Taxes, Spending, the Fiscal Cliff, and Austerity

[Foxfyre]

I may be disallusioned, but I damn sure know enough about baseline budgeting and economics to be pretty darn confident that I am right. And I know that a cut in the projected budget is not necessarily a cut in spending.

 

[The Rabbi]

I may be disallusioned, but I damn sure know enough about baseline budgeting and economics to be pretty darn confident that I am right. And I know that a cut in the projected budget is not necessarily a cut in spending.

No. It's like this:
Let's say you decide you want a new Harley. You budget $25,000 for it. You've put away say $2,000 already. Then your wife decides she wants a trip to Spain instead and it's going to cost $15,000. So you scrap the Harley and now you have an extra $23,000 to spend and charge it all on the credit card.

 

[Foxfyre]

I may be disallusioned, but I damn sure know enough about baseline budgeting and economics to be pretty darn confident that I am right. And I know that a cut in the projected budget is not necessarily a cut in spending.

No. It's like this:
Let's say you decide you want a new Harley. You budget $25,000 for it. You've put away say $2,000 already. Then your wife decides she wants a trip to Spain instead and it's going to cost $15,000. So you scrap the Harley and now you have an extra $23,000 to spend and charge it all on the credit card.

Yep. That's pretty much how it works.

And then you take the trip to Spain and run up $13k on your credit card. Next year you aren't going to Spain. Hey, I don't have to pay for a trip to Spain next year. We have $15k to spend on a cruise to Australia! Or, if you are doing baseline budgeting, you have $20k for a cruise to Australia. But we'll cut 10% of the spending and only plan to spend $18k for next year's cruise. And everybody will be so proud of us. We cut spending!

 

[Sactowndog]

Well, sorta, I got lost in your scenario fairly quickly. I ain't the sharpest knife in the drawer, and this stuff rapidly gets complicated. I'm not an accountant or a tax expert, or even an economist, just trying to understand this whole deal. That said, my understanding is that if you are a non-resident alien then you don't pay taxes here on capital gains, you do that in your own country whatever the CG rate is there. That means you had to renounce your US citizenship, which is happening these days, over a thousand a year. I think you gotta be out of the country for at least 3 years though. Anyway, if rich folks are renouncing their US citizneship for tax purposes because the income taxes or CG taxes are too high, that's a negative for the economy and jobs. Cuz those people ain't here spending money and investing as US citizens any more.

I am sorry, I can't communicate this more clearly. I can't think of another way to communicate it but you are still missing the main point. Where you live no longer matters where you invest. So yes we would lose what they spend which is small in the overall context but would not likely lose what they invest.

If you are an American, you pay our taxes no matter where you live or where you earn your income. Same deal if you are a resident alien living here, you are subject to the same tax rates as the rest of us. Sorry 'bout that. Which is one reason why higher CG and income rates discourage resident aliens from investing and staying here. I do not believe this is trivial either, over the past 30 years or so foreign investors have provided a significant chunk of capital into our economy.

Again where you live and where you invest is no longer correlated. This fact is especially true for the very wealthy. It was true in the 1980's but it is not true any longer. A low coporate income tax will attract foreign investment and a low capital gains tax will do nothing to do so.

Same deal with American investors, wherever they live. A higher cap gains rate disincentivizes them to put their money to good use on our economy. Maybe they don't invest it overseas, but we lose if that money if it's not invested here. Maybe they put it in tax free investments, or find creative ways to lower their tax burden. Long story short, there's no way a higher CG tax rate can be beneficial to an economy unless you're fighting inflation or the economy is overheating.

You can make the case that a higher capital gains tax would cause them to seek less risky investments WW. But remember the case I made was to increase the capital gains rate so that you can reduce the corporate income tax by the same amount. You missing and not accounting for those afffects.

The corp tax rate thing kinda muddied the waters a little for me. Don't quite see the link with cap gains, one is for investors and the other is for employees. A lower corp tax rate definitely makes a country more attractive for entrepeneurs to startup a business or expand one ormaybe even relocate one. There's a lotta other factors to that though, but the fact is that many countries and US states are trying to do exactly that, attractmore business and hence more jobs and hence more revenue.

Replace entrepenuers with investors and you will start to be there once you realize that investors can as likely be from Japan as the US. The lower corporate tax rate will make investing in the US more attractive both for those living in the US and those residing overseas.

 

[Wiseacre]

Well, sorta, I got lost in your scenario fairly quickly. I ain't the sharpest knife in the drawer, and this stuff rapidly gets complicated. I'm not an accountant or a tax expert, or even an economist, just trying to understand this whole deal. That said, my understanding is that if you are a non-resident alien then you don't pay taxes here on capital gains, you do that in your own country whatever the CG rate is there. That means you had to renounce your US citizenship, which is happening these days, over a thousand a year. I think you gotta be out of the country for at least 3 years though. Anyway, if rich folks are renouncing their US citizneship for tax purposes because the income taxes or CG taxes are too high, that's a negative for the economy and jobs. Cuz those people ain't here spending money and investing as US citizens any more.

I am sorry, I can't communicate this more clearly. I can't think of another way to communicate it but you are still missing the main point. Where you live no longer matters where you invest. So yes we would lose what they spend which is small in the overall context but would not likely lose what they invest.

If you are an American, you pay our taxes no matter where you live or where you earn your income. Same deal if you are a resident alien living here, you are subject to the same tax rates as the rest of us. Sorry 'bout that. Which is one reason why higher CG and income rates discourage resident aliens from investing and staying here. I do not believe this is trivial either, over the past 30 years or so foreign investors have provided a significant chunk of capital into our economy.

Again where you live and where you invest is no longer correlated. This fact is especially true for the very wealthy. It was true in the 1980's but it is not true any longer. A low coporate income tax will attract foreign investment and a low capital gains tax will do nothing to do so.

Same deal with American investors, wherever they live. A higher cap gains rate disincentivizes them to put their money to good use on our economy. Maybe they don't invest it overseas, but we lose if that money if it's not invested here. Maybe they put it in tax free investments, or find creative ways to lower their tax burden. Long story short, there's no way a higher CG tax rate can be beneficial to an economy unless you're fighting inflation or the economy is overheating.

You can make the case that a higher capital gains tax would cause them to seek less risky investments WW. But remember the case I made was to increase the capital gains rate so that you can reduce the corporate income tax by the same amount. You missing and not accounting for those afffects.

The corp tax rate thing kinda muddied the waters a little for me. Don't quite see the link with cap gains, one is for investors and the other is for employees. A lower corp tax rate definitely makes a country more attractive for entrepeneurs to startup a business or expand one ormaybe even relocate one. There's a lotta other factors to that though, but the fact is that many countries and US states are trying to do exactly that, attractmore business and hence more jobs and hence more revenue.

Replace entrepenuers with investors and you will start to be there once you realize that investors can as likely be from Japan as the US. The lower corporate tax rate will make investing in the US more attractive both for those living in the US and those residing overseas.

We are talking past each other or perhaps one of us is somewhat mistaken. The notion that a higher CG rate can possibly be a positive for economic growth is nonsense. Those with the funds to invest the most will be less inclined to do so, no matter where they live or where they invest. Obviously if they are instead investing in non-taxable avenues, that does our economy no good; you see that, right?

A lower corp tax rate would also be more attractive to investors, but why raise one and lower the other? Why not lower BOTH? Or leave the CG rate where it is and lower the corp tax rate?

 

[saveliberty]

T minus 20 days and counting on the cliff. Obama is still waiting for the mountain to come to him.

 

[oldfart]

I may be disallusioned, but I damn sure know enough about baseline budgeting and economics to be pretty darn confident that I am right. And I know that a cut in the projected budget is not necessarily a cut in spending.

I think your nihilism is getting the best of you. If scoring systems don't matter and all budget projections are worthless, what do you base your opinions on policy on? Entrails of a chicken?
Your attitude may be very emotionally satisfying, but it makes it impossible for anyone to have a discussion with you when you use this kind of argument to shut down all who disagree with you. You come over as something like a conspiracy nutcase, which I believe you are not.

If you really have a background in economics, use it and discuss issues, don't just bail because you don't like the process.

 

[oldfart]

No. It's like this:
Let's say you decide you want a new Harley. You budget $25,000 for it. You've put away say $2,000 already. Then your wife decides she wants a trip to Spain instead and it's going to cost $15,000. So you scrap the Harley and now you have an extra $23,000 to spend and charge it all on the credit card.

I was wondering where my wife got that argument from. I want my Harley back!

 

[saveliberty]

Bad information in yields poor results and recommendations out. Foxfyre makes a perfectly valid and true statement in saying a budget cut don't necessarily result in spending cuts. If you want to accept a bad model, clearly you have motives which run counter to good fiscal management oldfart.

 

[Foxfyre]

I may be disallusioned, but I damn sure know enough about baseline budgeting and economics to be pretty darn confident that I am right. And I know that a cut in the projected budget is not necessarily a cut in spending.

I think your nihilism is getting the best of you. If scoring systems don't matter and all budget projections are worthless, what do you base your opinions on policy on? Entrails of a chicken?
Your attitude may be very emotionally satisfying, but it makes it impossible for anyone to have a discussion with you when you use this kind of argument to shut down all who disagree with you. You come over as something like a conspiracy nutcase, which I believe you are not.

If you really have a background in economics, use it and discuss issues, don't just bail because you don't like the process.

Scoring is meaningless if they feed the CBO numbers that will produce the desired projections; most especially when subsequent Congresses pay no attention to the scoring and feel no responsibility to respecvt it. When they send a proposed project to the CBO to be scored, they aren't interested in what the actual costs will be. They just want to be able to sell it now as economically sound. They know full well they won't take the heat when those numbers don't hold up when static scoring doesn't hold up on down the road.

In 1965, Medicare was scored to cost $9 billion by 1990. The actual cost in 1990 was $67 billion and last year the costs had swelled to $690 billion. .

In 1967, the House Ways and Means Committee said the entire Medicare program would cost $12 billion in 1990. The actual cost in 1990 was $98 billion. In 1987 Medicaid was scored at less than one billion in 1992. Actual cost $17 billion. Last year around $275 billion.

The list goes on. The 1993 cost of Medicare's home care benefit was projected in 1988 to be $4 billion, but ended up at $10 billion. The State Children's Health Insurance Program (SCHIP), which was created in 1997 and projected to cost $5 billion per year, has had to be supplemented with hundreds of millions of dollars annually by Congress and almost immediately after his first swearing in, Obama signed a $33 billion bill that would add 4 million mostly low income kids to the SCHIP program over the next 4-1/2 years..

I will guess that you cannot name a single large government program in which the costs even remotely resemble the initial CBO scoring.

 

[catatomic]

Laffer Curve

I looked up supply side economics to find the Laffer Curve.

It plots tax revenue (y-axis) vs. tax rate (x-axis). If taxes are 0 or 100 %, obviously no money comes in. Between that, you get a concave graph with maximum revenue, say, somewhere around 70 %. It is implicit in the way this graph works that you wouldn’t do it unless you knew how many people would be employed in each bracket. That’s dynamic.

I can also think of the idea of a spending curve, with a mark at current level, and the ability to see 0 revenue coming in nor out from 0 spending (it doesn’t cost anything), to the point where the nation goes bankrupt. It is a negative, sloped downward graph.

Put them together and you can make ordinary differential equations to measure your success with a given set of data. The last of all data necessary to make a full dynamic analysis is just 3 months back, at a quarterly report. Then you can run the model in the computer, assuming someone hooked up with congress knows how to do all this.

But because of the time lag, you can look at all the things you want that might cause aberrations, like energy increase, investment decrease, manufacturing increase, and real estate increase. As much as things stay the same or trend the thing, one can probably still have a good model from 3 months ago.

That is all I can help you with to make your own decision. I trust it would be easy for them to do this and that they could anticipate aberrations and plug in data they foresee earlier than 3 months later. I also trust that the general conclusions will usually stay put for 3 months, because we can look back over years of data and usually the results have stayed the same.

 

[The Rabbi]

I may be disallusioned, but I damn sure know enough about baseline budgeting and economics to be pretty darn confident that I am right. And I know that a cut in the projected budget is not necessarily a cut in spending.

I think your nihilism is getting the best of you. If scoring systems don't matter and all budget projections are worthless, what do you base your opinions on policy on? Entrails of a chicken?
Your attitude may be very emotionally satisfying, but it makes it impossible for anyone to have a discussion with you when you use this kind of argument to shut down all who disagree with you. You come over as something like a conspiracy nutcase, which I believe you are not.

If you really have a background in economics, use it and discuss issues, don't just bail because you don't like the process.

Scoring is meaningless if they feed the CBO numbers that will produce the desired projections; most especially when subsequent Congresses pay no attention to the scoring and feel no responsibility to respecvt it. When they send a proposed project to the CBO to be scored, they aren't interested in what the actual costs will be. They just want to be able to sell it now as economically sound. They know full well they won't take the heat when those numbers don't hold up when static scoring doesn't hold up on down the road.

In 1965, Medicare was scored to cost $9 billion by 1990. The actual cost in 1990 was $67 billion and last year the costs had swelled to $690 billion. .

In 1967, the House Ways and Means Committee said the entire Medicare program would cost $12 billion in 1990. The actual cost in 1990 was $98 billion. In 1987 Medicaid was scored at less than one billion in 1992. Actual cost $17 billion. Last year around $275 billion.

The list goes on. The 1993 cost of Medicare's home care benefit was projected in 1988 to be $4 billion, but ended up at $10 billion. The State Children's Health Insurance Program (SCHIP), which was created in 1997 and projected to cost $5 billion per year, has had to be supplemented with hundreds of millions of dollars annually by Congress and almost immediately after his first swearing in, Obama signed a $33 billion bill that would add 4 million mostly low income kids to the SCHIP program over the next 4-1/2 years..

I will guess that you cannot name a single large government program in which the costs even remotely resemble the initial CBO scoring.

You nailed it. The Dems (GOP too probably) have figured out how to game the CBO to get the numbers they want. That is how the CBO reported that Obamacare would not cost more than $999B for the next 10years. No one believed that number. Not even the CBO.

 

[catatomic]

When you have dual differential equations like I said, there can be huge aberrations over long periods of time because of unforeseen long-term effects. But when you have short-time ago data, it can be used wisely to understand consequences of taxing and spending.

 

[Foxfyre]

When you have dual differential equations like I said, there can be huge aberrations over long periods of time because of unforeseen long-term effects. But when you have short-time ago data, it can be used wisely to understand consequences of taxing and spending.

It would be so if they used the dynamic means of scoring and were informed by the real time history of various tax policy and wrote the legislation based on that information. They don't. The CBO is fed numbers and a scenario to produce the desired projection. If the projection isn't what the promoters of the legislation were looking for, they throw in some kind of mythical cut, like cutting $1 trillion in waste and/or saving X dollars by eliminating fraud. Never in the history of the U.S. Congress in our lifetime have such cuts or elimination of fraud produced a single dime for the U.S. treasury. It is all smoke and mirrors. And it is high time the American public realized it and did something about it.

 

[catatomic]

I don't need to read this.

 

[Foxfyre]

The only real numbers are the actual government outlays and the actual deficit which is total expenditures less the total revenues. Currently we are spending $1 trillion or more than revenues every single year and that is projected to continue as far as the eye can see. And if it continues, the fiscal cliff will be the least of our worries. National bankruptcy is a certainty.

The ONLY thing that will divert that disaster is a policy that downsizes government and reins in all unnecessary spending and leaves the money with the private sector with assurance that the private sector will not be punished for producing profits and/or growing their businesses. Right now that is the exact opposite of what the Administration is asking for. A fully employed and productive working America and a steadily reducing entitlement will generate massive funds into the U.S. treasury and bring down the deficit. With the right policies, it will wipe out the deficit which such policies did for a brief period at the end of the Clinton administration.

Government spending and reducing unemployment by hiring more government employees won't fix the problem and will absolutely make it worse.

 

[Foxfyre]

I don't need to listen to this.

Yes, you really do need to be educated on this. I accept that you choose not to be.

 

[Trajan]

There are so many problems when looking at this from any perspective. First off, there is some merit to the idea that raising taxes will hurt more than help, at least in the short term. The problem is that we have gotten ourselves into a severe pickle because we have used tax cuts over the past decade plus as a way to stimulate the economy. Problem is, the tax cuts only helped in short stints, but in the long run, it did nothing. We can't cut taxes any further to stimulate the economy because revenue has hit rock bottom due to the already low tax rates.

So what about spending? Well, we could cut some here and there, but nobody can agree where to cut. In the end, there is not going to be a simple solution, and this storm is going to be with us for some time; we're going to just have to ride it out. My thoughts are that we end the payroll tax cut, and raise the tax rate on anyone making over $100,000 per year. The rate increase does not need to be massive. Secondly, raise the tax rate on capital gains to 20% with the idea of raising it higher once the economy gets rolling again, if necessary. As for cuts, the easiest way to cut spending is to freeze it across the board, other than for SS and Medicare. As for the long term, SS and Medicare spending must be reduced in comparison to what we are expecting to pay out. We can't cut spending on those programs because we have more and more people retiring. What we can do is raise the retirement age gradually for everyone until we hit a point where revenue and payouts are close to being balanced for the long term.

One thing nobody thinks about is that if we do what needs to be done to get spending under control, even if it is done slowly, the economy is going to pick up eventually. There are two factors to look at that have nothing to do with politicians, taxation, or government spending. The baby boomers are all retiring. Even if they haven't retired yet, they are downsizing and not spending as much money anymore. This wouldn't be such a problem but for the fact that their kids have delayed starting their own families. While there are reasons for this, mostly economic, they are starting to hit the age where they have to begin getting married and having kids. My thought is that within the next ten years, we are going to see a boom in child births which will lead to a lot of younger people needing to buy homes and bigger cars. The spending cycle will kick into high gear once again, and then we will see things improve dramatically.

Arguments like this unfortunately miss the big picture. When you argue for increasing government revenue one has to do so under the assumption that the government actually needs more money. That is the assumption that needs to be tackled first if we're ever going to get out of this. Instead of trying to figure out how to get the government more money, we should first be trying to figure out what does government actually need. Once we figure that out we can then devise a tax policy that ensures they get it.

Actually this is pretty much known. Most people look at ~19-20% of GDP as the amount of spending needed. A little less in good times and a little more in a recession. Revenues are currently in the 16-17% of GDP and have to come up for us to get to a balanced budget and maintain the things we currently say we want to have.

Now if we want to go back to an isolationist defense policy or eliminate Medicare or Social Security then we could drop the percentage but with those priorities you are in the 19-20% range.

huh?


actually what you need is a BIGGER PIE of gdp so the slice either 17 or 19% yields more $$$.

Its not a coincidence that everyone has figured out and now agree that no matter the tax policy ala rates etc, the gov won't get more than a 20% slice on a consistent basis.

But then theres the old ideological/pathological angle, the need to grab/employ higher rates as a politically gratuitous toolforf axe grinding.

Its far better to get a 18% slice of 120, than an 19% slice at 100...see?

Its all a matter of incentivizing correctly to create more and sustained taxable activity.

 

[saveliberty]

Expecting math skill Trajan?

<shakes head>

 

[oldfart]

My two cents worth.

The notion that a higher CG rate can possibly be a positive for economic growth is nonsense.

It all depends on what behavior model you have for investors and their expectations. Right now a lot of commercial real estate deals are trying to close by the end of December under the assumption that capital gains rates will rise in 2013. To the extent that some of this real estate is underutilized now and will be more aggressively utilized by the buyers, the anticipation of future higher capital gains rates may be marginally promoting economic growth. But this is a temporary effect and in general it is hard to see how with very low rates of anticipated inflation and low real interest rates that raising capital gains rates is helpful to the economy.

Obviously if they are instead investing in non-taxable avenues, that does our economy no good

I'm not sure I understand the reasoning here.
1. The only significant non-taxable investments are state and municipal obligations. Changes in income tax rates (but not necessarily capital gains rates) would increase the value of such bonds relative to securities generating taxable interest. I'll pass on the arguments over whether money raised by corporate bonds is better spent than money raised by state and municipal bonds.
2. Higher tax rates, including capital gains rates, increases the value of tax deferral, such as in annuities and unrealized capital gains. If such rates are expected to decrease in the future, investors will be even more likely to attempt to defer taking gains in the short term. Likewise at very low real interest rates the cost of deferring taxes is cheaper. To the extent people sit on underutilized investments, economic growth suffers.

A lower corp tax rate would also be more attractive to investors, but why raise one and lower the other? Why not lower BOTH? Or leave the CG rate where it is and lower the corp tax rate?

A good point. Personally I would prefer to lower the corporate income tax rate to the current average rate and eliminate most corporate tax preferences. At first glance this is revenue neutral, but because of the distorting effects on the economy of the many credits and deductions intended to help specific industries and groups, I think efficiency and growth would be improved. Such a rate would settle down to around 16%.