaks—such as the popular deduction for mortgage interest relief—they might scrap to pay for the lower rates.
The English translation of “dynamic effects” is “we’re going to reduce the velocity of money so that it is held by people whose Marginal Propensity to Consume is lower, and count that as a good thing, instead of it being used by people who will not hide it in the TOPIX, and who therefore don’t count in economic modeling. Because that worked well when we did it in 2001 and especially 2003.” (See Noah Smith for discussion.)
The print edition treats this mumbo-jumbo as if it were a real “tax plan.” Readers of the online PDF are saved such bollocks, and therefore better informed at the end of the article.
UPDATE: Ezra Klein (whom Google Plus seems to believe works for Bloomberg, not the web-inept Vast Wasteland that is Kaplan Prep Daily) delves into the Romney/Hubbard plan and finds pretty much what you would expect from the man who led the clusterfuck of 2003 and an at best ambiguous relationship with Medicare Part D* (“all of the expenses without any of the savings, unfunded”):
But for now, the narrative is clear: A Romney presidency will be tough on those who depend on government programs, and good for those who pay high taxes. That suggests a Romney presidency would, at least in its first few years, reduce the deficit by asking much more from the poor than from the rich. Is that really the narrative they want?
*Shorter Glenn Hubbard: “It happened on my watch, and I knew it was in the works, but the “gross mismanagement” of the Bush Administration in enacting Medicare Part D astounds me and I had nothing to do with it.”
“Is that really the narrative they want?”
Ah, yes it is, because what really matters is that you know Romney will make sure that you know your freedom is secure such that your church does not have to pay for contraception and thus will have all the money it needs to take care of you when you run short on food and fuel and clothing. And, because your church is tax free already and you benefit from that, then it is like you have had your tax cut all along. In fact you have had a bigger tax cut than the job creaters as a percentage of your income because you don’t have to spend all your money on food, fuel and clothing. You have a tax free church to give it to you unlike say the job creaters who donate to the church and thus are experiencing a self tax which should count toward the total taxes they pay.
Get it?
Romney’s tax plans may well be crap. I certainly wouldn’t expect any better from a politician on the stump whatever party they came from. But this is worse crap:
“The English translation of “dynamic effects” is “we’re going to reduce the velocity of money so that it is held by people whose Marginal Propensity to Consume is lower, and count that as a good thing, instead of it being used by people who will not hide it in the TOPIX, and who therefore don’t count in economic modeling. Because that worked well when we did it in 2001 and especially 2003.””
The English (and I can say this as I am English and you are not) translation of “dynamic effects” is that people change their behaviour in the face of changed incentives. Tax rates are incentives, thus people change their behaviour dependent upon tax rates.
Now, it’s fine to argue that people change their behaviour this way or that. I too can construct models where higher tax rates lead to more labour effort and thus higher revenues.
But to argue that we should only look at static tax models, never look at dynamic, my apologies, but this is gross, howling, stupidity.
And you’re better than that Ken, even though you are a Democrat.
On the other hand it is not either/or.
I could argue that a change in tax rates has a first order revenue effect while only facilitating dynamic actions as a secondary result and further that those actions could work both directions.
For example:
Case one: an increase in top rates captures an increased share of gains from productivity in tax revenues, which gain due to the behavioral stickiness of individual reactions to that marginal change are only minorly offset by tax offsetting investment (or ‘going Galt’ non investment) behavior. Result net tax gain.
Case two: an increase in top rates captures an increased share of gains from productivity in tax revenues, which gain is augmented by intensifications in investment behavior to maintain after tax income and consumption. Result net tax gain plus additional gain from the margin on the intensified margin.
And other theoretical combinations are possible. Which suggests that your simple opposition of dynamic vs static is while maybe not “gross, howling, stupidity” might be twit Brit flip half-wit. If I was into name calling. (Oh wait! Whom am I kidding?!)
The problem with Supply Side is not the simple static/dynamic opposition but the assumption that tiny changes at the margin (of taxation or anything else)
propagate in near instantaneous fashion (“fuck it, a 8.99% margin works, but 8.96%? Hell I fire everybody and take the first train to Galt’s Gulch!!”). Instead we have every reason to believe that there is inertia and behavioral stickiness at the margin, and that it takes more than say a shift from 33 to 35.9 to provide enough dynamic drag on the static gain. If indeed we concede that drag to start with. Which frankly historical data doesn’t support.
Frankly I prefer my strawmen better crafted. Because you don’t want the crows laughing at your attempted scarecrow.
To be fair Worstall concedes that the dynamic effect might work the opposite direction, but doesn’t seem to consider that dynamic effects either direction might be swamped by the statics.
That is that tax increases might on net increase tax revenues as a PRIMARY effect.