Do we really have one?
Doesn’t look like it to me. And if we do, the only realistic way out of it is economic growth — something that this administration (and until this year, the Congress) have been making war on.
49 thoughts on “Our Revenue Problem”
Comments are closed.
Looks like these graphs are already inflation-adjusted, but they really ought to be population-adjusted too. Not that any of the conclusions would change, but the conclusions would be clearer without anything left to bias the graph slope.
Yes, we do. Not that spending shouldn’t come down, but the Bush tax cuts and their continuation really did bring personal income tax revenue down significantly from historical norms as a share of GDP.
I’d rather see revenue increased by cutting tax expenditures than by raising marginal rates, but shrinking the national debt is going to require some revenue increase.
“Bush tax cuts and their continuation really did bring personal income tax revenue down significantly”
That’s a feature, not a bug.
@Will:
If the functions of the federal government can be performed for a fixed cost relative to population, then the required tax revenue as a share of GDP should trend towards zero as GDP per head trends toward infinity.
Or as Arthur Laffer would put it, lower taxes and the economy booms, so even though the government is getting a smaller percentage of the GDP, it’s getting much more revenue.
tax expenditures?
This chart makes very clear the impact of the Republican spending spree under President Bush, while it appears spending actually dropped in President’s Obama’s first term.
It also shows clearly how the Republican tax cuts created the current budget problem and inflated the deficit. President Obama should have never agreed to their extension.
And yes, this chart makes the idea that another Republican would fix the mess previous Republican president created nuts. If I was President Obama I would use it at the next news conference to point this out.
It also shows clearly how the Republican tax cuts created the current budget problem and inflated the deficit.
It doesn’t show that at all, except to those unacquainted with logic.
Contrary to what the snake Thomas Matula says, the revenue actually increased up until the mortgage crash, even though the Clinton recession delayed that increase. But of course Thomas Matula knows this.
How’s your extramarital affair going, Tommy boy? Would you like me to tell your wife about it?
When reading that graph, keep in mind that the democrats took congress in 2008, right before a major upswing in spending and drop in revenue. Republicans were thrown out for poor fiscal discipline, and replaced by idiots with no discipline of any sort.
Correction, the current regime was elected in 2008. The democrat congress was seated in 2007.
@Cecil Trotter
If expenditures are reduced to the level supported by the reduced revenue, it’s a feature. If not, not.
@Michael Kent
Tax expenditures are provisions of the tax code that treat some economic activity more favorably than others, like pretending that hedge fund managers aren’t being paid for their labor, or that employer provided health insurance isn’t compensation.
Republicans were thrown out for poor fiscal discipline, and replaced by idiots with no discipline of any sort.
Republicans tried to prove they could be just as bad as Democrats. When the Democrats regained control of Congress, they were hell-bent on proving that no one could possibly be worse than them.
Yes, we do. Not that spending shouldn’t come down, but the Bush tax cuts and their continuation really did bring personal income tax revenue down significantly from historical norms as a share of GDP.
From an admittedly questionable source (the Washington Post):
Income tax payments this year will be nearly 13 percent lower than they were in 2008, the last full year of the Bush presidency. Corporate taxes will be lower by a third, according to projections by the nonpartisan Congressional Budget Office.
The poor economy is largely to blame, with corporate profits down and unemployment up. But so is a tax code that grows each year with new deductions, credits and exemptions. The result is that families making as much as $50,000 can avoid paying federal income taxes, if they have at least two dependent children. Low-income families can actually make a profit from the income tax, and the wealthy can significantly cut their payments.
…
In the next few years, many can expect to pay more in taxes. Some increases were enacted as part of President Barack Obama’s health care overhaul. And many states have raised taxes because – unlike the federal government – they have to balance their budgets each year. State tax receipts are projected to increase in all but seven states this year, according to the National Council of State Legislatures.
But in the third year of Obama’s presidency, federal taxes are at historic lows. Tax receipts dropped sharply in 2009 as the economy sank into recession. They have since stabilized and are expected to grow by 3 percent this year. But federal tax revenues won’t rebound to pre-recession levels until next year, according to CBO projections.
In the current budget year, federal tax receipts will be equal to 14.8 percent of the Gross Domestic Product, or GDP, the lowest level since Harry Truman was president. In Bush’s last year in office, tax receipts were 17.5 percent of GDP, just below their 40-year average.
The lack of revenue, combined with big increases in spending, means the federal government will have to borrow 40 cents for every dollar it spends this year. The annual federal budget deficit is projected to reach a record $1.5 trillion.
Those Bush tax rate reductions were still in effect when he left office and the tax revenue collected was just under the 40 year average. Today, revenues as a percentage of GDP are near a 40 year low. The rates are largely the same now as they were then but the economy has slowed considerably while spending has increased radically. Increasing the tax rates won’t stimulate the economy (except in the DC area where business is booming) so the revenues will fall further.
The answer is to cut government spending.
You must be blind to not see the dive in revenues from Newt Gingrich’s Tax Relief Act of 1997. Lost revenue that only fed the housing bubble the act created with it tax holiday for housing.
Ken, you must be a Tea Party member given how much you like to attack folks you disagree with by lying, one more link between today’s Tea Party and the classic tactics used by the John Birch Society to attack those who had the courage to stand up to them.
A couple of things here…
The Tax Relief Act of 1997 passed the House 389-43 and the Senate 92-8. Characterizing it as “Newt Gringrich’s Tax Relief Act” is therefore misleading.
It lowered the capital gains tax from 28% to 20%. As a result, revenues from the tax increased from $365 billion in 1997 to $455 billion in 1998, a 25% increase.
It did not contain a “tax holiday for housing.”
Using IRS data, this article shows that since 1945, federal tax revenues have been remarkably flat at about 19% of GDP regardless of the highest marginal tax rate. If you want to grow revenues, do the things that grow the economy.
Hint for the dim: raising tax rates does not grow the economy.
Trying to spend our way to prosperity makes as much sense as drinking our way to soberity.
What on earth are you looking at? I see increasing revenues until 2000.
Or course, you also think spending is down in Obama’s “first term”, when that final spending data point is clearly higher than any other point on the graph.
Either consult an optometrist, or stop lying.
Larry J:
The chart you show is deceptive, because it charts *all* federal revenue.
If you look at income tax revenue, you can see that there’s no free lunch: the lower Reagan and Bush tax rates are associated with visibly lower income tax revenue.
http://blogs.reuters.com/felix-salmon/2010/12/06/chart-of-the-day-u-s-taxes/
gedaliya
FYI
http://www.filetax.com/97taxact.html#home
[[[The law exempts from taxation profits on the sale of a personal residence of up to $500,000 for married couples filing jointly and $250,000 for singles. To qualify, sellers must have owned and used the home as their principal residence for at least two of the last five years before the sale. Effective for sales after May 6, 1997, this new provision replaces the prior rollover provision on home sales and the $125,000 exclusion of gain for those 55 and over. There was no change in the rule that prohibits taxpayers from deducting losses on home sales. ]]]
The gap between passage and impact is normal given the time its takes for the different provisions to take effect.
And Newt Gingrich brags its his best legislative achievement as Speaker of the House, so why not give him credit for it?
@Will: No, the Reagan and Bush tax cuts increased revenue, but decreased it as a share of GDP, as your chart shows. What your chart doesn’t show is the massive gains in real GDP, which had been flat from the mid-1970’s till about 1982. Then we started posting 7 and 8% growth rates.
And that’s the whole point. GDP is not a fixed pie. Higher tax rates inhibit economic activity and thus put a damper on GDP growth, limiting future government revenues.
Another lesson is that tax rates and tax revenues are entirely different things. Often decreasing tax rates increases tax revenues, as noted by the famous Persian writer Ibn Kildun in his Advice to Kings, not long after the Muslim conquest of his country. If the Laffer Curve is easy enough for a medieval Muslim to grasp and explain, it shouldn’t be that hard for modern liberals to understand.
The one indisputable fact is that it is false static thinking to believe that raising rates raises revenue without including the dynamic result of behavioral changes that must be factored in.
Using that as the foundation of your argument means you have no argument.
those who had the courage to stand up to them.
…because courage is the first thing that comes to mind when we picture Seattle professors. NOT.
Larry J:
The chart you show is deceptive, because it charts *all* federal revenue.
If you look at income tax revenue, you can see that there’s no free lunch: the lower Reagan and Bush tax rates are associated with visibly lower income tax revenue.
Do you only pay federal income taxes? If you stimulate the economy, you get increased revenues from multiple sources. Lowering the marginal income tax rates stimulated the economy with things like high employment which increases payroll tax collections. Profitable companies are more common when the economy is good and so that leads to higher tax revenues there as well. When the Reagan rate reductions took effect, people had an incentive to earn more money instead of sheltering their income. They paid more in total taxes but had more left over so it was worth it.
I don’t know about you, but I pay a lot of taxes. Just to name the ones that quickly come to mind:
Federal income tax
Social Security tax
Medicare tax
State income tax
Property tax
Vehicle use tax
Taxes on electricity, natural gas, water and sewage on my utility bill
Taxes on my phone, cell phone, Internt and DirectTV bills
Federal and state gasoline taxes (over 40 cents per gallon)
Sales tax of over 7.5% on everything except food and medicine
That’s not even counting the hidden costs of corporate taxes and regulatory compliance that get buried in the cost of the products we buy. Some economists estimate that’s as much as 40% of the price of everything we buy, and we get to pay sales tax on that!
To isolate on one tax (even if it is the biggest one) is fundamentally dishonest. Added up, my wife and I pay over $60K a year in taxes. That’s money that goes down the government rat hole to largely be wasted. Taking more money from us will not stimulate the economy nor will it do anything but give more money for government to waste.
Get spending under control and then we can talk about raising additional revenues. Don’t fall for any “out year” gimmicks where they promise to cut spending 10 years from now, either. Only a fool would believe the politicians when they pledge to reduce the deficit by raising taxes and promising to cut spending at some future date. They’ve pulled that lie before and I’m not falling for it.
There’s no argument that GWB wasn’t a spender, Thomas, but for the exact same reason there’s no argument that every Democratic President back to LBJ was been at least as big a spender. So where are you going with this argument? If GWB was a fool, it’s OK for Obama to be a bigger one? Or we should throw both the parties out and start over? I’m OK with the latter.
I suspect the “decline” you see in spending between ’09 and ’10 is just the other side of the very steep spike up in ’09 with the $1 trillion stimulus Barack demanded as his coronation prize. What’s important is that if you subtract the spike you see a steep steady surge upward from 2008 to 2011 — in fact, there is no other period going back to 1965 that had as steep a rise in government spending as under Barack. The average slope of the 2008-11 curve looks to my eye about twice that from 2001-2008. I don’t think the population was growing twice as fast after Obama was inaugurated, do you? So if GWB was a spendthrift, Obama has been twice as bad. That isn’t much of an argument for handing the keys to him a second time, is it?
Additionally, any idiot can see the two steep declines in revenue correspond to the 2000 dot-com implosion and the 2008 real-estate implosion. As anyone with a trace of algebra understands, this collapse of revenue is a direct result of the absurdly progressive taxation scheme we have: when personal income declines by x%, government tax revenue declines by much more than x%. The boom ‘n’ bust volatility we’re seeing here in the Federal income tax receipts mirrors the volatility Calfornia has experienced in the last few decades because of its absurdly progressive taxation scheme.
So the cure is indeed more taxes — on the poor! Cut taxes for the rich, and raise them for the lower middle class and lower class. That will even out the tax structure, tremendously broaden the tax base, improve revenue, and drastically reduce volatility and the tragic viciousness that when the economy tanks — just when you Keynesians think government stimulus is needed — government revenue completely implodes.
I believe you agreed to this scheme in another thread. So, yes, I agree, your guy Obama should show this graph to the country on national TV along with the new slogan Hope and change! Tax cuts for the rich, tax hikes on the poor! Obama 2012!
I’m sure it will be a winner.
Added up, my wife and I pay over $60K a year in taxes. That’s money that goes down the government rat hole to largely be wasted.
So if you kept that $60K, what would you be spending it on that would be better?
Oh, and any answer that involves your bank using it to “invest” will be laughed at.
Actually I will laugh anyway. Don’t answer, it was a rhetorical question. Now if you excuse me I’ll go back to moving my company out of the US in preparation for August.
@George Turner: No, the Reagan and Bush tax cuts increased revenue, but decreased it as a share of GDP, as your chart shows.
Exactly… you beat me to the punch. The Statistical Abstract (referenced by Randall Hoven’s American Thinker piece) tells the story: between 1980 and 1990 federal revenues increased from $1.2T to $1.5T in constant 2005 dollars — a 25% real increase — while revenues as a percentage of GDP declined from 19.0% to 18.0%. For liberals, though, it’s never enough… they won’t be satisfied until it’s 100% and they get to design the 5-year plans to dig us out of stagnation.
Will McLean’s comment above about “tax expenditures” shows the mindset — letting taxpayers keep more of their money is an “expenditure” in their bookkeeping because they start from the premise that the government should own everything… and we should be grateful that they let us keep half of it.
So if you kept that $60K, what would you be spending it on that would be better?
Let me take a guess. He’d look around and peruse what people were actually offering for sale, i.e. he’d only spend it on truly “shovel ready” jobs, where the shovel was not only ready but actually in someone’s hands and poised for use.
Then, being shrewd and wanting to maximize his own benefit, he’d probably spend it on those things that were the best bargain, for example, he’d hire the person to cut his hair who was most desperate for the work and hence offered to do it for the least payment. He’d buy a house, say, that was being sold by the person most in need of getting out from under his mortgage, and who was consequently willing to sell for the smallest profit. That is, he would very carefully spend his money on exactly those people in the greatest need of jobs and income.
Furthermore, being naturally cautious, he would probably spend almost all his money locally, where he has the greatest possible information about conditions, so that he would make maximum use of the distributed economic information contained in local prices and wages. Multiply him by 100 million or so, distributed all across the United States, and you have an amazingly effective use of local expertise.
In short, he would spend that $60k in a way so smart and efficient that it would take a team of 2 million PhD in economics $150,000 a year bureaucrats to duplicate. And he’ll do it at zero cost to taxpayers! He is not even going to ask for an intern’s stipend to do all this diligent research and opitimization! He’ll work for mere coffee!
Only a complete moron would fail to realize what a very good deal that is for the rest of us.
Daveon Says:
July 7th, 2011 at 2:06 pm
Thanks.
BTW peckerwood, private money management is better than government spending every day.
George Turner:
I’m having a hard time seeing a clear correlation between lower marginal tax rates and higher real GDP growth.
http://www.presimetrics.com/blog/?p=307
I find it entirely plausible that there should be some correlation, but I don’t see the real world evidence for it.
I suspect that there is a relationship, but it’s swamped by other factors that matter more.
Daveon,
No one gives a shit what you are trying to sell so give it a rest.
Why would you expect a strong correlation between top marginal income tax rate and GDP growth, Will?
Surely the relevant thing to check would be (a) the average tax burden (percentage of income) versus GDP growth rate, or (b) the progressivity of the tax burden (average rate of increase in tax rate per additional dollar of income earned) versus GDP growth.
The former would test the hypothesis that it’s just the overall tax burden that affects growth, i.e. how much government siphons off for its nonproductive uses. The latter would test the hypothesis that steeply graduated tax rates discourage hard work at the margin by the most productive workers.
Seems like the Brezhnev stagnation starting in Y2K…
Hopefully the USA will not fail in the same way the USSR did. It took them what, two decades?
A couple of reasons to look at the top marginal rate, Carl.
One is that a huge share of the capital in the US is owned by people who pay the top marginal rate. The top marginal rate will determine the post-tax return on their investment decisions at the margin. When deciding to make a marginal investment, they don’t care what the average tax burden is, they care how much they get to keep of an extra million dollars.
Likewise, highly compensated people who decide between working more and consuming leisure. Average tax burden isn’t the issue, it’s how much of the marginal return.
The lower tax brackets matter too, but if the top bracket is 90% it’s likely that the one below it will be pretty high, too.
The top marginal rate is somewhat simplistic. I’d rather see data on what the marginal rate is for the top 1% and 10%. I don’t know if that’s available.
Average tax burden matters, but so does the marginal rate, There’s going to be a big revenue difference between taxing everyone at 50%, and taxing people below the mean at zero and everybody above it at 100%.
@Will:
Your plot is of top marginal tax rates versus GDP growth, not overall tax revenues as a percentage of GDP (how much money was sucked out of the economy).
The problem is that almost nobody ever paid the insanely high marginal rates, since the rich and ultra-rich have almost complete control over the configuration of their income stream (taxable, non-taxable, defered, etc). And of course along with those high rates came truly massive loopholes, since the rich were good at hiring lawyers, lobbyists, and tax advisors, and all Congress really wanted to do was convince the less well off that Rockefellers, Biltmores, and Carnegies were paying more than their fair share.
So what you have is a scatter plot of government window-dressing and class-warfare rhetoric versus GDP growth. The Laffer curve is an aggregate of the tax rates versus revenue, and is of course the sum of everybody’s individual curve. In the case of the top marginal rates, those people started paying more when their rates were lowered. So as a means of getting money from the rich, high tax rates are counterproductive.
As for the Laffer curve itself, independent studies in post-Soviet Eastern Europe have provided hard, real-world proof of the Laffer Curve, and also surprisingly found that tax complexity is also important in determining revenues.
Recently Arthur Laffer himself showed data on state GDP growth rates versus state income taxes, state income tax rates, and tax revenues. It wildly confirmed his thesis, that trying to soak the rich or even just instituting and income tax hurt the total yearly income, income growth, and tax revenues of those states compared to states that avoided such policies.
If you want a more down-to-earth explaination, hit some poor schmuck with massive child-support payments and a couple multi-million dollar lawsuit settlements and notice how his once large taxable (and takeable) income dries up to almost nothing. He quits doing honest work and spends his time fishing, gambling, and running little side-jobs for cash, buying and selling on eBay, etc.
George Turner:
I don’t dispute that there’s some point on the Laffer Curve where higher marginal rates result in lower revenue. Trivially, at 100%.
But there seems to a shortage of evidence that Bush II marginal rates are optimal.
If you have evidence, please present it. I am willing to be persuaded.
The top marginal rate will determine the post-tax return on their investment decisions at the margin.
Hardly. That would be the case if we lived in a world with a 50-page tax code, instead of the world of fiendishly complicated tax law hell we do. Off the top of my head, I would say the most important tax-law issue that determines ROI is the classification of the income stream, and what expenses can be set off against it. Congress has used the tax code for decades as a social engineering tool and it works. (Should we be greatly surprised that we have had such gigantic bad investments of capital — “bubbles” — over the past 50 years? Not if we have two neurons to rub together.)
As George says above, I think even as a proxy for the more complicated question of ROI at the margin for the wealthy, the top marginal rate just isn’t good enough, unless you can think of a way to compensate for the wildly shifting landscape of deductions and income classifications that underly it.
Average tax burden isn’t the issue, it’s how much of the marginal return.
Well, that’s a hypothesis to be tested, is it not? That’s why I suggest comparing GDP growth to average tax burden and to the progressivity in the tax code, which is a broad measure of the degree to which earning one more dollar nets you a smaller and smaller fraction of the dollar as you go up the income scale.
If total income tax burden is the key, you should see a good correlation with the first comparison, and a weaker correlation with the second. Contrariwise, if the key is not discouraging high earners from working more, and it doesn’t matter much whether you deduct 1 silver penny or 2 from the peasant’s 10 shekels per fortnight, then you should see a strong correlation with the second and not the first.
No one has a clue if Bush’s tax rates are optimal, Will. That’s an angels on the head of a pin debate.
But arguments that the tax cuts were appropriate and successful have been made, for example here, where they are credited with short-circuiting the 2000-01 recession.
In other words, compare the sharp rebound in tax revenue after the post-dot-com bubble in 2000 with the flat-bottomed curve that shows no sign of heading up in 2008-10. The sharp rebound is, the argument goes, the result of the Bush tax cut response to recession, while the failure of the economy to rebound in 2008-10 is a result of the Obama Charlie Foxtrot response, which it would defy brevity to even precisely define.
Carl, hitting the top of the Laffer curve is “optimal” only for an occupying army bent on extracting as much in long-term war reparations as possible without concern for how much pain and suffering you might inflict on the local populace.
Here’s an interesting thought experiment on attitudes about taxes and the Laffer curve: Instead of using tax revenues to fund income redistribution towards the poor, suppose our liberals lived in a country like Libya or medieval Europe where all the tax revenues went toward supporting the nobility’s hedonistic lifestyle, royal estates, and private armies.
Would liberals still argue for increasing the tax rates on the peasantry even if it generated less revenue for the pampered nobility, or would they doggedly look for the peak of the Laffer curve so they could maximize government revenues and make sure the noble families got to blow as much money as physically possible on castle expansions, jewels, courtisans, imported trinkets, and booze?
I meant “optimal” only in the sense of maximizing economic growth, George. Whether this maximizes tax revenue is an exercise left for the mathematically-inclined reader. Furthermore, I am allowing arguendo the Marxist’s assumption that government can at least in some cases have a positive effect on economic growth, as opposed to being always simply a parasite on it, delivering (ideally) improved livability (civil peace, national security, moments of national pride like planting a flag on the Moon) in exchange for a reduction in sheer individual prosperity.
I don’t really see a material difference between the modern Left’s attitude toward income redistribution and that of the medieval royalty. If the noblemen blew the tax income on castle expansions, did they not thereby employ hundreds of masons on shovel-ready projects? By importing trinkets, did they not stimulate the shipbuilding business? And, of course, they gave in alms — or vast public works projects like big cathedrals — great sums to the peasantry, too.
I grant you, the modern aristoi would have that the labor of everyone belongs to The People instead of The Crown, but this is a difference that makes no difference. In both cases it’s an abstract voiceless entitity, the wishes of which must be interpreted (of course!) by their most excellent selves. Just as Count Richelieu expressed to the Norman peasants what le roi wanted, so Princess Pelosi and Count Reid have recently been explaining to us what The People want.
The fortunate aspect of our modern state is that the Founders wisely prescribed regular four-year intervals at which the people can actually register their approval, or not, of the aristocrats’ interpretation of what The People want, without the traditional resort to pitchforks and bonfires. Aristocrats hate this, of course, just as medieval aristocrats hated having an actual live king muddle the message of what The Crown wanted. But unfortunately for them, and fortunately for us, the distinction between what the people say (at the ballot box) and what The People want, which they understand, is too subtle for any of our coarser minds to easily comprehend.
Carl, a 2007 Economist article cites a study that addressed the growth issue, saying
I would surmise that a tax rate near zero would optimize growth, assuming other factors aren’t changed. Almost all countries with a higher percentage of government revenue than the US have slower growth rates, but some of the countries with very low tax revenues have almost non-existent growth in GDP per head, but they’re mostly places like Bangladesh where money probably has novelty value.
Table of countries by tax revenue as percentage of GDP
As to your preference against resorting to pitchforks and bonfires, those provide jobs for street vendors, tool makers, and woodcutters. Or as some folks put it, “Politician, rope, lampost. Some assembly required.”
But yes, it’s fascinating how so much of modern liberalism is just putting new lipstick on The Crown, projecting their own desires on it, just like people for millenia have celebrated the birth of a royal heir while thinking “THIS ONE will fix things and treat us wee poor folks with love, charity, and compassion.” It’s still a monolithic, top-down, money-hungry bureaucracy, no matter how much Hopey Changey BS it emits.
@Will McLean: The top marginal rate will determine the post-tax return on their investment decisions at the margin.
This statement is, at best, wildly inaccurate. It is essentially true that the folks in the highest income bracket control a disproportionate share of the investment capital of the country. However, they don’t take the product of that investment as ordinary income. They take it as capital gains, mostly long-term capital gains. The capital gains tax rate is only loosely coupled to the ordinary income tax rates, and in a way that had varied wildly over time, as this excerpt from Wikipedia indicates:
Now, the capital gains tax is pivotally important to economic growth. A case could be made that our current high capital gains tax is one of the primary reasons we have been unable to match the growth rates of the mid-20th century. (And the complications above are obviously missing from the scatter plot that underlies the simplistic analysis at the Presimetrics blog you linked). But they are only part of the story. Also of fundamental importance is the incentive structure provided to the small-cap entrepreneurial class, the “$250K millionaires” whose wealth Obama wants to “spread around”. And the top rate may or may not be a good indicator of the incentive structure for those folks. These are people like doctors, lawyers, and small businessmen who may not have any capital gains to speak of but allot their economic energies in a way that aligns perfectly with the economic incentives provided to them, statistically speaking. Tax their contribution to GDP, and they will produce less. This is a simple consequence of supply and demand, like it or not.
Coupled to this is another fundamental and fatal flaw in the Presimetrics analysis: the starting income for the top rate has fluctuated wildly, sometimes dipping down into the entrepreneurial class, other times allocated only to the rarified few — mainly as a benchmark from which to scale the capital gains tax! This fluctuation appears nowhere in the simplistic scatter plot of Presimetrics. For example, in 1931 the top individual rate was 25%, with the top bracket starting at $100K income. The next year, Roosevelt hiked the top rate to 63%. But that rate only applied to incomes of $1M and above. In 1936 he jacked the top rate to 79% — for incomes of $5M and above! So in what data universe does it make sense to put 25% and 63% and 79% on the same scatter plot against economic growth with no correction for scope?
It’s worth noting that the worst fault of the Presimetrics plot is that it is dominated by the mistakes of the Roosevelt administration — the high tax rate of the prolonged Great Depression and the absurd economics of WWII — which produced 18% growth in GDP (along with massive debt). Gee, 1942 was a great year, wasn’t it? Wish we could have another one like it….
Daveon Says:
July 7th, 2011 at 2:05 pm
Added up, my wife and I pay over $60K a year in taxes. That’s money that goes down the government rat hole to largely be wasted.
So if you kept that $60K, what would you be spending it on that would be better?
Oh, and any answer that involves your bank using it to “invest” will be laughed at.
My wife and I could afford to do some improvements on our home, which would mean hiring one or more contractors, buying materials, new appliances, etc. Those things actually create jobs.
We could also save and invest more for our retirements since we have no pensions at work. We’ll have to live on what we manage to save for ourselves. Those investments add to the economy far more than government spending.
We might buy my wife a new car or I could get something better than my 44 year old Piper Cherokee such as a kitplane or even a Cirrus SR20. We might even buy an RV or something else we’d like to have – things that people produce for a living.
I’m not saying that I should pay no taxes, I’m saying that I’m paying a lot of taxes and seeing a lot of wasteful government spenting. Giving them even more of my money won’t help me, it won’t help the economy, and it’ll just let the government waste even more money. What’s the upside of that?
“We could also save and invest more for our retirements since we have no pensions at work. We’ll have to live on what we manage to save for ourselves. Those investments add to the economy far more than government spending.”
Ding. Ding. Ding.
When people start talking about increases to capital gains, dividend, or per trade tax increases they need to remember they are not hurting the rich they are hurting retired people.
“Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent.”
An interesting article. The heavy lifting for their results is very much driven by the pre-1980 tax cuts, which reduced marginal tax rates from very high levels. The growth impact of the post 1980 tax cuts is much lower.
And when they look at deficit-driven tax increases separately, those show *positive* GDP growth.
And when they look at deficit-driven tax increases separately, those show *positive* GDP growth.
One hopes they were very careful to sort out the effect of simply Cash For Clunkers borrowing of GDP from the future.
After all, if I run out and take a $5,000 advance on my Visa card in December, my Gross Domestic Product will increase substantially this year.
“Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent.”
Doing a little numeric modeling based on that:
A linear model, totally destroying GDP at a 33.3% tax rate, gives peak revenue of ~8.3% of max GDP at a tax rate of ~17%
Using an exponential model, peak tax revenue of ~12% of peak GDP at a tax rate of ~24-44%, GDP running at ~48-26% of potential. Given that demand for government services would decrease with strength in the economy, a tax rate at the lower end of the peak would be preferred to anything higher.
Stunning!
if you kept that $60K, what would you be spending it on that would be better?
That is just a stunning statement! How can you argue with someone that holds such a belief?
Some government hack that doesn’t even know you exist would spend money for your benefit better than you can benefit yourself. Absolutely stunning.
If help the poor is some kind of response it’s still stunning. People throughout the land are closer to the poor and better able to help them than some nameless bureaucrat.
Someone clue him in on Hayek and the knowledge problem. Business people are not saints but in a free enterprise system competition keeps them in check. Crony capitalism (the govt.) knocks it out of whack.
But demonize people with money and you can justify stealing it, right?
if you kept that $60K, what would you be spending it on that would be better?
That is just a stunning statement! How can you argue with someone that holds such a belief?
Some government hack that doesn’t even know you exist would spend money for your benefit better than you can benefit yourself. Absolutely stunning.
His arrogance was only exceeded by his ignorance. That’s a common combination in liberal circles. They think everyone else is too stupid to do anything on their own and need government’s help to do anything in life.