Taxpayers Aren’t Stationary Targets

The lesson of Gérard Depardieu:

Economists as far back at J. B. Say and Gustave de Molinari in the 19th century understood this. As Molinari wrote in his 1899 book, The Society of To-morrow, “The laws of fiscal equilibrium set a strict limit to the degree within which it is possible to impose new taxes, or to increase the rates of those already in force. The relative productivity of taxes soon shows when this point has been overstepped, for then returns not only cease to rise, but immediately begin to fall.”

Things can work in the other direction too. Other things being equal, cutting tax rates can prompt revenues to rise. This is not to say rising revenue is a good thing. As Milton Friedman once said, if a tax-rate cut brings in more revenue, the rates weren’t cut enough. Hear, hear!

Nevertheless, revenues can increase after a rate cut. Case in point: the rate cuts of 2001 and 2003, the so-called Bush tax cuts, which President Obama (until yesterday) had been hoping would expire for the top 2 percent of earners. According to the Congressional Budget Office, revenues increased from $1.9 billion in 2003—when all the cuts kicked in—to $2.3 billion in 2008 (in constant 2005 dollars). At that point the Great Recession hit and of course revenues then fell. Tax revenues always fall in a recession because when people lose their jobs they stop paying the income tax. Companies also pay less as economic activity slows down. When would-be tax raisers today complain that revenues are a smaller percentage of GDP than in previous years, that is the reason. It’s not that the tax rates are too low.

It’s not about revenue. It’s about “fairness.” That is, it’s ultimately about “need” and “ability,” i.e., Marxism.

Related: “The truth is, politicians are telling lies.”

This is not an ideological argument about the moral advantages of a smaller state: it is simple economic necessity. As the man said, there’s no money left. And the only ways that anybody can think of for the state to get more of it are either futile (taxing the “rich”) or destructive of any possibility of recovery (more borrowing). What began as a banking collapse has turned into a crisis of democratic politics. Is this what we have to look forward to? The process of campaigning and voting will be an irrelevance: all parties will tell pretty much the same lies. Whichever one is marginally more credible than the others will gain power (probably in coalition with another bunch of liars), and then have to do what needs to be done in whatever desperate, underhand ways it can devise. Nobody will feel that he got what he voted for, because what he voted for was impossible.

And low-information voters believe them, which is how Obama and other Democrats got reelected. But the piper will be paid. As Glenn says:

Something that can’t go on forever, won’t. Debt that can’t be repaid, won’t be. Promises that can’t be kept, won’t be.

But as with any bubble, the issue isn’t if, but when.

55 thoughts on “Taxpayers Aren’t Stationary Targets

  1. Charles Lurio

    “From each according to his ability, to each according to his needs.”

    I’ve long thought that – leaving aside all the subsequent history – on the face of the words this is a quite literal description of slavery.

  2. Gregg

    “I’ve long thought that – leaving aside all the subsequent history – on the face of the words this is a quite literal description of slavery.”

    Especially when the slave-master (government) gets to decide what is “needed”.

    1. Charles Lurio

      Well, of course it’s the government, who else? All you need is minimal food, sleep and the whip.

      And sometimes not even the first two. See: N Korean labor camps, or even worse, Haiti when the slaveowners found it cheaper just to work the slaves to death & replace them with new ones. There was a good reason it resulted in revolt. Unfortunately subsequent rulers there have just acted like slightly toned-down versions of the slaveholders, basically following feudalism.

  3. Gregg

    The statements in the articles are so plain and so obvious, that I was aghast at the election results.

    Can that many voters really be THAT clueless?

    I guess we have the answer.

    1. Thomas Matula

      No, they just believe JFK’s famous line.

      “Ask not what you country could do for you, ask what you could do for your country.”

      But then what are you able to do when folks want to follow a communist like JFK? :-)

      1. Paul Milenkovic

        You called just JFK a Communist (or imputed that Conservatives would call tax-cutter John Kennedy a Communist by way of the sort of straw-man argument that has a vogue these days), whom Ted Sorensen would have speak “Pay any price, bear any burden, meet any hardship, support any friend, oppose any foe” And that stupid Smiley Face doesn’t make a person any more clever for saying something lame.

        And whereas the famous line in a famous inaugural address was about fighting Communism, what does “ask not what your country could do for you” have to do with the reelection of a President who famously courted votes with “ask what that rich guy over there could do for you.”

        Rand, you really need to recruit a better class of “troll” for your site.

        1. Thomas Matula

          Paul,

          But the JFK line is so opposite of what the Tea Party/Republicans stand for in the budget debate he must be a big government Obama style socialist which of course is the same thing as a communist on this blog :-)

          And let’s not forget the big socialist projects that JFK was known for – Projects like Apollo, the Peace Corps, etc.

          As for JFK being a tax cutter, folks forget that was because he was a Keynesian who decided to counter the recession by creating a large (for the time) budget deficit.

          http://www.usnews.com/opinion/articles/2011/01/26/the-myth-of-jfk-as-supply-side-tax-cutter

          The Myth of JFK as Supply Side Tax Cutter

          Folks here forget that Keynes argued there was three ways to stimulate an economy via a budget deficit – tax cuts, increased government or a combination of the two. So the Tea Party/Republicans who are calling on tax cuts to stimulate the economy are really as much Keynesian as JFK :-)

        2. rednecktech

          Thomas is IMO, informed opposition. That is a totally different class than troll. While I disagree with him quite often, I also learn more from those interactions than the echo chamber posting. I followed the link on a comment of his below and learned a good bit about the thinking of that opposing viewpoint.

          The reaction of people on “our side” of exaggerating and distorting the net effects of the “other sides” policies creates a credible opposition that can garner votes and support, even though it is not as bad as theirs.

          Economically, I think that neither side has it all figured out. As a small business owner, I will say that I wouldn’t mind higher tax rates too bad if enough stupid regulations were eliminated to make it possible to make the money to pay taxes on. I would rather pay a net 30% on $500,000.00 than a net 20% on $50,000.00. That would be quite possible in a rational regulatory environment. Of course my competition might react even better and reduce my income below current levels.

          1. Edward M. Grant

            Who needs to distort the effects of left-wing policies? They’ve been a massive failure wherever they have been free to impose them without opposition, and thanks to decades of increasing ‘progressivism’ elsewhere we’re now on the verge of global bankruptcy.

          2. Gregg

            “Economically, I think that neither side has it all figured out.”

            This is quite true and that is why the government should NOT be figuring it out at all. 535 knuckleheads in an artificial bubble of D.C. cannot possibly figure it out.

            hundreds of millions of economic actors can.

      2. someguy

        I really don’t think you know what that phrase means.

        Let’s look at the first part. “Ask not what your country could do for you”: This is exactly what you and other leftists are doing, asking what your country can do for you. That is, asking who you can tax (“because they can afford it”, as if that is a valid reason) and redistribute money from in order to redistribute it to you.

        And yes, Social Security, Medicare and the rest are wealth redistribution programs.

        1. Thomas Matula

          Someguy.

          You really need to do some research. Social Security and Medicare, are not only self funding they run large surpluses. In fact, a large portion of the National Debt is owed to the Social Security Trust fund since the government has been borrowing from it for decades.

          http://www.foxnews.com/politics/2012/09/04/who-do-owe-most-that-16-trillion-to-hint-it-isnt-china/

          [[[Fully two-thirds of the national debt is owed to the U.S. government, American investors and future retirees, through the Social Security Trust Fund and pension plans for civil service workers and military personnel. China, it turns out, holds less than 8 percent of the money our government has borrowed over the years.]]]

          No wonder the Tea Party wants to get rid of Social Security, government pensions and military retirement. If you get rid of them you also get rid of the portion of the national debt owed to them… You see this is one of the things that make the National Debt different than the household debt, namely that most of the federal government’s Debt is owed to agencies of the federal government :-)

          Or to put it into non-economic terns, its like you taking a loan from your 401K to buy a house for cash. You are “paying” a loan on the house, but you are paying it to yourself.

          1. someguy

            Thomas, you didn’t address my point at all.

            First of all, nothing in the government is “self-funding”. If the government was self-funding, I wouldn’t need to pay any taxes.

            Anyways, whether or not they are adequately funded is completely irrelevant as to my point that Social Security and such are wealth redistribution programs. Since they are wealth redistribution programs, they should never have been started.

            Social Security says that I am stolen from to pay part of someone’s cost of retirement, on the promise that I can steal from some future guy for part of the cost of my retirement. Why not just let me keep my own money directly, and no one steals from anybody?

          2. Karl Hallowell

            Social Security and Medicare, are not only self funding they run large surpluses.

            So why aren’t you applying GAAP (Generally Accepted Accounting Principles)? The revenue isn’t keeping up with the liability. And haven’t we already transitioned to deficit for Social Security and Medicare? Looking at Wikipedia, I see $841 billion in revenue projected for the 2012 budget from payroll taxes (including those for Social Security and Medicare) and I see almost $830 billion in spending (discretionary and nondiscretionary combined) just from the Social Security program. Medicare/Medicaid is apparently at least another $523 billion (in 2010), most of which is in Medicare. Where are these “large surpluses”?

          3. Thomas Matula

            Someguy.

            I am using the term as it is used by common Americans, not like Tea Party folks do when twisting the language to fit their agenda.

            Also Social Security was passed by Congress and signed into law by the President of the time as provided for under the Constitution. It is part of the law of the land you were born it or choose to become part of voluntary when as an immigrate you become a citizen. It is not stealing in either the legal and common American definition of the term, again that is just the Tea Party twisting language for their agenda.

            And if you don’t like Social Security you are feel to campaign for its repeal as is your right under the Constitution as a citizen. You see that is how the American government works. But don’t twist words on what the program is and its legality.

      3. Gregg

        Nice twisted strawman but taxing the people into economic destruction and forcing the economy into depression is NOT doing for the country.

        Especially when it has been shown countless times that THOSE are the results and they are everwhere very bad.

        And I just LOVE how the Eurocentric-no-borders-we-are-all-one types in La Belle Fraunce get all nationalistic when Depardieu does what any sensible person would do…and what sensible people in the US are doing and will continue to do.

        But you just keep thinking you are very clever with your twisty strawmen. You look like a fool. One of those clueless dweebs.

        1. Thomas Matula

          Gregg,

          Yes, increasing tax rates to the level they were during the Clinton boom years will really destroy the economy….

          You really have to wonder what is in the right wing, conservative, what ever they are calling themselves today, eggnog :-)

          1. wodun

            And has been pointed out numerous times by Rand and others, going back to Clinton level spending wouldn’t ruin our country yet neither party has a plan to get us under $1t in yearly deficits.

          2. Gregg

            As has also been pointed out numerous times (especially in the articles cited at the top) this is NOT the Clinton era. Everything is different. We were coming to the end of a tech bubble and were flush with money. Debt and deficits were nowhere near what it is now. We were experiencing productivity boosts which we are not experiencing now.

            But please, don’t bother to read the articles or assimilate the information.

            Do choose to remain clueless…..

          3. Peterh

            1. Going back to Clinton era tax rates wouldn’t ruin the economy, but would harm it.

            2. We have more than just the expiration of the Bush tax cuts coming. We have additional taxes coming from the health care takeover abomination.

            3. The big problem is spending, the government enabled taking of goods and services. Neither major party in congress appears to be proposing a reduction to Clinton era spending rates.

          4. Thomas Matula

            Gregg,

            You are the one clueless. You are confusing a stock market bubble with economic productivity. The bubble was in the tech stocks and most of those paper profits were never realized or taxed.

            BTW the productivity gains from tech are still continuing and are actually a factor in the unemployment numbers.

            http://usatoday30.usatoday.com/money/economy/2011-04-04-us-economy-jobs.htm

            U.S. productivity gains stifle job creation

            [[[The United States has proved the exception. U.S. productivity growth doubled from 2008 to 2009, then doubled again in 2010, according to the Organisation for Economic Co-operation and Development.]]]

            And this doesn’t even take into account the potential of new technology like 3D Printers will have on productivity…

  4. Godzilla

    There will always be people willing to evade taxes no matter how low the rates are. Tax evasion is not a reason to lower tax rates. There are many ways to decrease tax evasion. If US and EU governments were serious about it they could start closing tax loopholes. They do not do it because the politicians themselves are some of the major recipients of the loopholes to begin with.

    Would increasing taxation reduce the deficit or not? Of course it would. Besides the income tax increases for the rich I still think the US will get VAT sooner rather than later. A lot of the debt will be inflated away but taxation is still necessary.

    1. Gregg

      “Would increasing taxation reduce the deficit or not? Of course it would.”

      Of course it would?

      Did you not read the articles?

      Did you not see that tax receipts stay within a narrow band just under 19% no matter what you do?

      1. Godzilla

        Did you not see that tax receipts stay within a narrow band just under 19% no matter what you do?

        That conclusion is specious at best. You can keep telling yourself whatever you want. Even back in the Middle Ages, when personal income was lower, effective income tax rates of 30% were commonplace. e.g. 10% for the King, 10% for the feudal Lord, 10% for the Church for much worse services. Of course our present feudal lords can’t stand being taxed like ordinary people, just like their predecessors, so they keep pushing these sorts of views in the MSM they themselves own. The Daily Telegraph for example is owned by The Barclay Brothers:
        http://en.wikipedia.org/wiki/Barclay_brothers

        Contrary to what the articles say what is unaffordable is not governments but too big to fail banks. Governments all over the world are siphoning money from social security and medical insurance funds to pump into these cesspools of toxic assets. Let them all fail.

        1. wodun

          Some of us don’t want to go back to the middle ages.

          Tax evasion isn’t taking advantage of legal write offs. Tax evasion is using illegal methods to avoid paying taxes.

          A high tax rate does effect behavior, as we see today with multinational companies holding profits earned abroad offshore instead of repatriating them to the USA. So, the government gets less in tax revenue than if the tax rate were low enough to encourage companies to repatriate profits. Many of these companies would like to transfer the money back home.

          1. Godzilla

            The problem with the Middle Ages IMO was not the effective tax rate per se but the fact that the Church and the Lords did not get taxed at all. The wealthiest got away without having to pay for anything. While the Lords contributed significantly to defense and peacekeeping this was tolerated but as national armies took charge of the brunt of defense this situation got harder to justify. Back then anyone not paying their tithe to the Church was excommunicated and liable to be expropriated and killed so it is not like you could avoid the tithe either.

            Sure there is tax avoidance but tax evasion also happens contrary to what you may hear. Just recently some UBS clients got in jail for this. The tax avoidance can be mitigated by plugging existing legislative loopholes. The problem is not limited to profits earned abroad being kept offshore. The problem is the profits aren’t being taxed properly neither where the profit is earned nor where the wealth is generated to begin with! This news item refers to the example of Forest Laboratories which does nearly its entire sales and has nearly its entire operation in the US but funnels their income through Bermuda to avoid paying taxes:
            http://www.npr.org/2011/03/17/134619750/how-offshore-tax-havens-save-companies-billions

          2. wodun

            “Sure there is tax avoidance but tax evasion also happens contrary to what you may hear.”

            Sure but the problem is not just big corporations. There is a massive shadow economy in the US. Some of this is just straight up crime but there are a lot of businesses that choose to break the rules because the taxes and regulations are too burdensome. Cash is king as they say.

        2. Gregg

          “Even back in the Middle Ages, when personal income was lower, effective income tax rates of 30% were commonplace. e.g. 10% for the King, 10% for the feudal Lord, 10% for the Church for much worse services.”

          Are you out of your mind?

          First off there was less stricture on the nobility tossing serfs like you into the hoosegow for non-payment of taxes.

          Secondly there are countless examples of kings overtaxing and being handled roughly for it (Magna Carta ring a bell….??? at ALL????)

          1. Godzilla

            In King John’s case he tried to raise his income by extraordinary means in order to pay for wars in France. One of his most unpopular measures was increasing the amount required to be paid by noblemen who did not provide military service: even in peacetime. He was also known to be partial to his favorites when collecting these taxes. Income taxes were gathered in a different fashion from today as well. Tax collectors in his demesne i.e. sheriffs paid a lump sum in order to be tax collectors plus they had to provide a certain amount of taxation to the crown: however in return they could tax those in the demesne for whatever they wanted.

        3. Gregg

          ….not to mention the fact that in our own history we have plenty of examples of people revolting for smaller taxes than that.

          We are not telling ourselves what we want; we are simply observing. You see. But you don’t observe (SH).
          Lastly….are you out of yoru mind? I ask again because it’s a real face slapper when someone tries to compare the Middle Age tax structure, enforcement and receipts with the last, say 100 years of Industrialized, free United States.

          1. Godzilla

            So were you thinking about the Boston Tea Party or the Whiskey Rebellion? Because we know how the Whiskey Rebellion ended don’t we?

            You are the one who does not understand. Given today’s food prices and level of services provided taxes could be *higher* than the Middle Ages average rather than less. Are you convinced that those in the higher tax brackets are going to starve to death by going back to a tax rate similar to that when Clinton was President?

          2. someguy

            Are you convinced that those in the higher tax brackets are going to starve to death…

            Since when is “they can afford it” a valid reason in and of itself to raise taxes?

            No, rich people are probably not going to starve to death with slightly higher income taxes. However, that is completely irrelevant.

            The government shouldn’t be doing all that it is doing. The federal government should be sticking to its main roles of national defense, foreign policy and making sure the states don’t wage economic war on each other (the original meaning of “regulate commerce among the several states”). It should not be running giant wealth redistribution programs or digging itself into responsibilities it was never given (education, housing development, etc).

        4. Peterh

          You’re comparing net total taxes across several layers of government with tax receipts from just one layer. Apples and oranges.

    2. Eric Weder

      Godzilla – You have finally showed yourself to be utterly clueless when it comes to economics, government and taxation. Last time I bother with one of your posts.

      1. Godzilla

        We will talk about this some more after you get yourself increased income taxes for the higher brackets and some VAT love there in the US. There are even some people in the US Libertarians and Republicans favoring VAT if they get some deductions in their income taxes in return. VAT introductiobn may take more time, like a decade, but it will happen.

        Sorry about my poor knowledge of economics. I only learned basic microeconomics back in college as I am only a software engineer. Of course considering what the economic experts at Goldman Sachs have done perhaps it is better to have a poor knowledge of economics and more knowledge in actually producing wealth in the first place.

        I have already been proven right here in Europe where they have followed exactly the hateful recipe I considered back then, to attempt to recreate the conditions of a monetary devaluation in the indebted EMU nations, i.e. lowering effective salaries to improve competitiveness, increasing VAT to reduce consumption of goods.

        1. someguy

          Can you point to these “US Libertarians and Republicans favoring VAT if they get some deductions in their income taxes in return”?

          The one I am aware of is trading completely the income tax for VAT, not just reduction in income taxes, which can then always be increased after the next election. That would just mean after two years I would have my original income tax burden and now have an additional VAT tax to deal with.

          http://cnsnews.com/news/article/2012-gop-platform-ties-vat-tax-income-tax-repeal

        1. Edward M. Grant

          The left keep telling us that if we want less of something we should tax it. Smoking? That’s bad, tax it so people smoke less. Oil? Produces CO2, that’s bad, tax it so people burn less.

          But income?

          Nope. Raising income tax won’t make people earn less. Definitely not. Never happen.

          1. wodun

            TM,

            From your link,

            “A caveat—obvious but critical—is in order. Simultaneity does not equal causation. Annual growth rates are a consequence of many factors, macro and micro, and the isolated impact of marginal tax rates on growth is hard, if not impossible, to discern from these numbers alone.”

          2. Thomas Matula

            Wodun,

            Exactly, the economy is far too complex for the simple relations advocated in economic philosophy or the Laffer Curve.

        2. wodun

          Whatever the arguments for raising taxes there is one thing we know, they will not lower the deficit because spending increases will be larger than revenues.

          People would be ok with tax increases if they were part of a plan that would get us close to break even but neither party has put out a plan that would get us anywhere near that. Which is why conservatives are so against raising taxes.

    3. Peterh

      The giant mutant lizard falls for the leftard fallacy of assuming a static economy when calculating the effect of tax code changes. The evidence is very clear, raising tax rates results in less of whatever is being taxed, and taken far enough results in a drop in tax receipts. I am convinced that tax rates in the US are past the futility rate.

  5. ken anthony

    Would increasing taxation reduce the deficit or not?

    The correct answer is: insufficient information because spending is an independent variable.

    Secondary issues.

    Taxation? Is that referring to rate or revenue?

    If you ignore the Laffer curve you have a juvenile argument.

    If you ignore the historical trend of about 20% collected regardless of rate you have a juvenile argument.

    If you argue like Karl Marx you are a Marxist; the greatest juvenile of his century.

    1. Thomas Matula

      Ken,

      So, based on the Laffer Curve, what should be the level of taxation that maximize federal revenue. A percentage please :-)

      1. Peterh

        The exact shape of the Laffer curve is uncertain, and depends on how taxes are structured, but my best estimate shows a peak tax revenue at ~30% tax rate. But that’s not taking into account tax rate progressivity, or split between federal, state, and local taxes. Or the burden of regulation, which also suppresses the economy. Also, I have good reason to believe that any one part of government setting tax rates to maximize its own revenue impacts revenue to the rest of government. So we end up with a sort of tragedy of the tax commons, where each part of government trying to maximize its own revenue independently results in less total tax collected. We were better off when the federal government was forbidden from directly taxing citizens, and an assessment was made to states based on enumerated population.

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