CBO: Budget deficit shrinks

Discussion in 'Economy' started by Big Blue Machin, Jul 8, 2005.

  1. Big Blue Machin
    Offline

    Big Blue Machin Member

    Joined:
    Jun 26, 2005
    Messages:
    260
    Thanks Received:
    11
    Trophy Points:
    16
    Location:
    Ontario, Canada eh?
    Ratings:
    +11
    http://www.cnn.com/2005/POLITICS/07/08/budget.deficit.ap/index.html

    This is a very good thing. The Bush adminstration needs to take steps to reduce the deficit NOW, not in a year or two. But the bad part is that he will cut all the money out of social sercuity and medicare. I'm for budget cutting, but everyone needs to suffer the pain of budget cuts, not just the social services. The military budget is 1 trillion (or 400 billion, I can't remember which one). You can take 5% out of that, and not affect anything.
     
  2. 5stringJeff
    Offline

    5stringJeff Senior Member

    Joined:
    Sep 15, 2003
    Messages:
    9,990
    Thanks Received:
    536
    Trophy Points:
    48
    Location:
    Puyallup, WA
    Ratings:
    +540
    Cutting tax rates has had the effect of RAISING tax revenue - just like the Laffer curve predicts. So, to reduce the deficit even more, cut taxes even more!!!
     
  3. Big Blue Machin
    Offline

    Big Blue Machin Member

    Joined:
    Jun 26, 2005
    Messages:
    260
    Thanks Received:
    11
    Trophy Points:
    16
    Location:
    Ontario, Canada eh?
    Ratings:
    +11
    But cutting taxes all the time isn't a good thing. Although I am for tax cuts, I think they should be small when needed. Taxes are needed to pay for gov't programs like defence and social services.
     
  4. Max Power
    Online

    Max Power Guest

    Ratings:
    +0
    That's nonsense.

    Reducing government spending will help the economy.
     
  5. Big Blue Machin
    Offline

    Big Blue Machin Member

    Joined:
    Jun 26, 2005
    Messages:
    260
    Thanks Received:
    11
    Trophy Points:
    16
    Location:
    Ontario, Canada eh?
    Ratings:
    +11
    But cutting taxes will also help the economy.
     
  6. MtnBiker
    Offline

    MtnBiker Senior Member

    Joined:
    Sep 28, 2003
    Messages:
    4,327
    Thanks Received:
    230
    Trophy Points:
    48
    Location:
    Rocky Mountains
    Ratings:
    +230
    I'm all for reduced spending, but how is Jeff's comment nonsense?
     
  7. Said1
    Offline

    Said1 VIP Member

    Joined:
    Jan 26, 2004
    Messages:
    12,087
    Thanks Received:
    937
    Trophy Points:
    83
    Location:
    Somewhere in Ontario
    Ratings:
    +937
    This isn't a flame, but in another thread, he said he has trouble forulating sentences.

    Anyway, I'm not familiar with Laffer's theory, is increaed revenue from taxed goods and services?
     
  8. MtnBiker
    Offline

    MtnBiker Senior Member

    Joined:
    Sep 28, 2003
    Messages:
    4,327
    Thanks Received:
    230
    Trophy Points:
    48
    Location:
    Rocky Mountains
    Ratings:
    +230
    I've been known to forulate, but it had nothing to do with a sentences. :D

    Taxes, Revenues, and the "Laffer Curve"

    JUDE WANNISKI
    Associate Editor
    The Wall Street Journal
    JUNE, 1978



    As Arthur Laffer has noted, "There are always two tax rates that yield the same revenues." When an aide to President Gerald Ford asked him once to elaborate, Laffer (who is Professor of Business Economics at the University of Southern California) drew a simple curve, shown on the next page, to illustrate his point. The point, too, is simple enough -- though, like so many simple points, it is also powerful in its implications.

    When the tax rate is 100 percent, all production ceases in the money economy (as distinct from the barter economy, which exists largely to escape taxation). People will not work in the money economy if all the fruits of their labors are confiscated by the government. And because production ceases, there is nothing for the 100-percent rate to confiscate, so government revenues are zero.

    On the other hand, if the tax rate is zero, people can keep 100 percent of what they produce in the money economy. There is no governmental "wedge" between earnings and after-tax income, and thus no governmental barrier to production. Production is therefore maximized, and the output of the money economy is limited only by the desire of workers for leisure. But because the tax rate is zero, government revenues are again zero, and there can be no government. So at a 0-percent tax rate the economy is in a state of anarchy, and at a 100-percent tax rate the economy is functioning entirely through barter.

    In between lies the curve. If the government reduces its rate to something less than 100 percent, say to point A, some segment of the barter economy will be able to gain so many efficiencies by being in the money economy that, even with near-confiscatory tax rates, after-tax production would still exceed that of the barter economy. Production will start up, and revenues will flow into the government treasury. By lowering the tax rate, we find an increase in revenues.

    On the bottom end of the curve, the same thing is happening. If people feel that they need a minimal government and thus institute a low tax rate, some segment of the economy, finding that the marginal loss of income exceeds the efficiencies gained in the money economy, is shifted into either barter or leisure. But with that tax rate, revenues do flow into the government treasury. This is the situation at point B. Point A represents a very high tax rate and very low production. Point B represents a very low tax rate and very high production. Yet they both yield the same revenue to the government.

    The same is true of points C and D. The government finds that by a further lowering of the tax rate, say from point A to point C, revenues increase with the further expansion of output. And by raising the tax rate, say from point B to point D, revenues also increase, by the same amount.

    Revenues and production are maximized at point E. If, at point E, the government lowers the tax rate again, output will increase, but revenues will fall. And if, at point E, the tax rate is raised, both output and revenue will decline. The shaded area is the prohibitive range for government, where rates are unnecessarily high and can be reduced with gains in both output and revenue.



    Tax rates and tax revenues

    The next important thing to observe is that, except for the 0-percent and 100-percent rates, there are no numbers along the "Laffer curve." Point E is not 50 percent, although it may be, but rather a variable number: it is the point at which the electorate desires to be taxed. At points B and D, the electorate desires more government goods and services and is willing -- without reducing its productivity -- to pay the higher rates consistent with the revenues at point E. And at points A and C, the electorate desires more private goods and services in the money economy, and wishes to pay the lower rates consistent with the revenues at point E. It is the task of the statesman to determine the location of point E, and follow its variations as closely as possible.

    This is true whether the political leader heads a nation or a family. The father who disciplines his son at point A, imposing harsh penalties for violating both major and minor rules, only invites sullen rebellion, stealth, and lying (tax evasion, on the national level). The permissive father who disciplines casually at point B invites open, reckless rebellion: His son’s independence and relatively unfettered growth comes at the expense of the rest of the family. The wise parent seeks point E, which will probably vary from one child to another, from son to daughter.

    For the political leader on the national level, point E can represent a very low or a very high number. When the nation is at war, point E can approach 100 percent. At the siege of Leningrad in World War II, for example, the people of the city produced for 900 days at tax rates approaching 100 percent. Russian soldiers and civilians worked to their physical limits, receiving as "pay" only the barest of rations. Had the citizens of Leningrad not wished to be taxed at that high rate, which was required to hold off the Nazi army, the city would have fallen.

    The number represented by point E will change abruptly if the nation is at war one day and at peace the next. The electorate's demand for military goods and services from the government will fall sharply; the electorate will therefore desire to be taxed at a lower rate. If rates are not lowered consistent with this new lower level of demand, output will fall to some level consistent with a point along the prohibitive side of the "Laffer curve." Following World War I, for example, the wartime tax rates were left in place and greatly contributed to the recession of 1919-20. Warren G. Harding ran for President in 1920 on a slogan promising a "return to normalcy" regarding tax rates; he was elected in a landslide. The subsequent rolling back of the rates ushered in the economic expansion of the "Roaring Twenties." After World War II, wartime tax rates were quickly reduced, and the American economy enjoyed a smooth transition to peacetime. In Japan and West Germany, however, there was no adjustment of the rates; as a result, postwar economic recovery was delayed. Germany's recovery began in 1948, when personal income-tax rates were reduced under Finance Minister Ludwig Erhard, and much of the government regulation of commerce came to an end. Japan's recovery did not begin until 1950, when wartime tax rates were finally rolled back. In each case, reduced rates produced increased revenues for the government. The political leader must fully appreciate the distinction between tax rates and tax revenues to discern the desires of the electorate.

    The easiest way for a political leader to determine whether an increase in rates will produce more rather than less revenues is to put the proposition to the electorate. It is not enough for the politician to propose an increase from, say, point B to point D on the curve. He must also specify how the anticipated revenues will be spent. When voters approve a bond issue for schools, highways, or bridges, they are explicitly telling the politician that they are willing to pay the high tax rates required to finance the bonds. In rejecting a bond issue, however, the electorate is not necessarily telling the politician that taxes are already high enough, or that point E (or beyond) has been reached. The only message is that the proposed tax rates are too high a price to pay for the specific goods and services offered by the government.

    Only a tiny fraction of all government expenditures are determined in this fashion, to be sure. Most judgments regarding tax rates and expenditures are made by individual politicians, Andrew Mellon became a national hero for engineering the rate reductions of the 1920s, and was called "the greatest Treasury Secretary since Alexander Hamilton." The financial policies of Ludwig Erhard were responsible for what was hailed as "an economic miracle" -- the postwar recovery of Germany. Throughout history, however, it has been the exception rather than the rule that politicians, by accident or design, have sought to increase revenues by lowering rates.
    [​IMG]

    Link
     
  9. Max Power
    Online

    Max Power Guest

    Ratings:
    +0
    Decreasing the intake of money (cutting taxes) without decreasing the spending, cannot reduce the deficit.

    It's really quite simple.

    *To make things clearer, I understand what is being said... tax more money, but at a lower rate; but it isn't working. Government revenue was higher under the higher tax rate than the lower one. (We're not yet on the 100% tax rate side of that Laffer curve yet)
     
  10. MtnBiker
    Offline

    MtnBiker Senior Member

    Joined:
    Sep 28, 2003
    Messages:
    4,327
    Thanks Received:
    230
    Trophy Points:
    48
    Location:
    Rocky Mountains
    Ratings:
    +230
    Link
     

Share This Page