Tax Cuts, Increased Spending to Blame for Increased Deficits

[Toro]

And you know this how? Not being dick, but you know how us righties are, we kinda like to see some evidnece.

Why do you assume that they don't? Factors are tested to account for multiplier affects on the economy. Econometrics isolates differing factors to empirically test the affects of different policies. One could turn around and ask a similar question to you, i.e. why should we assume that tax cuts have any affect on the economy at all? How do you know they have a positive affect? Or do just take that on blind faith? Of course, the answer is exactly the same. We can empirically test the data to isolate the affects of the tax cuts.

If you want some evidence, look at the empirical research done by George Bush's own chair of economic advisers on tax cuts, Greg Mankiw, in the post above. He estimates that for every $1 in income tax cuts, the government loses 83 cents in revenues.

And I did phrase it wrong. My mistake. Some of the variables are linear. Some are not. But, like Mankiw concluded, there is not a 1 for 1 trade-off.

After spending some time researching, I am persuaded that income tax cuts do not come close to paying for themselves by means of economic growth, in terms of revenue. I saw the reference to 83 cents, but I also saw the loss in capital taxes is about 50%, so it does depend on what kind of tax cut you have. Those numbers come from a study that is pretty wonky, I looked at it but wasn't completely sure what it said.

However, I am not yet convinced that the increase in economic growth does not yield some reductions in gov't spending due to higher employment numbers. Less money going out in unemployment checks, foodstamps, and in healthcare payments. And it may well be that the economic improvement has positive results that do not show up on the gov'ts balance sheet. That's subjective on my part, there's no data to back it up, but I believe an employed person will consume less gov't resources over somebody who doesn't have a job. And what about the next generation that doesn't grow up in a household that has been dependent on the gov't? I'm thinking it's money well spent instead of more gov't spending where the gov't decides who the winners and losers are for political reasons.

It depends on the taxes, and it depends on the level. For example, some capital gains taxes do increase revenues when cut. There is a fair amount of evidence that cutting corporate income taxes raised revenues. Same with cutting royalties on mining and other natural resources. Also, there is evidence that cutting taxes in emerging countries with high levels of tax evasion increases revenues when accompanied by a crackdown on evasion. In the UK, Thatcher eliminated a raft of expropriationary taxes, such as the 98% tax on "unearned income" which lead to higher revenues from those sources. I'm also willing to say that Reagan lowering the highest marginal income tax rate from 70% - which is egregious and abusive - had at least some positive affect. My point of contention is with those who say cutting taxes always leads to an increase in revenues. That drives me nuts.

There is certainly an efficiency argument for cutting taxes. In Mankiw's study, for example, a $1 decrease in income taxes decreases revenues by 83 cents, meaning tax cuts have a net positive marginal affect. Likewise, raising income taxes by $1 will only lead to an increase of 83 cents in government revenue, meaning there is a deadweight loss in the economy to raising taxes.

 

[CountofTuscany]

there is a case for higher taxes, but is NOW the right time?

I don't think so. But I do think we need to cut spending. We need to learn to live with less.

 

[Wiseacre]

Why do you assume that they don't? Factors are tested to account for multiplier affects on the economy. Econometrics isolates differing factors to empirically test the affects of different policies. One could turn around and ask a similar question to you, i.e. why should we assume that tax cuts have any affect on the economy at all? How do you know they have a positive affect? Or do just take that on blind faith? Of course, the answer is exactly the same. We can empirically test the data to isolate the affects of the tax cuts.

If you want some evidence, look at the empirical research done by George Bush's own chair of economic advisers on tax cuts, Greg Mankiw, in the post above. He estimates that for every $1 in income tax cuts, the government loses 83 cents in revenues.

And I did phrase it wrong. My mistake. Some of the variables are linear. Some are not. But, like Mankiw concluded, there is not a 1 for 1 trade-off.

After spending some time researching, I am persuaded that income tax cuts do not come close to paying for themselves by means of economic growth, in terms of revenue. I saw the reference to 83 cents, but I also saw the loss in capital taxes is about 50%, so it does depend on what kind of tax cut you have. Those numbers come from a study that is pretty wonky, I looked at it but wasn't completely sure what it said.

However, I am not yet convinced that the increase in economic growth does not yield some reductions in gov't spending due to higher employment numbers. Less money going out in unemployment checks, foodstamps, and in healthcare payments. And it may well be that the economic improvement has positive results that do not show up on the gov'ts balance sheet. That's subjective on my part, there's no data to back it up, but I believe an employed person will consume less gov't resources over somebody who doesn't have a job. And what about the next generation that doesn't grow up in a household that has been dependent on the gov't? I'm thinking it's money well spent instead of more gov't spending where the gov't decides who the winners and losers are for political reasons.

It depends on the taxes, and it depends on the level. For example, some capital gains taxes do increase revenues when cut. There is a fair amount of evidence that cutting corporate income taxes raised revenues. Same with cutting royalties on mining and other natural resources. Also, there is evidence that cutting taxes in emerging countries with high levels of tax evasion increases revenues when accompanied by a crackdown on evasion. In the UK, Thatcher eliminated a raft of expropriationary taxes, such as the 98% tax on "unearned income" which lead to higher revenues from those sources. I'm also willing to say that Reagan lowering the highest marginal income tax rate from 70% - which is egregious and abusive - had at least some positive affect. My point of contention is with those who say cutting taxes always leads to an increase in revenues. That drives me nuts.

There is certainly an efficiency argument for cutting taxes. In Mankiw's study, for example, a $1 decrease in income taxes decreases revenues by 83 cents, meaning tax cuts have a net positive marginal affect. Likewise, raising income taxes by $1 will only lead to an increase of 83 cents in government revenue, meaning there is a deadweight loss in the economy to raising taxes.

LOL, here we go again. I am not sure you can legitimately claim that if a tax cut results in an 83 cent loss on revenue necessarily means that a tax hike would result in an 83 gain. I haven't seen any studies about that, and Mankiw does not say that in his report. While the short term gain in a tax hike might be 83 cents, if the increase is sufficient enough it might disincentivize new investments here and so long term the economy as a whole suffers.

Seems to me the real advantage or disadvantage to a change in tax rates depends on a lot of other factors, one of which is it's permanency. That's why a one time good deal tax rebate doesn't stimulate, you get a bump and go right back to the status quo. The oher thing about a tax hike is how effectively the gov't spends that money, as opposed to leaving it in the hands of the private sector people who earned it. There's a wide disparity in opinions about this, my guess is the actual effects of a tax rate change is dynamic, and might or might not be effectual depending on the circumstances. Predicting the economic future is not something that economists are good at, and you always have disagreements.

One other point - tax rate changes signal to the market the projected business climate and attitudes in gov't going forward. In today's global economy, if the US continues to follow policies that are not conducive to the startup or expansion of business, then we're going to reduce our changes for significant positive growth. That is what I think the Obama admin has been doing for the past 2 and a half years, and I thinkt hat's partly why the recovery has not been as robust as it might have been.

 

[Toro]

After spending some time researching, I am persuaded that income tax cuts do not come close to paying for themselves by means of economic growth, in terms of revenue. I saw the reference to 83 cents, but I also saw the loss in capital taxes is about 50%, so it does depend on what kind of tax cut you have. Those numbers come from a study that is pretty wonky, I looked at it but wasn't completely sure what it said.

However, I am not yet convinced that the increase in economic growth does not yield some reductions in gov't spending due to higher employment numbers. Less money going out in unemployment checks, foodstamps, and in healthcare payments. And it may well be that the economic improvement has positive results that do not show up on the gov'ts balance sheet. That's subjective on my part, there's no data to back it up, but I believe an employed person will consume less gov't resources over somebody who doesn't have a job. And what about the next generation that doesn't grow up in a household that has been dependent on the gov't? I'm thinking it's money well spent instead of more gov't spending where the gov't decides who the winners and losers are for political reasons.

It depends on the taxes, and it depends on the level. For example, some capital gains taxes do increase revenues when cut. There is a fair amount of evidence that cutting corporate income taxes raised revenues. Same with cutting royalties on mining and other natural resources. Also, there is evidence that cutting taxes in emerging countries with high levels of tax evasion increases revenues when accompanied by a crackdown on evasion. In the UK, Thatcher eliminated a raft of expropriationary taxes, such as the 98% tax on "unearned income" which lead to higher revenues from those sources. I'm also willing to say that Reagan lowering the highest marginal income tax rate from 70% - which is egregious and abusive - had at least some positive affect. My point of contention is with those who say cutting taxes always leads to an increase in revenues. That drives me nuts.

There is certainly an efficiency argument for cutting taxes. In Mankiw's study, for example, a $1 decrease in income taxes decreases revenues by 83 cents, meaning tax cuts have a net positive marginal affect. Likewise, raising income taxes by $1 will only lead to an increase of 83 cents in government revenue, meaning there is a deadweight loss in the economy to raising taxes.

LOL, here we go again. I am not sure you can legitimately claim that if a tax cut results in an 83 cent loss on revenue necessarily means that a tax hike would result in an 83 gain. I haven't seen any studies about that, and Mankiw does not say that in his report. While the short term gain in a tax hike might be 83 cents, if the increase is sufficient enough it might disincentivize new investments here and so long term the economy as a whole suffers.

Seems to me the real advantage or disadvantage to a change in tax rates depends on a lot of other factors, one of which is it's permanency. That's why a one time good deal tax rebate doesn't stimulate, you get a bump and go right back to the status quo. The oher thing about a tax hike is how effectively the gov't spends that money, as opposed to leaving it in the hands of the private sector people who earned it. There's a wide disparity in opinions about this, my guess is the actual effects of a tax rate change is dynamic, and might or might not be effectual depending on the circumstances. Predicting the economic future is not something that economists are good at, and you always have disagreements.

One other point - tax rate changes signal to the market the projected business climate and attitudes in gov't going forward. In today's global economy, if the US continues to follow policies that are not conducive to the startup or expansion of business, then we're going to reduce our changes for significant positive growth. That is what I think the Obama admin has been doing for the past 2 and a half years, and I thinkt hat's partly why the recovery has not been as robust as it might have been.

An 83 cent loss implies an 83 cent gain for every $1 in income tax. I would imagine it depends on your starting point, ie a 40% marginal rate v a 90% rate, but it will have very small affects on changes on lower rates, ie 40% to 35%. Personally, I don't know anyone who worked more or less because of recent changes in the tax code. In fact, there is an argument that people will work more when taxes are raised since people will want to replace the lost income from the tax hike. I don't really buy that though. There is recent empirical evidence that culture plays much more of a role in work hours than taxes.

On government spending, for the most part, money is better left in the private sector. There are instances when government spending is necessary, but the government is best not allocating capital in the economy when it is unnecessary.

 

[Wiseacre]

It depends on the taxes, and it depends on the level. For example, some capital gains taxes do increase revenues when cut. There is a fair amount of evidence that cutting corporate income taxes raised revenues. Same with cutting royalties on mining and other natural resources. Also, there is evidence that cutting taxes in emerging countries with high levels of tax evasion increases revenues when accompanied by a crackdown on evasion. In the UK, Thatcher eliminated a raft of expropriationary taxes, such as the 98% tax on "unearned income" which lead to higher revenues from those sources. I'm also willing to say that Reagan lowering the highest marginal income tax rate from 70% - which is egregious and abusive - had at least some positive affect. My point of contention is with those who say cutting taxes always leads to an increase in revenues. That drives me nuts.

There is certainly an efficiency argument for cutting taxes. In Mankiw's study, for example, a $1 decrease in income taxes decreases revenues by 83 cents, meaning tax cuts have a net positive marginal affect. Likewise, raising income taxes by $1 will only lead to an increase of 83 cents in government revenue, meaning there is a deadweight loss in the economy to raising taxes.

LOL, here we go again. I am not sure you can legitimately claim that if a tax cut results in an 83 cent loss on revenue necessarily means that a tax hike would result in an 83 gain. I haven't seen any studies about that, and Mankiw does not say that in his report. While the short term gain in a tax hike might be 83 cents, if the increase is sufficient enough it might disincentivize new investments here and so long term the economy as a whole suffers.

Seems to me the real advantage or disadvantage to a change in tax rates depends on a lot of other factors, one of which is it's permanency. That's why a one time good deal tax rebate doesn't stimulate, you get a bump and go right back to the status quo. The oher thing about a tax hike is how effectively the gov't spends that money, as opposed to leaving it in the hands of the private sector people who earned it. There's a wide disparity in opinions about this, my guess is the actual effects of a tax rate change is dynamic, and might or might not be effectual depending on the circumstances. Predicting the economic future is not something that economists are good at, and you always have disagreements.

One other point - tax rate changes signal to the market the projected business climate and attitudes in gov't going forward. In today's global economy, if the US continues to follow policies that are not conducive to the startup or expansion of business, then we're going to reduce our changes for significant positive growth. That is what I think the Obama admin has been doing for the past 2 and a half years, and I thinkt hat's partly why the recovery has not been as robust as it might have been.

An 83 cent loss implies an 83 cent gain for every $1 in income tax. I would imagine it depends on your starting point, ie a 40% marginal rate v a 90% rate, but it will have very small affects on changes on lower rates, ie 40% to 35%. Personally, I don't know anyone who worked more or less because of recent changes in the tax code. In fact, there is an argument that people will work more when taxes are raised since people will want to replace the lost income from the tax hike. I don't really buy that though. There is recent empirical evidence that culture plays much more of a role in work hours than taxes.

On government spending, for the most part, money is better left in the private sector. There are instances when government spending is necessary, but the government is best not allocating capital in the economy when it is unnecessary.

I think there is a tendency for tax evasion to increase as tax rates go up, and decrease as they go down. And I would expect the amount of evasion to be an upward curve rather than a straight line. And I would agree that the starting point for a cut or a hike influences the end results. Maybe this is nitpicking, and the difference is slight. But if the rate change is significant enough, I think in today's global economy the impact could be more than it was even 5 or 10 years ago.

 

[rightwinger]

So let me get this straight...

If you cut taxes and increase spending.....that will cause a deficit

Damn that economics stuff is tricky