Lie Side Economics
So last week a Christopher Lucia of Vancouver had a letter to the Oregonian defending the Bush tax cuts, and including this statement: "tax cuts have actually resulted in significantly higher government tax revenues."
Now, first of all, Mr. Lucia's statement is a clear and demonstrable lie. As the Tax Policy Center sets out in this chart (see link), personal income tax revenues (which were the focus of the Bush tax cuts) exceeded one trillion dollars in 2000 and have been dramatically lower since the Bush tax cuts of 2001 and 2003 -- only $808 billion in 2004. By contrast, personal income tax collections rose every year of the Clinton Administration. In fact, they normally rise every year, as the population goes up, the economy expands, etc. Under the tax-cutting Reagan, they were essentially flat for three years. Under Bush, they have collapsed:
http://www.taxpolicycenter.org/TaxFacts/TFDB/TFTemplate.cfm?Docid=203
I think it's important for progressives to know that the so-called "supply side" lie is an easily refutable lie; in the words of Casey Stengel, "you can look it up." But it's also important for us to understand why the THEORY doesn't make sense. The 'supply-siders' argue that cutting taxes gives people more of an incentive to work hard and be productive. That spurs the economy to new heights, resulting in higher tax revenues.
What's wrong with that theory? Well, first of all, most of us have no choice but to work, full-time; we have jobs, with fixed hours, and our bosses aren't going to take kindly to it if we say "sorry, Mr. Dithers, I'm knocking off early today; my marginal income tax rate is just too high to bother staying later than 3:30."
Rich people do have the option of working less. But most of them aren't going to take that option; their ego is bound up in their jobs. Michael Eisner doesn't have to stay at Disney, but he dos; that's part of who he is. Now, not everybody is Michael Eisner; maybe some rich people will indeed respomd to a tax increase by saying: "The hell with it, I'm not going to work more than I have to when so much is going to the government." But logically, at least an equal number will come to exactly the opposite conclusion: They have a certain lifestyle to maintain, which requires a certain amount of post-tax income; in order to maintain that income after a tax hike, they'll have to work MORE.
Think about it. Your name is Mr. Rich, you make $500,000 a year, two kids in the Ivies and a house in the Hamptons. Your taxes go up by $50,000 a year. Do you respond by quitting your job, selling the house, and telling Calvin and Gloria that it's City College from here on? Or do you buckle down and work harder, to jack up your pre-tax income to $600,000, so you can keep making payments on the house and keep the kids at Harvard and Brown?
The "supply-side" argument is even sillier when it comes to capital gains taxes. "We need to cut the tax on capital gains from 28% to 15% to give people an incentive to invest." What exactly do we think rich people wll do with their money if they have to pay capital gains taxes? Not invest it at all? And do what -- Put it in their mattresses? Unless rich people are a lot dumber than I think, given a choice between keeping 72% of a return on an investment, and 100% of nothing, they're going to choose the 72%.
Obviously, if the tax rate were 100%, there'd be no reason to invest, or to work. I'll give the supply-siders that much. But at any level under 100% -- even the 91% top marginal rate that prevailed during the reign of that well-known socialist Dwight Eisenhower -- making money is still preferable to not making money.
Paul Krugman, a very smart economist, has pointed out over and over that no respectable economists ever endorsed the "supply-side" theory. But you don't need to be a Ph.D to see that the theory is idiotic. Economics is about human behavior. And there is no plausible theory of human behavior that would make the supply-siders right.
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October 3, 2005 |
Steve Novick
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Comments
Posted by: Robert Harris | Oct 3, 2005 9:54:51 PM
I'm not am journalist, and I realize the Oreginian letters section is opinion, but don't the editors have some minimal journalistic obligation to fact check the letters they print?
I read that particular letter repeating the falsehood about increased tax collections from the Bush tax cut and just shook my head in exasperation, not only at the writer but at the newspaper.
When facts that support the main thesis of an opinion are wront, the opinion of the writer is basically without foundation and not worthy of print.
Posted by: Eddie | Oct 3, 2005 10:08:57 PM
Great points. Also, from Econ 102, it should be noted that the "marginal propensity to save" rises as income rise (or taxes fall). That is, for every extra (marginal) dollar earned, an increasingly larger portion of those dollars will be saved. Not hard to realize this since we all have "fixed costs" like rent mortagages, food etc. Once those are covered you can start to save.
Well, turns out that savings (on a macro economic level) are considered a "leakage" in the economy, as that money is no longer in play with the same strength as if it were spent on goods or services directly. And in economic parlance, leakages are bad, injections are good. When taxes are collected and spent on goods and services by the government it keeps capital circulating, which is healthy for the economy.
This point is a bit more difficult to grasp for the average Joe that doesn't have any macro economics education, but it is true nonetheless. You could find it in any Econ 102 book.
Taht's not to say that their is never a time or place for tax cuts to embolden consumers. As we are seeing currently, our spending keeps our economy afloat. When national malaise sets in, and people lose hope and stop spending, then the economy suffers. And then any action, including tax cuts, that can influence the psychology of the masses, will help. I gues you could liken it to the placebo effect for what ails an economy. It doesn't do anything good from a money flow standpoint, but if the patient (consumer) is emboldened by it , then the effect can be positive.
The problem emerges when those cuts become the new benchmark, and slowly over time, tax cut after tax cut, we starve our collective ability to make proactive public investments in our future.
Posted by: LT | Oct 3, 2005 10:29:14 PM
Great points. Also, from Econ 102, it should be noted that the "marginal propensity to save" rises as income rise (or taxes fall). That is, for every extra (marginal) dollar earned, an increasingly larger portion of those dollars will be saved. Not hard to realize this since we all have "fixed costs" like rent mortagages, food etc. Once those are covered you can start to save.
Very good comment, especially since it explains that "marginal" means every extra dollar earned.
But tell that to the person working 3 jobs or the person who has been laid off from their job. The whole "marginal" dollars or "marginal tax rates" concept sometimes seems more suited to an Econ class than to the real world.
For instance, imagine someone with a part time job and an on-call job (substitute teacher, vacation/ sick leave relief for any employer).
What are the tax consequences of such a person filling out the W-2 for each job exactly the same way, vs. looking closely into whether it is smarter to raise or lower the withholding? Seems to me I remember someone I know having a shock about taxes owed because of being in that situation.
But most discussion of taxes involves throwing around terms like "marginal tax rates" which may go over the heads of people listening, just as terms like "dialup", "broadband" and "gigabyte" can sometimes go over the heads of people who don't have a home computer.
I always thought the best communication was explaining things at the level of the person listening. That is why some committee chairs at the legislature do things like requiring anyone using acronyms too often to put a dime in a jar or something. It is a bad habit to speak above the understanding of a portion of the audience.
Posted by: David English | Oct 4, 2005 3:19:07 AM
Steve,
I am currently reading Krugman's book, The Great Unraveling. It is an eye opener for sure in terms of seeing the lies we've been fed in terms of the tax cuts.
Even despite 9/11 and the need for increases in spending for national security, Hurricanes Katrina and Rita and the need to spend money to help people recover, despite all that Bush and his minions still defend the tax cut.
Meanwhile, we are running up a national debt that would make even Ronald Reagan turn over in his grave.
Posted by: ross smith | Oct 4, 2005 6:05:29 AM
The principle underlying so-called "supply-side" economics is based on the Laffer Curve, which states that as marginal tax rates go down, after-tax returns on investment will necessarily rise, thus stimulating investment in the economy from the "supply-side" -- the supply of capital for investment and economic expansion. This in turn creates jobs which puts people to work, together with an overall economic expansion which produces more total tax revenue even at these lower tax rates.
This is not just a theory. It has been demonstrated in the administrations of Kennedy, Reagan, and now George W. Bush. Look at the revenue numbers in the link provided by Mr. Novick. From a high of over $2 Trillion at the heighth of the 1990s expansion, federal revenues declined during the subsequent recession, and will again exceed that earlier number in 2005, and are on track to grow steadily to $2.8 Trillion by 2010, an overall expansion of over forty percent in ten years.
Keynesian economists like Novick and Krugman error when they equate cuts in marginal tax rates as an attempt to stimulate directly the "demand-side" of the economy, with people working harder to get ahead. Economic expansion with its correlative creation of more jobs and more people working is the aim of supply-side economics. Branding an economics one does not understand or appreciate as a "lie" certainly does little to advance a healthy dialogue in this country, and I would suggest that Mr. Novick tone down his rhetoric a notch or too, and take a closer look at what is really going on in our economy.
Posted by: C2TBF | Oct 4, 2005 7:07:35 AM
Thanks Mr Smith.
As to the rest, you people are truly fooling yourselves. Reading these comments is like watching a train wreck in slow motion.
Take a simple study of the varying tax and monetary policies across Europe or Latin America and see which countries have experienced macro-economic success over the recent decades and which have not. Ever heard of Ireland? Chile? The Baltics?
Posted by: Karl | Oct 4, 2005 7:34:04 AM
One problem with the supply side theory is that most of the jobs that increased capitol creates are in China. Our economy grows when the lower and middle class people buy stuff.(The upper class already has what they need.) Unfortunately, these are the people whose incomes are shrinking. They have less to spend and need to spend more on gas and other essentials.
Posted by: Becky | Oct 4, 2005 8:21:04 AM
I'll agree that supply side economics isn't all it's cracked up to be, but there is some truth in it that should not be ignored. For example, small business owners typically have to run a tight ship. Since they employ half of America's workers, what happens to them is very important to the economy. Higher taxes and regulatory burdens quite literally can force them to cut the number of workers they may hire. Certainly some small businesses will not be able to cut workers because they're at bare bones already. What heppens is they don't give out raises or bonuses, or perhaps they increase employees' share of health insurance. I've worked for small businesses for much of my career, and I've seen that this is true. Additionally, when ordinary people have more expendible income they hire more service providers. This can be everything from getting your nails done every week to hiring a housekeeper or landscaper or even doing a remodeling job on your home. Sometimes taxes impact personal decisions about lifestyle, as well. Several years ago, the combination of lower property taxes and paying off a vehicle allowed us to afford for me to quit working and stay home with my kids for 3 1/2 years. So while it is probably true that most people can roll with the punches of tax increases, you really can't say that there is no impact on the economy or on society or that "trickle down" is a groundless philosophy. It is much more complicated than that. I does appear to me, however, that the small business is being trumpeted in support of policies that really benefit large corporations. We need to take a closer and more open-minded look at the entire mess.
Posted by: Steve Novick | Oct 4, 2005 8:45:59 AM
I am amazed by Mr. Smith's ability to continue to insist that up is down and down is up. Mr. Lucia's statement that Bush's tax cuts HAVE increased government revenues is clearly a lie: personal income tax revenues are lower now than they were in 2000. The idea that they will be higher in 2007 proves "supply-siders" right because revenues are rising as we "come out of the recession" is ludicrous: have we been in a 6-year recession? I thought that last year we were supposed to have a great economy, AND REVENUES WERE ALMOST 20% LOWER THAN FOUR YEARS BEFORE, EVEN THOUGH, NORMALLY, REVENUES GROW ALMOST EVERY YEAR. There was a recession in 1990-92, and tax revenues did not drop 20%; in fact, they INCREASED SWIFTLY after Clinton raised taxes in '03.
Posted by: Homer | Oct 4, 2005 9:24:38 AM
Mr. Novick,
You are way off base. Tax cuts have mad it possible to redevelop the Pearl District (and other locales) with the benefits trickling down to and through the community. The PDC Housing Incentive Program, (along with Metro's TOD and others) would not be in existence if your thinking was adopted by our local officials.
Of course there is always a turn around time frame involved as supply side economics is not as immediate as your preferred redistribution approach of simply cutting checks for the so called have nots.
As Mr. Smith explained,
"$2 Trillion at 1990s expansion,
declined during the recession,
will again exceed that earlier number in 2005,
on track to grow steadily to $2.8 Trillion by 2010, an overall expansion of over forty percent in ten years."
Yet your anger is based on the notion that because revenue did not immediately return to 2000 levels following the Bush tax cuts then the cuts don't work.
"Economics is about human behavior"?
Hmm? Here's some behavior.
If you want to target your anger at something look at the Oregon lottery and it's effect on the low income earners who participate.
Do you think there is a government trickle down that reaches them in excess of their "contribution"? Hardly.
As with all of the punitive, confiscatory and redistributionists
methods you advocate the outcome is exactly the opposite of what you claim you seek.
Posted by: A Question of Becky | Oct 4, 2005 9:56:17 AM
Becky,
You say, "Higher taxes and regulatory burdens quite literally can force them to cut the number of workers they may hire. Certainly some small businesses will not be able to cut workers because they're at bare bones already. What heppens is they don't give out raises or bonuses, or perhaps they increase employees' share of health insurance."
I believe this to be true, but we are talking about a how to better stimulate the economy and create jobs, not how to create a system of welfare for business. Sure, many, if not most small businesses have a more difficult time giving raises and providing health insurance...
But who is to say whether business owners will spend their tax refund on such a benevelant agenda, their is no requirment. Your comments create the perception that you believe it is just "a given" that small businesses will use their tax refunds to reward workers. It sounds like you believe we should reward these workers.
So why not give the workers the tax break? Extra money in their pockets, regardless of whether it comes from a raise or a tax refund is still extra money in their pockets. Is this not the most direct approach to get the money to the workers? If the goal is to get money in the hands of the workers, it seems to me, risky business to trust a middle man to administrate and allocate funds, when they have no requirment to do so under law.
I don't see that many people saying trickle down economics is groundless. The term was created very accurately, trickle down economics. Throw a bunch of money at the top and some may trickle down the rest of us.
Posted by: sjp | Oct 4, 2005 10:09:34 AM
The principle underlying so-called "supply-side" economics is based on the Laffer Curve, which states that as marginal tax rates go down, after-tax returns on investment will necessarily rise, thus stimulating investment in the economy from the "supply-side" -- the supply of capital for investment and economic expansion.
Unfortunately, tax incentives are only one of several forces acting on investment returns -- and a relatively weak one at that when compared to, for example, increases in consumer demand.
A reasonable case can be made that the cost of supply-side tax cuts outweighs any potential gain and has much less of a positive impact than progressive tax cuts on wages which 1) have a more direct and positive effect on working families and 2) stimulates consumer demand.
This in turn creates jobs which puts people to work, together with an overall economic expansion which produces more total tax revenue even at these lower tax rates.
That's the theory. Of course, as Novick points out, tax revenues have fallen during the last 4 years of economic growth, and job creation has been 1) less than was predicted by Bush's economic advisors and 2) primarily of the low-wage, low-benefit variety.
Posted by: Robert Harris | Oct 4, 2005 10:20:27 AM
Re supply side and the Laffer curve.
The curve is a bell shaped curve. Prof. Art Laffer hypothesized that as you start from zero tax and increased the rate, tax collections would go up until the rate hit a point where people would not strive to increase their incomes, at which point revenues would decrease.
So supply siders argue that a decrease in marginal rates will actually increase revenue (I've never heard of a 6 year delay claimed by Mr. Smith)
However, that assumes that the marginal rate is on the right hand (upper) side of the curve apex. If the marginal rate is on the left had (lower) side of the apex, then a decrease in tax rates which resulted in a decrease in revenue would support the proposition, according to the Laffer curve, that tax rates aren't as high as they could be before hitting the level of taxpayer resistance.
Since Bush's tax cuts caused a decrease, not increase in tax collections, it seems to me that the Laffer hypothesis would support the notion that the economy and the taxpayers could take an increase in taxes (get rid of most of Bush's tax cuts) which would not harm tax collections and could be used to reduce the deficit.
The claim that theres a 6 year delay for tax cuts to take effect (which Mr. Bush never calimed would be necessary) reminds me of the guy I knew who was selling an office building for $400,000,. I told him I thought it was worth about $300,000. He told me I was nuts. It stayed on the market for 5 years, then sold for $400,000. He bragged to me about how wrong I was.
Posted by: Becky | Oct 4, 2005 10:22:20 AM
I believe that America's small business community is, unlike our corporate community, a reflection of the American people. I would bet you that most small business owners view their employees as a vital part of their business and develop personal relationships with them. Some small business owners are not so generous - just like society as a whole, there are good people and not-so-good people everywhere. Of course there are no guarantees about how a small business owner will use increased profits, but I still trust the small business community much more than I trust corporate America and even more than I trust organized labor, which, like all large institutions, constantly struggles with corruption. I would ask you how do you plan to get money into the hands of the worker who has no job because employers can't afford to hire him? I think America's small business community as a whole is very proud of the jobs they create and personally, I'm very proud of America's small business community - hardworking people who are risk-takers and exercise personal initiative, putting the American dream into practice. And in those cases where the entrepreneur cares only to enrich himself, it still holds true that the money he spends is largely going to be spent on services and products and investments that still provide jobs and economic benefit. Here you might point to the problem of outsourcing, saying that the products people are buying aren't coming from America and aren't helping our economy, and you would get a hearty agreement from me. I strongly believe we have screwed ourselves big time by allowing outsourcing of jobs in exchange for cheap consumer goods. We don't NEED all those goods we now feel compelled to buy, and too often what we do buy is junk that breaks down quickly and soon must be re-purchased. I remember the days when you could expect a toaster or hair dryer, for example, to last for 10 or more years. I have a toaster that's older than I am and it still works. I'd like to see us return to lower consumption rates, manufacturing jobs here at home, and a faith in good-old American craftsmanship. But that's another subject, I guess.
Posted by: howard | Oct 4, 2005 10:24:17 AM
I believe it best to look at the effects of marginal tax rates. The Clinton years proved that the economy can prosper as long as the top marginal income tax rate does not exceed 40%.
The Bush administration is failing the country and the economy in running huge deficits while keeping the top marginal rate under 35%.
Posted by: C2TBF | Oct 4, 2005 10:28:35 AM
Bush has successfully run up deficits. It's the only way to get Congress to stop spending money, having them hit their credit limit.
Posted by: blue | Oct 4, 2005 10:33:55 AM
I believe it best to look at the effects of marginal tax rates. The Clinton years proved that the economy can prosper as long as the top marginal income tax rate does not exceed 40%.
We experienced massive economic growth throughout the 1950's when the marginal tax rate on top wage earners was 90 percent. We had more rapid growth during much of the 1960's and 70's than we have today when the marginal tax rate on top wage earners was 70 percent.
I mention it because it suggests that there is very little real relationship between marginal tax rates and economic growth.
Posted by: Aneurin | Oct 4, 2005 10:34:06 AM
Chris Lucia is a Republican precinct committee officer in Vancouver. He's just parroting some RNC talking points for public consumption.
Wash, rinse, repeat.
Posted by: Robert Harris | Oct 4, 2005 10:53:06 AM
C2TBF says:
Bush has successfully run up deficits. It's the only way to get Congress to stop spending money, having them hit their credit limit.
I'll give you his success at running up deficits. The implication that its some sort of a plan is just rationalization for fiscal policy gone horribly wrong. If its a plan, why hasn't the Pres. propose actual cuts? why not veto the increase in the spending limit, otherwise the congress (which is run by Reps by the way,) will never reach its "credit limit". Sort of an essential part of your theory. (All reps voted for the increase, some Dem's voted no).
Even Grover Norquists plan to drown the government envisions a downsizing of the size of government, something Mr. Bush has never ever proposed.
Posted by: Sid Leader | Oct 4, 2005 11:07:51 AM
So, one of Lar's neighbors in Tract Home Hell saves up 39 cents for a stamp.
Whopee!
I never read anything written in Vancouver... seen their school test scores?
Yikes!
Posted by: George | Oct 4, 2005 12:02:03 PM
Robert Harris wanders a bit.
"Bush's tax cuts caused a decrease"
Only temporarily.
Back when the tax cuts were passed the left lectured us that Bush was destroying the economy. Then it was no jobs and now they have risen for many quarters. Now the story is the deficit.
As it diminishes the story will change again.
The economy and recession have turned around and revenue is on the rise as predicted.
A real economy, not the 90's one bolstered by billions in false earnings reports which collapsed us into recession.
Tax increases will not reduce the deficit. Only the economy will and that is on the way to happening now.
The left is not concerned about the deficit, jobs or the economy.
They just want to controll who makes and gets what.
Posted by: Jon | Oct 4, 2005 12:49:23 PM
"Economics is about human behavior"?
Hmm? Here's some behavior.
If you want to target your anger at something look at the Oregon lottery and it's effect on the low income earners who participate.
Do you think there is a government trickle down that reaches them in excess of their "contribution"? Hardly.
Last I checked, playing the lottery is completely voluntary.
Is there an income limit Im not aware of where the government forces people to play?
As for wanting higher and higher taxes....people bitch because there are no "living wage" jobs, but its ok if the government takes 70% of your pay? Either way people dont have enough left to spend on stuff they need.
No wonder progressives dont think the min wage is high enough. Its not because they want people to be able to provide for their families, they want them to be able to provide for the government.
I think I see now. In their perfect world, the Government will provide for our families?
Posted by: Bill Holmer | Oct 4, 2005 12:55:41 PM
Steve Novick's original commentary wrongly places blame for the decline in personal tax receipts primarily on the Bush tax cuts. The primary cause of the decline in personal tax receipts was the recession. Had the impact of the recession not been softened by the cut in tax rates, the personal income tax receipts would likely have been even lower. But that would require Steve to think dynamically, rather than relying on the static analysis of political economists like Paul Krugman.
But as Steve says, you can look it up. According to the Congressional Budget Office, the percentage of total personal taxes paid by the top 20% declined from 64.4% in 2001 to 63.5% in 2004 - a whopping decline of 0.9%. Total personal taxes, including payroll taxes, declined from $1.69 trillion in 2001 to $1.54 trillion in 2004. The amount paid by the top 20% of income earners dropped from $1.09 trillion in 2001 to $0.98 trillion in 2004, a decline of $110 billion.
The most recent figures show that tax revenues will increase by $262 billion in the fiscal year which ended last week, an increase of 14% over fiscal 2004. Most of the increase will come from personal taxes, most of which will come from the top 20%. It appears that the theory of supply side cut in tax rates is not only alive and well, but also beginning to produce record revenue growth. Sorry Steve, a closer look at the facts shows where the truth lies.
Posted by: chris McMullen | Oct 4, 2005 1:23:19 PM
Paul Krugman -- "the very smart economist" -- is a partisan hack who's been corrected multiple times by the NYT for false statements he's made in his opinion pieces. He was also paid $50,000 by Enron to be on their advisory board and wrote a supportive puff-piece about Enron in Fortune magazine.
Furthermore, Krugman has admitted that "his forecasting record is not great..."
It's probably a good idea to distance yourself from him, Steve.
Posted by: Steve Novick | Oct 4, 2005 1:23:23 PM
Oh, I see. So does Mr. Holman think that we were in a recession last year? 2005 is the first non-recession year? I don't think anybody else thinks that. And how does explain the fact that the first George Bush had a recession, too, but personal income tax revenues did not plummet? And if tax cuts lead to higher revenues, tax increases should lead to lower revenues, so how does he explain the steady increase in tax revenues under Clinton? In the right-wing world, every improvement in the economy and increase in tax revenues is attributed to tax cuts, even if you have to assume a six-year delay in the tax cuts 'working,' while every downturn in the economy is explained as result of tax increases (the George HW Bush recession is attributed to his tax increase), and any period when taxes increase and the economy is good and revenues increase (Clinton) is simply ignored. Very convenient.
Posted by: david | Oct 4, 2005 1:52:34 PM
The fact of the matter is the economy, jobs and revenue are coming roaring back when the Steve Novicks and Paul Krugmans told us Bush was destroying all of them.
How many times can a liberal be wrong before a liberal is wrong?
Fortunately the county is not run like liberals run Oregon.
Posted by: Bill Holmer | Oct 4, 2005 2:53:54 PM
Look at your own link, Steve. No I don't think 2005 was the first non-recession year. Personal income taxes in fiscal 2004 (which began in the fall of 2003) were $809 billion, up from $794 the prior year. Looks like the economy was coming out of the recession, which it was.
George H.W. Bush, who saw personal income tax receipts increase by 11% from $401 billion in 1988 to $446 billion in 1989, and who never believed in what he called "voodoo economics," decided that what the economy needed was just a modest tax increase in 1990. What he got was a modest recession and personal income tax receipts which barely increased from $467 billion in 1990 to $468 billion in 1991.
As far as Clinton is concerned, he was able to slash defense spending (thank you Ronald Reagan), while increasing tax rates. Even Clinton admitted he thought he had raised taxes too much. We'll never know if personal tax receipts would have been higher without the rate increases. In defense of Clinton, he also kept a lid on non-defense spending, with total spending increasing a mere 3.3% per year while he was in office. Some would say that he was just lucky enough to ride the new technology wave during peacetime. But that would be just too convenient.
Posted by: Jeff Bull | Oct 4, 2005 3:53:52 PM
I'm shocked that we've come this far and no one caught the original error. The claim in Mr. Lucia's original letter was that ""tax cuts have actually resulted in significantly higher government tax revenues." What Mr. Novick missed entirely is that this is possible even when personal income tax revenues go down; personal income taxes are not the sole source of government tax revenues - and that's the point of a lot of this.
Mr. Lucia is right over all, but wrong about the cause: the revenue "bump" has less to do with supply-side "boost" than it does with a one-time depreciation holiday (over half), plus capital gains tied to the hot housing market. In other words, the revenue boost is highly dependent on keeping the housing market buzzing....how we all view that depends on personal views on economics. And for all the apparent solidity implied by the numbers, economics is a hell of a soft science, especially when looking into the future.
Posted by: Robert Harris | Oct 4, 2005 4:33:03 PM
To Jeff Bull
I checked the link that Mr. Novick cited. It appears total revenues were down from 2001 through 2004. And 2005 projections barely exceed 2000. Thats total, not just personal income taxes. Unless I'm missing something or someone has a better source. So don't pull a "Lucia" here ;)
Posted by: howard | Oct 4, 2005 4:56:56 PM
blue posted:
"We experienced massive economic growth throughout the 1950's when the marginal tax rate on top wage earners was 90 percent. We had more rapid growth during much of the 1960's and 70's than we have today when the marginal tax rate on top wage earners was 70 percent.
I mention it because it suggests that there is very little real relationship between marginal tax rates and economic growth."
The growth of the late 1940's and 1950's resulted from pent up consumer demand caused by the unavailability of automobiles, consumer durables etc. and other measures imposed by world war II.
By 1957 we were in a recession with top marginal rates over 90%. JFK was elected in 1960 and cut the top marginal rate to 40% and the economy recovered.
Kennedy was assassinated in November 1963 and Johnson started his "Great Society" programs as well as expanding the Viet Nam war financed with borrowing and tax increases. Nixon was elected in 1968 and introduced wage and price controls which along with the formation of OPEC and higher oil prices brought on stagflation and inordinately high interest rates into the 1980's. Reagan was elected in 1980 and reduced the top marginal rate back (from where it had been increased to 70%) to 40% and the economy strengthened through the 80's. The top marginal rate was reduced below 40% in the mid 80's. Gerald Ford in 1991 and Bill Clinton in 1993 each boosted the top marginal rate back to 40%. The 1990's saw strong economic growth and smaller deficits.
There were other factors influencing the economy in that 60 year period, but I strongly suggest that history shows the modern U.S. economy performs best when the top marginal income tax rate is in the neighborhood of 40%.
Posted by: Steve Novick | Oct 4, 2005 5:04:34 PM
Who says Kennedy cut the rate to 40%? My understanding is, and this chart confirms, that the rate was cut to 70% in the '60's and stayed there until Reagan.
http://www.truthandpolitics.org/top-rates.php
Posted by: Jody | Oct 5, 2005 8:25:54 AM
Really, Homer, you speak as tho the Pearl is a whole new economic base for Oregon. But do folks who can afford one million dollar homes stop eating out, buying stuff and owning new homes if they aren’t in the Pearl? Even folks who are in the subsidized usits in the Pearl would eat and shop someplace if not in the Pearl. I doubt any of them would be homeless, and eating out of cans without the Pearl.
There were massive tax breaks and other forms of public participation in the new infrastructure for much of the Pearl. That area now supports a different kind of economic life. But it is silly to think this created some great new economic wave. Folks who eat, sleep, and buy there now, would be involved in the same economic activities someplace else, if not in the Pearl. Was all that public investment, on into the future with virtually no property tax payments by many worth the investment? Only if we care about peak oil, and a vital downtown city.
Kids in crowded classrooms, and some of the formerly sheltered folks who are now homeless may think it wasn’t a particularly good idea to spend public resources that way. The changes would likely have come eventually anyway…. and with little public participation.
Posted by: howard | Oct 5, 2005 10:30:07 AM
Thank you Steve Novick. I stand corrected that Kennedy's 70% top rate stood until cut again by Reagan in the 1980's.
Plugging in that correction in my recap above, I trust you will agree that the Clinton years proved that the economy grew and deficits shrunk with Clinton's top marginal rate of 39.6% in the 1990's.
Posted by: Ruth Adkins | Oct 5, 2005 11:42:55 AM
The fact of the matter is the economy, jobs and revenue are coming roaring back when the Steve Novicks and Paul Krugmans told us Bush was destroying all of them.
Huh? Roaring back? The only roaring I hear is the emptiness of my checking account as I struggle to pay the bills and buy groceries for my family each week.
I can't follow all the arguments and counter-arguments about marginal tax rates etc. All I know is, under Bush and the GOP, the rich are getting richer, the poor are getting poorer (and there are more of them), and formerly solid middle class people like my family are slipping further and further behind. We are WORSE OFF than we were under Clinton. And I don't see any end in sight. How are my kids going to go to college? How are they going to pay off this huge deficit? It's scary.
Posted by: Gordon Hillesland | Oct 5, 2005 5:04:23 PM
Actually, tax receipts have decreased since 1996 because Internal Revenue Service stopped enforcing tax law. Prior to 1997, there were 90 field tax collectors employed by Internal Revenue Service in Oregon. Today, there are 20. Policies and procedures have been changed to insure collections are smaller. The purpose is to starve government of revenue so privatization can be justified. The Oregon Department of Revenue has done the same. Examples if ODR collection policies can be seen in an article which appeared in Willamette Week entitled "The Case of the Fecal Physician". DEQ assessed a $370,000 penalty against a property owner and the collection agency, ODR, was unable to collect one cent, even though there were 9 pieces of real estate and rents receivable from many parties available as collection sources. If you read about the bankruptcy of Hanna Carwash Manufacturing Company, you saw that ODR left $140,000 in trust fund taxes on the table while the CEO was charging $80,000 on his corporate American Express Card. The policy of IRS and all departments of revenue in every state is to reduce revenue. To change that, we need new leadership. The Director of Oregon Department of Revenue reports directly to the Governor.
Posted by: Tenskwatawa | Oct 6, 2005 10:35:05 AM
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I agree with Steve Novick. And it don't matter.
And I agree with howard "... economy performs best when the ... tax rate is in the neighborhood of 40%." I agree: 40%. But I get to that number a completely different way, and I disagree with every step (or accuse it of omitting significant material) in howard's steps to that number, (and I spotted the mistake about what JFK did (didn't) the minute I read it).
The letter in the paper stated a lie. Around that there are ways to shift the foreground/background such that the letter in the paper stated the truth. What the letter stated mostly depends on the preset filter of the reader. We all have filters, and they are made from our experiences and knowledge collecting, which is individual. This "debate" is undecideable in terms of economics, and that repeats the comment that economics is the exemplary "soft science." Economics no more can wear the 'science' label than creationomics. Because it means reproducible results. And while Econ is wonderfully filled with math and curves, ultimately, at the end of the debate, there are multiple answers -- each does not reproduce the other's results. It ain't science.
I call it dither. I can get practical results with it, such as coming up with the 40% 'sense' of optimum. But I thought comments were importantly questioning the paper's use of printing a fraud point, (I saw it was a lie the minute I read it), and it seems to me the paper exploits the dither of subjects that can be exhausted behind a screen of their debateability, while in fact printing the letter is not debating it at all -- it is deciding the debate and putting that determination in readers' eyes. I imagine the paper receives a letter for each of the various different 'results' in a debated topic, and they choose the one they agree with, and what they print is the point they are making. I'm not so sure there's any use in trying to change the paper, and I more work on trying to change the filter people see the paper with, so that we know not to trust it and not to believe it and not, really, to need to read it. I've started skipping days' issues. It's a hard habit to break. The value of it is another topic of dither: It's debateable.
Anecdote, intended humorously: I took 6 courses of Econ (and more) and then transferred to MIT. Each department head transferred every one of my Chicago credits one-for-one into MIT credits. Except Paul Samuelson's Econ department. Samuelson himself grilled me twenty questions about the quality of the Econ I had been taught, and after the third question ("What kind of Economics was it?"), he kicked me out of his office saying he refused any transfer. (My correct answer was 'MicroEconomics' and Friedman-Keynes duality; Samuelson was all and only 'MacroEconomics.') I had no idea what the dither any of them were talking about, so I figured I didn't deserve the credits anyway. It just seemed funny that the hard science courses -- and I mean gut gut gut courses -- transferred to the science capitol without a blink, but the soft science courses had measures of qualifiable or non-.
My tools (filter?) for building understanding of news items about "the economy" started collecting in the steel strikes and merger of AFL with CIO and wondering what was going on, Eisenhower-something. Two or three of the tools have turned out to be the most durable and have helped me understand the widest array of news tidbits.
One is the debt. Two is the budget. Third to be named later.
The budget explains one of the disagreements -- talking past each other -- going on in this very thread. Steve said tax revenues were '1 trillion, down to 800 billion,' and ross smith said revenues were '2 trillion going to 2.8 trillion,' and Bill Holmer said 'total personal taxes were 1.7 to 1.5 trillion.' Which is it -- 1, 1.5, or 2.8 trillion?
Here's my budget tool. The Govt gets about $1.0 trillion from income taxes. And another $1.5 trillion from collecting Social Security withholdings, the obstreperous 'FICA.' That's $2.5 T out of people's paystubs. But they can't "spend" the $1.5 T from FICA -- that goes into savings for the SocSec trust fund, but then they can "invest" it out of the trust into "instruments" which "return on investment" to put it back. But none of what's going on with that $1.5 T has much to do with the first $1.0 T which is, strictly speaking, 'income' taxes -- the 17% or 22% or 32% nick in wages after the 7% FICA nick. (And if Fed is 17% and FICA is 7% and State is 9% and nigglety-nickel is 5%, there's the '40%' sense on the paystub.) Then there's the people who don't get paychecks, they get dividend checks. It is not many people but they get most all of the dividendings. Whatever the income, all that some administration can do playing with the income tax rates is change the $1.0 T. The FICA $1.5 T is monsterously unstoppable.
In the end, it is simply that they got a trillion they can spend (discretionary) and another trillion-and-a-half they can spend only one way: putting it in savings, good ol' FDR's SocSec trust. All this is round numbers. They been dithering around over the years. I guess from Bill Holmer's comment the income taxes to discretionarily spend is up from $1.0 T to $1.5 T in the years I ignored it, and taken together with on-going FICA's $1.5 T means I'll be seeing some "budget" numbers near $3.0 T. Which is ross smith's $2.8 T "federal revenues." Steve is only talking about the $1.0 T income taxes and saying collection is down to $0.8 T.
I think I understand some details in the difference between Bill's $1.5 T income taxes and Steve's $1.0 T income taxes, and I disregard it and throw it away and stick with $1.0 T rounded off, (or $1.2 T when I need accuracy according to the number I registered in the latest budget I took note of. For on-the-fly thinking, the $1.0 T still has a durable sensibility, a general proportionality.)
Okay, that's the budget tool. $1.0 T to spend. $1.5 T to put in non-descretionary Social Security et al.
A few details. First of all, 1.0 trillion is 1,000 billion. I am amazed by how many people don't know that. (Or that 1 billion is 1000 million.) So Congress has 1,000 billion to spend. (It's a lie to say the president spends it, or that it's the president's budget, or that who I vote for president matters at all from any tax rate reported as "his.") Congress spent this year's 1000 billion thusly: half (500 B) to the Pentagon. A quarter (250 B) was the Transportation Bill that just went by. I believe 150 to 200 B goes to pay interest on the debt, (Tool one, coming up in a second.) I think 30 B goes to Education, but maybe that's Interior, or maybe one of them is 100 B. I think we/they spend 8 B on "Foreign Aid' which is neither foreign nor aid. Anyway, the 1000 B is already gone, and there are still loose ends and contingencies to go. Like Katrina -- 50 B. Or was it 100 B? Well, so, we/they borrowed 500 B to tide us/them over. Income tax revenues collected: $1000 B. Income tax revenues spent: $1500 B. Hmmmm.
So that's one year, a $500 B (equals $0.5 T) "deficit." All the deficits make the "debt." Tool one. Up to 1980 the debt had grown to $1.0 T in the time since it was last zero -- un-indebted -- Andrew Jackson, 1830-dither. 1980 = $1 T. (Half of that, .5 T, since 'Eisenhower.' Dither.) Reagan gets in. (But you know what I recently figured out? Bush Sr was really president 1981-88, while Reagan was unconscious. Bush got three terms. Plus two more now with his boy's proxy.)
In 1980 debt was $1 trillion. In 1988: $4 T. In 1992: $6 T. (1994: $6.5 T.) In 1996: $6 T. In 2000: $4.5 T. (I think in 2004 debt was back up over $7 T and aimed higher by Congress's helm.)
So the big debt thing was going from 1 to 4 trillion in Bush's two shadow terms, 1980-88. That's a large bump, percentage-wise. That's why this year we spend $200 B (out of a possible $1000 B) for "Interest on the debt," which is no investment at all, supply side or demand side. I think it goes to China, or Europe, or whoever we owe $7 T. And...that's why there was a $1 T Savings & Loan crisis, (1980-88). And that's why Congress repealed the SocSec Trust lockbox firewall, to allow The Income-Tax Govt to 'borrow' from The FICA Govt, (1985-dither). And why Packwood re-wrote the entire IRS income tax code, (1986). There was a $1 T pea under three walnut shells switched around for 8-dither years -- maybe one pea, maybe one pea under each shell, maybe no pea ....
If I think of $1000 B as a $10.00 (ten dollar) bill, Congress's checking account looks a lot like mine -- not putting food on the table. To fix Congress's problems, I say simply remove the Pentagon. Sell all the aircraft carriers and airplanes and tanks and everything. The world is not about that any more, we don't need it. As proof, try to sell it. Offer all the military hardware for sale, to China or anybody, and I say nobody would buy it. If we are going to get rid of it and not have any, they see they don't have to have any then, either. So nobody's going to cash us out for all the hardware, we're stuck with it. Melt it, I suppose, and make something else. That's kind of what the Unatilla incinerator is up to. (About $5.0 B, I think, I lost track of it when it went dithery between $2 B and $3 B, and rising.)
To fix my own checking account problems, I say I better start chainsaw-carving upright grizzley bear statues to sell, out of old growth snags and stumps. Or collecting windfall limbs in the forest and lashing together 'rustic' furniture to sell. Or I'm interested in small-production papermaking, making paper to sell out of wood. Or sharpen up my chops and play music gigs -- pa-arrrt-y -- the rest of my life; hey, dying while playing music is not a bad way to go. Or, sharpen up my keystrokes and write 'books' to sell. 'Or steal my daddie's cue and make a living out of playing pool.'
Or growing two acres of strawberries, one to eat, one to sell. Gestate a cow, sell the milk. Chickens, eggs. I'm sure not going to hire out for pay, ("get a job"), serving hamburgers through a window into cars, or gassing up car tanks. And I'm not going to take a middleman position buying something wholesale by the dozen and selling them retail one at a time, cars or something, and pocketing the 'mark-up.' And I'm not so careless with my money that I'm going to give it to someone else to do what they want with it, in exchange for a stock-certificate border, printed piece of paper and dividend checks every quarter for as long as they last. Hmmmm. Or maybe I could count on winning the lottery. Yeah, that's the ticket.
What I'm getting at is exactly what Becky said: "see us return to lower consumption rates, manufacturing jobs here at home, [sorry, disagree: "manufacturing in the home"], and a faith in good-old American craftsmanship." "That's another subject," she says. No, that's this subject, The Economy, My Economy. Same same. I don't see it as government's purpose to "provide jobs" or "create jobs" for me. That's my purpose. What can I do? For myself and for others. Getting into grandparent's age, maybe I could watch the kids while the parents go to work. If I could live-in with them. So long as there'd be food on the table and a place for me.
Because. I look for such working ways because ... the oil is about to run out. People don't really get that and none of us knows what it means, or what it is going to be like. The usual way people don't get it is that they say "I don't get that but I'm going to keep thinking it's a long time in the future like I heard once upon a time and I'm not going to look it up, I'm busy."
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P.S., I guess; the third tool that reliably and comprehensively explains to me economics news items, and which politics is better to vote for common wealth, is: I ask people I meet, "How's it going?" Mostly, people say what Ruth Adkins said. 'It ain't going.' I agree. It ain't going, personally. I ask people, "Would you vote for somebody new, not a Democrat, not a Republican, to make a new Congress, with new ideas and leadership in a new direction, toward a new economics of The Economy, that is not lie side economics." People say, "You're weird, T. -- tell me more about The New Economy and can I get a job in it and where do I vote?"
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Posted by: Bill Holmer | Oct 6, 2005 12:39:35 PM
T - In response to your question. All the numbers can be found in Steve's original link.
Steve was referring to total personal income tax receipts.
I was referring to total personal tax receipts which includes Social Security and Medicare.
Ross was referring to total receipts which also includes corporate income taxes, excise taxes, and other federal receipts.
Posted by: LT | Dec 20, 2005 7:33:02 PM
The people with enough disposable income to be buying expensive presents for the upcoming holidays and who have secure full time jobs have the right to believe the economy is "roaring back".
Those of us who do work hard but have not landed full time work (a person is not lazy if they get a rejection letter saying "you were one of the finalists but we chose someone else", are they? That was from a rejection letter for a part time job, btw).
There is an intelligent opinion piece on all this at
http://www.washingtonpost.com/wp-dyn/content/article/2005/12/17/AR2005121700028.html
I agree with:
I can't follow all the arguments and counter-arguments about marginal tax rates etc.
The phrase "marginal tax rates" has been used for decades. Does it mean
something other than a theory (not proven that I can see) saying low tax rates make people work harder?
How does that apply to:
people with multiple part time jobs?
people who pay more in FICA than income tax?
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Posted by: Terry | Oct 3, 2005 9:21:07 PM
Great piece, Steve Novick.
From a progressive point of view, one of the interesting trends in the Tax Policy Center data is the dramatic drop in corporate income taxes as a percentage of total income tax revenue to the federal government.
In 1960, the last year of the Eisenhower administration, corporations supplied 34.4% of the income taxes collected by the feds. In 2004, the corporate share was only 19%.
We see that same trend in Oregon, which is one of the reasons our schools are underfunded.