Gillespie Versus Chait, On Deficits

And it’s Nick in a knockout. As always, though, phrases like this seem jarring, and oxymoronic:

What I showed in the post is that in fact federal revenue increased nicely under Bush, despite the tax cuts. Revenues tailed off at the end of his reign of error, because of the recession and the financial crisis (caused largely by idiotic government policies).

Emphasis mine.

How can federal revenue increase when we cut taxes? The answer is that we didn’t cut taxes. We increased taxes. What we cut was the tax rate. This misleading phraseology makes me crazy and if we could get it right, we’d have a strong rhetorical upper hand, but both conservatives and libertarians almost always feed the left with it. As I wrote a while ago:

Both sides of the aisle continually make the mistake — though it’s no mistake on the part of the Democrats — of confusing a tax rate cut with an actual tax cut. Here is a commonsense, as opposed to the Alice-in-wonderland, definition of a real tax cut. It is a reduction in the amount of taxes paid. Conversely, a tax increase is an increase in the amount of taxes paid to — and revenue received by — the government.

That’s it. Almost too simple, isn’t it?

When a politician says that he’s going to either cut or increase your taxes, he is engaging, wittingly or not, in a conceit and a deceit. He says it as though he has the power to do any such thing, when in fact he does not. He has no power except to reduce or increase the rate at which you pay taxes, whether on property, income, or whatever.

Think of it as the difference between a joystick and a mouse. With a computer mouse, you can point directly to the place that you want to be on a screen. With a joystick, you can only control the rate at which you move toward it, and in so doing, the target may move, and it may move faster or in a different direction than you can keep up with using your rate control. Politicians talk about tax cuts as though they have a computer mouse that allows them to pass a law and a specified amount of revenue will roll in, but the reality is that they have a slow joystick, with a nebulous relationship to the eventual goal.

For instance, he can raise your top income tax rate from, say, thirty to ninety percent. Did he increase your taxes by that amount? Only if you’re as stupid as he is. More likely, you’ll just cut back on how much you work, settle for the lower bracket, or do more work off the books, and he’ll end up getting less in taxes from you than before. So did he increase your taxes? Nope.

Similarly, he could cut your rate, and you might be motivated to go out and earn even more, perhaps enough more that you pay more taxes, even at the lower rate. So did he cut your taxes? No. But the wealth of the nation — including your own — was increased.

I also note in that piece the implicit assumption of the statists that all of your wealth belongs to them, and that you should be brimming with gratitude for whatever they allow you to keep, an assumption that some in the UK want to bring to its logical conclusion:

The UK’s tax collection agency is putting forth a proposal that all employers send employee paychecks to the government, after which the government would deduct what it deems as the appropriate tax and pay the employees by bank transfer.

But of course! Why hasn’t the IRS thought of that?

Anyway, the simple addition of the word “rate” as a modifier of “cuts” in Nick’s sentence renders it non-oxymoronic and sensible, and more care with phrases like this in general would reduce both confusion and obfuscation on this issue by the Chaits of the world.

54 thoughts on “Gillespie Versus Chait, On Deficits”

  1. How about we go with a flat tax of ten percent, everyone files an individual return, and the only deduction allowed is a poverty level exemption.

    The optimal rate seems to be around 20% of GDP (slightly higher in other countries with publicly funded health systems).

    If instead of a poverty deduction one adds an automatic poverty rebate of say $5000/year then one can also do away with social security and a lot of public health funding – much cheaper again with regard to administration costs. (Everyone gets $5000, and the first $25000 is effectively tax free). I would also consider automatically adjusting the rebate level as a proportion of GDP. It would then automatically lower with a recession and increase with greater general prosperity and those on the poverty line would have a direct vested interest in the prosperity of the country.

  2. 20% seems like too much to me, but I am an avowed small federal government guy. I think the federal government could get by on 10% if they got rid of Education, Commerce, Energy, Interior, Agriculture, Labor, Homeland Security, and Housing and Urban Development entirely, and dramatically scaled back Treasury, HHS, and EPA.

    One day we’re gonna have to overhaul the Federally-enforced ponzi schemes called Social Security, Medicare, and Medicaid.

  3. I remember a number of ~22% being calculated in a fairly serious special report as optimal for New Zealand around twenty five years ago when New Zealand was going through a very serious financial crisis, this was a number that included down stream effects. The actual effective tax rate (proportion of GDP) in New Zealand is I think more like 30%. New Zealand also has a fairly serious public education, health and welfare system, take these out of the equation and the optimal tax rate would presumably be significantly lower.

    By optimal I mean that a tax rate as a proportion of GDP of 22% was the rate at which the total tax revenue was effectively maximized, or perhaps that was the size of the economy was maximized, I forget. The two are probably at fairly close to the same point.

  4. Pete, I had to do VAT returns, several times a year. They were not simple, took up many hours of time and they had attached a bunch of penalties for mistakes and errors. Not just for fraud. VAT brought a whole new bunch of bureaucrats into the system too. That’s one of the reasons I came to the US.

    I will give you that it is a tax on consumption but as I said it is disproportionately levied. Everyone has to eat and be clothed. If I only pay tax on what I consume then the rich will again escape with a lower proportion of the tax burden compared with income.

    Here in the US it would probably take a constitutional change to institute a VAT system instead of Income Tax – 16th Amendment I think it was, memory may be faulty and I don’t have a copy of the Constitution immediately to hand. I don’t see any changes to the Constitution any time soon. Much more likely we will have two separate taxes on income for the feds, normal Income Tax, VAT as a consumption tax and of course Social Security. Taxes generally do not go away!

    Perhaps the fairest way to tax – if we accept that we have to be taxed is to go for some form of flat tax on income. The government already sets a poverty level, add 10% to it for some padding and then tax everything over that poverty level plus 10% at the rate that covers the government’s needs for any given year. That way you only need two tax rates; one for individuals and one for corporations. Tax exempt status for non-profits (501c.3) can remain.

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