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The public policy blog of the American Enterprise Institute

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Discussion: (53 comments)

  1. Max Planck

    “But that analysis is somewhat misleading. ”

    Of course, this is a trait your analysis is never burdened with.

    Right. We get it.

    1. Thomas Sullivan

      Useless comment.

    2. Stupid comment, not unexpected though…

  2. Jon Murphy

    If tax revenues were to return to their average (18.1%), that only equates to about $160 billion in additional revenues. But, let’s assume that tax revenues can make it to their highest mark ever, and hold it there (20.9%, achieved in 1944). That equates to $619 billion in additional revenues. That 20.9% is probably unrealistic to expect for any given period of time, considering it was only achieved once. In fact, Federal Revenue only surpassed 20% three times in US history.

    Basically, unless you are using historically unprecedented expectations of revenue or expecting historically unprecedented growth rates, there is no way to argue that spending is not a problem here.

    1. Jon Murphy

      Oh, my calculations are using the current GDP figures.

  3. Jon Murphy

    By the way, the WSJ has a Make Your own Deficit Plan graphic. I was able to reduce the deficit to under $300 billion fairly easily (easily meaning no major shocks to the economy) with no tax hikes whatsoever. I probably could have gone more, but a) I didn’t want to do tax hikes, b) a deficit under $300 billion and modest inflation will eat away at the debt for so the net increase in real debt is zero and negative and c) the WSJ didn’t give me some of the other options I would like such as bringing all the troops home from everywhere, dismantling the DOE, DOC, Homeland Security, FCC, FDA, ACPPA, Ex-Im Bank, etc.

    Check it out. It’s a fun way to spend your day if you’re a nerd like me.

    1. David Conklin

      I drove the annual deficit down to $273–I’m not afraid of tax increases ($650) and I cut spending ($179). The deficit could have been less if they had included fixing the AMT.

      There’s also a budget simulator put by The Committee for a Responsible Federal Budget.

      1. what they need on the budget simulator is a color keyed graphic for each category that starts out saying “politically feasible” but gradually changes to “politically impossible” as the cuts get deeper.

        those simulators are dead on in the numbers but most scenarios that people pick are in the “no way in hell” category.

  4. Max Planck

    “c) the WSJ didn’t give me some of the other options I would like such as bringing all the troops home from everywhere, dismantling the DOE, DOC, Homeland Security, FCC, FDA, ACPPA, Ex-Im Bank, etc.

    Check it out. It’s a fun way to spend your day if you’re a nerd like me.”

    Someone needs a life.

    1. “Someone needs a life,” Says the guy who makes multiple comments on a blog site. Gee I bet Jon Murphy is jealous of the life you have!

  5. re: tax cuts will increase growth which will increase revenues… in theory – what is Plan B if it fails?

    how do we start to pay back the 16 trillion debt?

    The impression I get over and over is that the GOP takes no responsibility for the debt other than to blame Obama and make it his job to figure out while they advocate for more tax cuts and more generic (non-specific) budget cuts.

    Used to be the GOP had a good contingent of pragmatic fiscal conservatives who included the deficit and debt in their list of responsibilities they accepted.

    Now days.. they are all about talk and politics and instead of them putting budget cuts on the table – they say Obama has to.

    WTF? The GOP has spent 4 years blathering about a spending problem and now they can’t provide a simple list of what they’d cut?

    1. Jon Murphy

      The idea behind the theory that tax cuts could raise revenue is based on the Laffer Curve. The theory is that, if taxes are past the optimal point (point T* in the graph), then lowering taxes will spur activity (or bring back activity from other sources), thus increasing government revenues (After all, is it better to have 100% of $1, or 1% of $1000?).

      As an aside, I do not think we are past T* on the Laffer curve. Other than corporate tax cuts, I am not sure how effective cutting taxes past where they are now will be.

      But the post here was just on how to increase government revenue without increasing taxes, not necessarily about the deficit or debt.

      I agree with you. Tax cuts/hikes alone will not help the deficit, even if they increase government revenue. It’s the same problem the other side keeps running into: revenues are not the problem here. The math I did above shows that, even with a rosy scenario, revenues fall about $400 billion short from reaching a “balanced budget.” Any serious plan to balance the budget needs spending cuts simply because there is only so much revenue you can raise. Neither Republicans nor Democrats have given a serious attempt to answer the spending question. Both plans put forth merely slow the rate at which spending grows (which is falsely labeled as spending cuts). And that will do nothing to fix the deficit or debt.

      Even this so called “sequestration” shows how unserious Congress is at spending cuts. The sequestration sounds impressive: “$1.2 trillion in spending cuts!” It’s spread out over 10 years. That’s approximately $120 billion a year. For prospective, the government spends that much in about 11 days, give or take ($3.8 trillion in spending/365 days in a year).

      1. taxes were higher under Clinton and so was growth so that needs some explanation but more than that…

        if spending has increased since Clinton – and it has, what would be nice would be to see where spending has increased and by how much.

        Take FICA/SS out of it (as well as Medicare PartA) and then let’s take a look at where the costs have gone up… and if you really want a clean approach -…

        go back to the Clinton years and look at entitlements and DOD as a PERCENTAGE of the budget then roll it forward to now – and let each one have their percentage of current revenues ( no percent of GDP, a percent of actual revenues).

        that balances the budget. Let the entitlements and DOD figure out how to allocate what they get and what must be cut but the percent remains their spending control.

        You get a percent of available revenues and that’s it.

        then “growth” goes to buy down the debt.

      2. Max Planck

        “$1.2 trillion in spending cuts!” It’s spread out over 10 years. That’s approximately $120 billion a year”

        Thank you for that excellent example of 3rd grade math. The savings are actually compounded year over year as the debt is reduced through eliminating the interest payments on the outstanding debt. Not that it matters THAT much in this rate environment, but at least look at the numbers properly.

        As far as the Laffer Curve, it’s a joke, as Mr. Laffer is.

        1. As far as the Laffer Curve, it’s a joke, as Mr. Laffer is“…

          This coming from a joke of a person…

          Rightous!

          1. Jon Murphy

            I mean, let’s face it. If you are looking to cut your spending, and the best you can do is shave off $0.03 for every dollar you spend, you ain’t trying hard enough.

          2. I mean, let’s face it. If you are looking to cut your spending, and the best you can do is shave off $0.03 for every dollar you spend, you ain’t trying hard enough“…

            Heck jon would three cents on the dollar even cover the interest payment?

        2. Jon Murphy

          My point remains, Max. These are not serious cuts.

          This is like saying “I’m $100,000 in debt. To tackle this issue, I’m going to cut out one cup of coffee a week.” Sure, the savings will add up (eventually), but in addressing the bigger issue, it’s not really getting it done.

          You are also making one giant assumption: the $120 billion is actually applied to the national debt. Given the history of our government, I do not see that happening.

    2. “The impression I get over and over is that the GOP takes no responsibility for the debt other than to blame Obama and make it his job to figure out while they advocate for more tax cuts and more generic (non-specific) budget cuts.”

      Your hero Obama could embrace the plans of one of his debt commissions he appointed then ran away from.
      He is the President of the United States and you’re actually whining about him getting the “blame” for the trillion dollar plus deficits he runs up every single yr of his presidency. That’s how it works, idiot. He wanted the ruinous spending levels, he gets the blame.

    3. “Used to be the GOP had a good contingent of pragmatic fiscal conservatives who included the deficit and debt in their list of responsibilities they accepted.”

      And so of course you support Obama who accepts no responsibility for anything.

      Part of Obama’s first offer to Boehner was actually MORE spending and ending the debt ceiling. He gets away with this because weak-minded fools like you either don’t pay attention or will give the GOP all the blame regardless.

      1. “And so of course you support Obama who accepts no responsibility for anything.

        Part of Obama’s first offer to Boehner was actually MORE spending and ending the debt ceiling. He gets away with this because weak-minded fools like you either don’t pay attention or will give the GOP all the blame regardless.”

        I EXPECT Obama to be a tax and spend guy… but I used to EXPECT the GOP to be the adults in the budget realm.

        but no more.

  6. Thomas Sullivan

    The goal of the Democrats is to grow socialism and state control, not growing the economy.

    1. yet another useless comment!

      ;-)

      1. Don’t YOU just hate it when someone outs your game?

    2. Max Planck

      Oh, shut up.

  7. Jon Murphy

    taxes were higher under Clinton and so was growth so that needs some explanation but more than that…

    Tax rates where higher under Clinton, but not taxes themselves (either in absolute terms or as a percentage of GDP).

    Also, tax rates do not enable economic growth. Economic growth enable higher tax rates. Tax rates are inherently unproductive. They “discourage” (to use a vulgar term) activity. Just as taxes on cigarettes discourage smoking and taxes on carbon discourage emissions, taxes on productivity discourages production. In order for an economy to absorb a tax hike, it needs to be growing at a strong pace. When the Clinton tax hikes were passed, Real GDP year-over-year growth was over 4%. The economy subsequently grew at a slower pace the next few quarters (around 2%) while the economy went through an adjustment phase. With one quarter exception in 1994 (likely reciprocal pressure), the economy would not return to that level of growth until 1996, three years after the tax hike was passed. During that time period, Federal Revenue as a percentage of GDP stayed just around the average. It wasn’t until the end of the decade and the DotCom Bubble where federal revenue would touch the 20% mark.

    1. Max Planck

      “They “discourage” (to use a vulgar term) activity. Just as taxes on cigarettes discourage smoking and taxes on carbon discourage emissions, taxes on productivity discourages production. In order for an economy to absorb a tax hike, it needs to be growing at a strong pace. When the Clinton tax hikes were passed, Real GDP year-over-year growth was over 4%. The economy subsequently grew at a slower pace the next few quarters (around 2%) while the economy went through an adjustment phase.”

      The flaw in your logic is that these are taxes levied on people who can EASILY afford them, and wouldn’t even alter their spending habits.

      Once again, in 3rd grade math: an increase to 39.6% on a $300k a year wage earner comes to $38 per week! That’s assuming that wage earner has no deductions like property tax, mortgage interest or children! (Which is doubtful)

      So by most estimates these modest hikes don’t even kick in until Line1 on the 1040 hits about $340,000.

      That’s not a killer for the economy, and anyone who believes it is, is an idiot. Or a paid shill.

      1. the belief that any/all taxes detract from an otherwise “better” economy is simply really demonstrated as investments in things like public infrastructure, national defense, public education are enablers of a stronger economy and without those investments, the economy while perhaps more pure – is also more vulnerable.

        You can’t run Fed Ex trucks to Podunk, Miss if there ain’t no road there.

        you can’t put a man on the moon if the literacy rate of the country is 10%.

        but I DO AGREE with Jon that 100 billion a year in the face of a 16 trillion debt is pretty pitiful.

        but then Jon is opposed to higher taxes to buy it down so whdya gonna do?

        1. Jon Murphy

          Hang on, Larry. I want to be perfectly clear on this:

          I am not saying that taxes do not generate positives. Some of the things you mention do have benefits (roads, national defense, police, fire. The education thing I’ll quibble about, but that’s not for right now). It is just important to remember that taxes do not magically appear out of thin air. They are diverted from the private sector, and could have been used elsewhere.

          Although I may sound like it, I am hardly an anarchist. I have no problem with the government building needed roads and bridges, providing a police department and firemen, having an army, and so forth. What I object to is needless spending. I mean, do we really need a military presence on every continent? Do we really need a Corporation for Public Broadcasting? Do we really need to be giving Big Agriculture massive tax subsidies? Do we really need the Patriot Act?

          Taxes are funds that are diverted from use in the private sector for use in the public sector. For every dollar used to build a road, that is one less dollar available to make a cure for cancer. For every dollar used in Iraq or Afghanistan, that is one less dollar available for use to make housing.

          That is what I mean when I say taxes “discourage” activity.

          Affordability is a red herring. It doesn’t matter if you can afford a tax. If you have less money, you will consume/produce less (all else held equal).

          1. Jon Murphy

            This is why I put “discourage” is quotation marks. It’s not quite the right word, but I wasn’t sure what else to use.

          2. re: ” They are diverted from the private sector, and could have been used elsewhere.”

            they are indeed. Are they diverted for a better purpose?

            is it better for you to spend money on your driveway or for your money to be added to others so you and your neighbors can get to town?

            re: public education – I’d only point out that taxes for public education in Europe, Asia, etc beats the pants off of us so it must be something else going on.

            re: military presence – could not agree more.

            re: what is the correct amount of taxation so that things that power the economy get acquired and used?

            I continue to shy away from metrics that involve GDP and ignore actual tax revenues.

            I wonder what a chart of actual tax revenues received vs GDP would look like….

          3. Jon Murphy

            they are indeed. Are they diverted for a better purpose?

            And that, my good man, is an ideological question. As you so correctly noted, I would argue that there are very few instances where taxes are diverted for better uses. You, obviously, would argue differently. We will never agree on that, I am afraid :-P

            what is the correct amount of taxation so that things that power the economy get acquired and used?

            Dude, that is a whole other can of worms. I don’t think either of us have the time to get into this conversation right now. I am not trying to shun away from the question, but that there are entire college courses that deal with that one specific question.

            I wonder what a chart of actual tax revenues received vs GDP would look like….

            You mean like total tax revenues compared to actual (non-chained) GDP? I’d be more than happy to make that graph for you, if you’d like. Just say the world and I’ll take care of it tonight at home.

          4. re: ” You, obviously, would argue differently. We will never agree on that, I am afraid :-P”

            don’t be so sure about that.. we’d probably agree on quite a few things.

            re: ” You mean like total tax revenues compared to actual (non-chained) GDP? I’d be more than happy to make that graph for you, if you’d like. Just say the world and I’ll take care of it tonight at home.”

            deal!

          5. Jon Murphy

            don’t be so sure about that.. we’d probably agree on quite a few things.

            We’d find common ground, for sure (the military thing is most obvious). But in others, you’d probably object. I doubt you’d let me dismantle the FDA or SEC, for example.

          6. re: FDA, SEC … maybe…

            fannie/freddie – yes

            NTSB, FDIC, NASA? AEC? TSA, Coast Guard, FAA?

          7. Jon Murphy

            Here is the chart you asked for Larry.

            That will be $12.50. I accept cash or money order. I usually do checks, but you look like a deadbeat :-P

          8. WHAT!? I’m not ENTITLED to it?

            ;-)

            thank you man… looks like when taxes increased under Clinton (not giving him credit) .. that GDP did good..maybe better than other lower tax periods…

            eh?

            do you take paypal?

          9. Jon Murphy

            NTSB, FDIC, NASA? AEC? TSA, Coast Guard, FAA?

            Yes. Yes. Already gone. Yes. Yes. Maybe. Hells yeah.

          10. How about HUD, HEW, and the Commerce department?

          11. Jon Murphy

            Basic rule with me:

            If it has an acronym, it’s getting cut

          12. :-)

        2. Jon Murphy

          but then Jon is opposed to higher taxes to buy it down so whdya gonna do?

          It’s not even that I am opposed to higher taxes (ideologically, I am, but in a reality I can go along with it). I just doubt how effective they will be at raising revenue right here in 2012 given the historical evidence.

      2. Jon Murphy

        The flaw in your logic is that these are taxes levied on people who can EASILY afford them, and wouldn’t even alter their spending habits.

        If that is the case, then why hasn’t government revenue ever exceeded 20.9% of GDP, regardless of the tax rate? If that is the case, why do Mitt Romney, Barack Obama, and many other wealthy citizens have money overseas, where it is taxed less (if at all)? If that is the case, why do corporations relocate to areas where the tax rate is more favorable? If that is the case, why do green energy companies need tax subsidies? If that is the case, why do carbon taxes work at all?

        Time for your second economic lesson: Incentives matter.

        1. yup, but in 2000, it was the 2nd highest percent in history, right?

          I don’t think people move their money overseas for $35 in extra taxes unless they see no way to invest their money to get higher returns to beat the higher tax.

          It looks to me that under Clinton that is what happened.

          1. Jon Murphy

            yup, but in 2000, it was the 2nd highest percent in history, right?

            I don’t think people move their money overseas for $35 in extra taxes unless they see no way to invest their money to get higher returns to beat the higher tax.

            Correct, but that was more due to the DotCom bubble than the tax rates (the tax rate had been at its rate for 7 years by that point).

          2. Max Planck

            “Correct, but that was more due to the DotCom bubble than the tax rates (the tax rate had been at its rate for 7 years by that point).”

            Why would you presume this is from the “Dot com” bubble? It’s a popular meme used to dismiss Clinton’s achievements, but there is nothing to it.

          3. Jon Murphy

            Why would you presume this is from the “Dot com” bubble?

            Deductive reasoning. The tax rate was unchanged for 7 years, so it couldn’t have been the cause. The only thing that had changed was the rate of growth in the economy (from about 2% in 1996 to 5% in 2000). It was during that time we saw revenues start to rise. With the bubble in full swing, that’s when tax revenues reached their peak. Similar to how tax revenues behaved during the Housing Bubble. As we’ve discussed (and you seem to agree with me on), tax revenues as % of GDP are divorced from tax rates.

            It’s a popular meme used to dismiss Clinton’s achievements, but there is nothing to it.

            Kind of like how the Housing Bubble is used to dismiss Bush? :-P

          4. Max Planck

            “Deductive reasoning. The tax rate was unchanged for 7 years, so it couldn’t have been the cause. The only thing that had changed was the rate of growth in the economy (from about 2% in 1996 to 5% in 2000). It was during that time we saw revenues start to rise. With the bubble in full swing, that’s when tax revenues reached their peak.”

            But tech didn’t even make up 8% of the employment of the US economy. We’ve been through this before- how did near full employment across dozens of sectors occur, even at burger flipper levels, during that time? It wasn’t due to a “tech bubble,”

            “Similar to how tax revenues behaved during the Housing Bubble.”

            Not really, but no conservative site will admit it:
            Here’s another view:

            “Indeed, Riedl acknowledges, “Yes, the 2001/2003 tax cuts played some role in keeping revenues below their historical average for most of the 2000s, but the country was also recovering from a recession at that time, too.” This makes my point: that McConnell is wrong in contending “there’s no evidence whatsoever” that the tax cuts diminished revenue.

            “To blame that entire revenue drop on the 2001/2003 tax cuts completely ignores the bursting of the stock market bubble as well as the recession,” Riedl says. But, of course, I did not blame the entire revenue drop on the tax cuts. I was simply responding to McConnell’s mischaracterization.

            Some readers have pointed out, entirely accurately, that the gross amount of tax revenue rose in the aftermath of the tax cuts, although there was some decline through 2004. The government took in $2 trillion in 2000; $2.6 trillion in 2007. (I’m using Riedl’s preferred high-point year here.) This increase barely keeps up with inflation.

            More important, to get back to McConnell’s assertion about the absence of evidence that the tax cuts “actually diminished revenue,” the point is: compared to what? The only logical benchmark is whether the tax cuts diminished revenue compared to what they would have been in the absence of any change, and here the answer is indisputable: the tax cuts did their intended job of returning money to taxpayers. The government took in less than it would have otherwise.

            How do I know? Brian Riedl said so. Riedl found that the 2001 and 2003 tax cuts were responsible for “just 14 percent of the swing from the projected cumulative $5.6 trillion surplus for 2002-2011 to an actual $6.1 trillion deficit.”

            How much is just 14 percent? Riedl did the math so I don’t have to: $1.7 trillion. Throw in other tax costs — primarily the annual patching of the Alternative Minimum Tax, made more expensive by the existence of the Bush tax cuts — and you get another $400 billion. Throw in the extra interest payments caused by the increased debt — a cost Riedl conveniently omitted — and you have $377 billion more.

            Readers have also suggested that looking at the ratio of revenues to GDP is misguided because the entire theory of the tax cuts is that they would spur economic growth — “the vibrancy of these tax cuts in the economy,” in McConnell’s phrase. That would be a fair argument — if in fact the economy had grown at a better-than-expected rate. But it didn’t. As the Center on Budget and Policy Priorities has shown, “the 2001-2007 economic expansion was among the weakest since World War II with regard to overall economic growth.” Even singling out the boomiest years — 2003-2007 — growth in GDP was below average.

            “As we’ve discussed (and you seem to agree with me on), tax revenues as % of GDP are divorced from tax rates.”

            As I have repeatedly pointed out ad nauseum, and you should tatoo on your forehead: you cannot isolate the data points you like in the time frames that suit you to prove your “point.” There are too many economic variables going on at the same time, all pushing and pulling the economy in one way or another. Lately, we’ve seen gas prices plummet- another input that is divorced from whatever tax policy extant- yet, there WILL be an effect.

            “Kind of like how the Housing Bubble is used to dismiss Bush? :-P”

            No comparison.

        2. Max Planck

          If that is the case, then why hasn’t government revenue ever exceeded 20.9% of GDP, regardless of the tax rate? If that is the case, why do Mitt Romney, Barack Obama, and many other wealthy citizens have money overseas, where it is taxed less (if at all)? If that is the case, why do corporations relocate to areas where the tax rate is more favorable? If that is the case, why do green energy companies need tax subsidies? If that is the case, why do carbon taxes work at all?

          Time for your second economic lesson: Incentives matter.”

          First off, you couldn’t teach me anything. You don’t have the knowledge or the historical insight.

          Secondly, to answer your question, Mitt Romney is a god damned tax cheat, and his reticence to show his returns should have been proof enough, even to the blind cheerleaders who wanted him elected. That is the only reason to keep your money overseas- to evade taxes, which apparently, you think is both moral and beneficial.

          Which is another reason why I can’t take you seriously. You’ve developed a pathological hatred of government, but yet, you depend on them as much as any one, even if you’re not on food stamps.

          To answer your last question first, that might even prove that “rates” don’t really matter that much, one, because WE HAVE A MARGINAL SYSTEM, and even at a 90% top bracket, it doesn’t really change anything unless it kicks in at $10,000 worth of income, to use a ridiculous example for illustration.

          We need to boost revenues, and the measures the President has suggested are piddling amounts, practically meaningless, but yet, you can’t take the emotion out of the issue, so everyone prattles on.

          1. Jon Murphy

            I never claimed tax evasion is beneficial or ethical. I said it will occur when tax rates are risen (which you seem to agree with me on). Besides, it needn’t be tax evasion that causes one not to pay taxes. Keeping your money in legal tax shelters is one way.

            I do not have a hatred of government. As discussed above, I see a use for it. What I do hate, however, is misuse of government power for social engineering causes or to legislate morality.

            You seem to agree with me that tax rates do not matter. So why go to all this fuss to raise them if they will not accomplish anything? Seems like an awful lot of wasted time and effort for a solution that we know won’t work.

          2. Max Planck

            “I never claimed tax evasion is beneficial or ethical. I said it will occur when tax rates are risen (which you seem to agree with me on).”

            No I do NOT agree with it. I may not like a law, but I have a duty as a citizen to obey it, and those that don’t deserve prosecution. You can bet your bottom dollar Romney- and many others who had no need or any right to- got away with murder with that Swiss tax amnesty the government undertook.

          3. I agree with Max on this. Every one of us could make a separate argument about what we think is fair or right but tax evasion is tax evasion and should be dealt with no matter what the individual justification is.

  8. Hey how about we raise taxes on off shore companies ?

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