CBO: Budget deficit shrinks

[Big Blue Machin]

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.

 

[5stringJeff]

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!!!

 

[Big Blue Machin]

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.

 

[Max Power]

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!!!

That's nonsense.

Reducing government spending will help the economy.

 

[Big Blue Machin]

But cutting taxes will also help the economy.

 

[MtnBiker]

That's nonsense.

Reducing government spending will help the economy.

I'm all for reduced spending, but how is Jeff's comment nonsense?

 

[Said1]

I'm all for reduced spending, but how is Jeff's comment nonsense?

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?

 

[MtnBiker]

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?

I've been known to forulate, but it had nothing to do with a sentences.

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.

Link

 

[Max Power]

I'm all for reduced spending, but how is Jeff's comment nonsense?

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)

 

[MtnBiker]

U.S. Budget Deficit May Drop to $325 Bln This Year, Agency Says
July 8 (Bloomberg) -- Rising tax payments and a growing economy may push the U.S. federal deficit down to $325 billion or lower, a 24 percent decline from the previous estimate, the Congressional Budget Office said.

The agency, in a monthly snapshot for fiscal 2005 that ends on Sept. 30, said tax payments and spending were running ahead of the year-ago pace. As a result this year's deficit ``will be significantly less than $350 billion, perhaps below $325 billion.''..............

Link

 

[5stringJeff]

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)

Sure, let's decrease gov't spending. I don't think many on the board would disagree.

But revenue figures show that Bush's tax rate cuts have indeed increased tax revenues. So we can safely say that we can cut tax rates more (e.g. income taxes, cpatial gains taxes, corporate taxes) and end up with more revenue.

 

[Big Blue Machin]

Sure, let's decrease gov't spending. I don't think many on the board would disagree.

But revenue figures show that Bush's tax rate cuts have indeed increased tax revenues. So we can safely say that we can cut tax rates more (e.g. income taxes, cpatial gains taxes, corporate taxes) and end up with more revenue.

Assuming the economy will be good for the next few years, then yes your thing is right. But for recession time, you will not get back the same amount of revenue.

 

[5stringJeff]

Assuming the economy will be good for the next few years, then yes your thing is right. But for recession time, you will not get back the same amount of revenue.

In a recession, it is even more important to keep taxes lower, to lessen the effecs of recession. Yes, gov't revenues might fall in the short term, but if you keep the recession from lasting as long (through lower taxes) then the economy will rebound quicker, raising revenues again.

 

[Big Blue Machin]

In a recession, it is even more important to keep taxes lower, to lessen the effecs of recession. Yes, gov't revenues might fall in the short term, but if you keep the recession from lasting as long (through lower taxes) then the economy will rebound quicker, raising revenues again.

Fair enough point.

 

[Max Power]

Sure, let's decrease gov't spending. I don't think many on the board would disagree.

But revenue figures show that Bush's tax rate cuts have indeed increased tax revenues. So we can safely say that we can cut tax rates more (e.g. income taxes, cpatial gains taxes, corporate taxes) and end up with more revenue.

Can you establish that the tax cuts have increased tax revenues, and not the growing economy itself?

 

[Annie]

Links at site:


http://instapundit.com/archives/024230.php

July 13, 2005

SHRINKING DEFICITS: The trade deficit is down:

The U.S. trade deficit narrowed unexpectedly in May to $55.3 billion as exports rose slightly to a record and imports retreated a bit from the record set in April, a U.S. government report showed on Wednesday.

The smaller-than-expected trade gap suggested stronger-than-expected U.S. economic growth in the second quarter and could help persuade the Federal Reserve to remain on a path of steadily rising interest rates.

And so is the budget deficit:

Based on revenue and spending data through June, the budget deficit for the first nine months of the fiscal year was $251 billion, $76 billion lower than the $327 billion gap recorded at the corresponding point a year earlier.

The Congressional Budget Office estimated last week that the deficit for the full fiscal year, which reached $412 billion in 2004, could be "significantly less than $350 billion, perhaps below $325 billion."

The big surprise has been in tax revenue, which is running nearly 15 percent higher than in 2004. Corporate tax revenue has soared about 40 percent, after languishing for four years, and individual tax revenue is up as well.

Most of the increase in individual tax receipts appears to have come from higher stock market gains and the business income of relatively wealthy taxpayers.

Hmm. Weren't people telling us just recently that the budget deficit was growing because wealthy taxpayers were paying less? Apparently they were in error.
posted at 10:59 AM by Glenn Reynolds

 

[Max Power]

Links at site:


http://instapundit.com/archives/024230.php

And?

 

[Annie]

And?

Your trite answer proves that you do not wish to debate. Obviously you think you are here to enlighten, yet you choose to present a false 'question'' that cannot be proved or disproved:

]Can you establish that the tax cuts have increased tax revenues, and not the growing economy itself?

Since the tax revenues HAVE increased, which has been replicated each time taxes have been cut, a logical hypothesis would be that they are at the very least partially causative in nature.

 

[Said1]

Since the tax revenues HAVE increased, which has been replicated each time taxes have been cut, a logical hypothesis would be that they are at the very least partially causative in nature.

Does that mean people are spending more.....taxed goods/services/investments?

Yes or no will do, I'm way too tired for anything longer than that!

 

[Annie]

Does that mean people are spending more.....taxed goods/services/investments?

Yes or no will do, I'm way too tired for anything longer than that!

More money=more spending=more taxes collected.