Taxes, Spending, the Fiscal Cliff, and Austerity

Discussion in 'Clean Debate Zone' started by Wiseacre, Nov 26, 2012.

  1. Wiseacre
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    Wiseacre Retired USAF Chief Supporting Member

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    In this thread I want to talk about these things; what has Europe done and how did it work, and what we should do with our own fiscal problems. Someone wanted to know how I got the idea that various European countries have raised taxes more than they cut spending, so let's start with that.

    Below is a chart done by Veronique De Rugy from the Mercatus Center, but I found it at the Cato.org website. Note that taxes outpaced spending cuts by a factor of 9 euros to 1. And many of those spending cuts were really reductions in spending increases. The tax hikes were not just to the upper crust; middle incomes got hit too in some places, as well as higher VAT taxes that everyone pays and taxes on cigarettes, alcohol, fuel, and property taxes, and other things too.

    European Politicians Share Obama

    Here's the problem: this approach has not worked. The snippet below is looking at the question of which hurts an economy more, a tax increase or spending cuts.

    Over at EconLog, George Mason University’s Garett Jones provides the answer: Tax increases. He looks at an IMF paper, often used by anti-spending cuts advocates to say that spending cuts hurt the economy, to show that actually fiscal adjustment based mostly on tax increases will hurt the economy the most. Here is Jones:

    Quick summary of the method: The economists looked at 173 “fiscal consolidations” in rich countries, times when governments decided to reduce the long-run deficit. They then checked to see whether consolidations based mostly on tax hikes turned out better or worse than ones based on spending cuts (Inside baseball: They followed a version of the Romer and Romer event study methodology, but applied it to exogenous-looking fiscal tightening instead of exogenous-looking monetary tightening). . . .
    Both GDP and consumer spending tell the same story: Spending cuts are the less painful path to fiscal rectitude. When countries tried to get right with the bond markets, this IMF study found that nations that mostly raised taxes suffered about twice as much as nations that mostly cut spending.

    This is consistent with a new paper called “The Design of Fiscal Adjustments,” by Harvard economists Alberto Alesina and Silvia Ardagna. Building up on their previous work, they provide even more evidence that fiscal consolidations based mostly on the spending side result in smaller recessions, or none at all, when compared to tax-based adjustments. Additionally, they find that private investment tends to react more positively to spending-based adjustments. Thus, they argue that spending cuts are more sustainable and effective in reducing debt and raising economic growth; expansionary fiscal consolidation is possible.


    Which Hurts More, Tax Increases or Spending Cuts? - By Veronique de Rugy - The Corner - National Review Online
     

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  2. Wiseacre
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    Wiseacre Retired USAF Chief Supporting Member

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    So you ask, what does this have to do with our fiscal cliff? Well, the president is asking for tax hikes and the republicans are asking for spending cuts. Hard to say what we'll end up with, but I'm pretty sure it'll be weighted more to the tax hike side than the spending cut side. In a recent article appearing the USAToday by Matthew Melchiorre of the Competitive Enterprise Institute, the current fiscal cliff as it is now calls for 4 times the amount of tax increases than spending cuts.

    snippet:

    Beginning next year, $136 billion of spending cuts are scheduled to take place according to the Congressional Budget Office (CBO). These include the mandatory sequestration of defense and discretionary spending resulting from the failure of last year's bipartisan "supercomittee" to agree on a 10-year plan to cut the federal budget by $1.5 trillion. They also include the end of unemployment benefit extensions and reductions in Medicare reimbursement rates. Keep in mind these aren't real cuts in overall government spending, but merely reductions in its rate of growth.

    They are also trivial compared to the $532 billion of scheduled tax increases that CBO also reports. Most of this comes from income tax rates reverting back to pre-2001 levels and the alternative minimum tax expanding deeply into middle-class households. That's roughly four dollars of tax increases for every one dollar of so-called spending cuts.

    Column: America must avoid Europe's toxic tax remedy

    It is true that significant spending cuts will hurt short term. But it needs to be done, the big deficit drivers are defense, medicare and medicaid, and social security. These programs must be reined in to be sustainable not just for the seniors who need them now but also for younger generations who will need them later. Combine that with tax reform that increases revenue and a cap on gov't spending and we're in business. I think this is Obama's big chance to make his mark in American history; if he can lead us to reasonable and workable solutions that will succeed long term, he could go down as one of our best presidents. If he doesn't, he'll take his place next to Jimmy Carter.
     
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  3. jwoodie
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    jwoodie Gold Member Supporting Member

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    This debate is like arguing about what procedures would have saved the Titanic (hint: none). Demographics are overwhelming every quasi-socialist country, and we are joining that list. Private sector job growth (and inflation) is the only available solution. The rest is pure sophistry.
     
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  4. Old Rocks
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    Old Rocks Diamond Member

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    Clinton raised taxes on the rich in '92. And the economy cratered, right? Not quite. Longest sustained economic boom in our naton's history.

    Then Bushie Baby cut taxes, while engaged in two wars. And the economy did great, right? LOL. 16 trillion in homeowners value and 401Ks lost in two years, from 2007 to 2009.

    So, what are we to believe? Recent history or rightwing ideology?
     
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  5. WillowTree
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    WillowTree Diamond Member

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    The dishonesty of the left is the major tombstone in the cemetary too.
     
  6. WillowTree
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    WillowTree Diamond Member

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    So if you want to go to the Clinton era tax levels are you willing to go with the Clinton spending cuts too? Yes? or NO?
     
  7. oldfart
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    oldfart Older than dirt

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    You cover a lot of ground in this post, and I think by the time I think it all through and do the neded research, it might be Janaury. So I'll take points one at a time.

    I went to the Cato Institute website and this is apparently a paper delivered in a symposium but not made available on the website. The graphic you used from her presentation is indeed startling. My problem is that I cannot find anything that shows how the numbers were derived, nor could I find a database that clearly would either confirm or debunk it. The Cato Institute has an agenda, which does not mean than any research they use is wrong, but it does mean it's good to check out their numbers.

    I spent about three hours looking at databases and apparently if anybody is breaking down austerity plans into revenue and spending components, I haven't found it. The 9:1 ratio, however strains credulity. All the descriptons of austerity programs in Greece, Italy, Spain, and Britain mention both broadly based tax increases (especially the VAT, taxes on "luxuries" and import taxes) and spending cuts (most frequently in government pensions, wages of government workers, and reduced subsidies to state enterprises).

    So for now I believe that the role of tax measures is probably less than stated, that you are correct tha many of these taxes fall very broadly and some are regressive, and that austerity in atleast southern Europe has definitely involved direct cuts in many workers income.
     
  8. Wiseacre
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    Wiseacre Retired USAF Chief Supporting Member

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    I could not find anything to substantiate the 9:1 ratio, nor could I find any competing numbers from anywhere else. I do know that there are/were many proposed spending cuts over there that never actually went into effect or got reduced or removed when the ruckus got too severe. Pretty sure most of the tax cuts survived though. Most liberal sources decry austerity but don't give you any details, so it's difficult to know what the real numbers are.

    Whatever the true ratio is, I think it's safe to say that tax hikes have been the major part of the various european austerity measures. There are studies that show that approach is generally unsuccessful, primarily because when you raise taxes you stunt economic growth. Consider the following snippet from an article written again by de Rugy:

    " The “balanced approach” has proven a recipe for disaster. In a 2009 paper, Harvard University's Alberto Alesina and Silvia Ardagna looked at 107 attempts to reduce the ratio of debt to gross domestic product over 30 years in countries in the OECD. They found fiscal adjustments consisting of both tax increases and spending cuts generally failed to stabilize the debt and were also more likely to cause economic contractions. On the other hand, successful austerity packages resulted from making spending cuts without tax increases. They also found this form of austerity is more likely associated with economic expansion rather than with recession.

    While the “balanced approach” may give the appearance of pursuing fiscal solvency, in practice it stagnates the possibility of growth. Real fiscal reform comes from a commitment to cut spending and from structural changes to taxation and the regulatory environment. "

    Austerity By the Numbers | Mercatus

    One can dispute whatever de Rugy writes, but she didn't have anything to do with the paper by the two Harvard professors.
     
  9. JQPublic1
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    JQPublic1 Gold Member

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    Don't include social security on your list of deficit drivers. That programs is funded separately through payroll taxes and has nothing to do with the Federal deficit! Don't take my word for it, listen to this live interview from the right wing guru himself, Ronald Reagan!

    Ronald Reagan: ‘Social Security has nothing to do with the deficit.’ | MoveOn.Org

    If he messes with social security the consequences might be far more serious than anything that happened to Jimmy Carter. I am not a Reagan fan but in this instance I hope Obama is as informed as Reagan on social security and leaves it off the deficit reduction negotiation table. Medicare is also funded by payroll taxes but so-called Obamacare could offer better coverage with lower premiums.

    BTW, Obama has already surpassed anything Carter did or, for that matter, most of the other presidents! As a two term president he should never be compared to Jimmy Carter again!
     
  10. Wiseacre
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    Wiseacre Retired USAF Chief Supporting Member

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    Re Social Security, you do know that things have changed in the last 30 years, right? The trustees who are responsible for managing and overseeing the SSA fund have said the program will not be solvent in another 20 years or so, I forget the most recent estimate. Talk to people in the 20s and 30s, many of them don't believe the system will be there for them when they retire. And for good reason, these days the SSA is paying out more than they are taking in, as we've got more old guys retiring than new guys coming into the workforce. We've got like 3 workers paying for one retiree's benefits, and it could drop to 2 for 1. I see no reason why we can't raise the minimum age for collecting benefits for those who are at least 10 years away from retirement. Or whatever solution the pols come up with, but something must be done to make the SSA sustainable and restore confidence in it.
     

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