Rich Karlgaard thinks that’s what’s going on, and the cure for it is supply-side tax-rate cuts. He doesn’t call them that, though–he makes the mistake of calling them “tax cuts,” even though it’s clear that he knows that’s not what they necessarily are:
Conservatives generally avoid the class warfare talk, but they do fall into two other traps about supply side tax cuts. One trap is that tax cuts add to the federal deficit. There is no evidence of this. The evidence is either neutral or points the other way. Government tax receipts after supply side cuts have been enacted go up, not down.
I’ve kvetched about this before.
By definition, if revenues went up, it’s not a tax “cut.” It’s a tax increase, achieved through lower rates but faster economic growth and an increase in GDP. Sloppy language like this is one of the things that makes it hard to sell the concept.
So why are supply side tax cuts considered a cure? As I see it, time is the cure. Kill off rather than assist the unprofitable businesses and then things will sort themselves out without any need for intervention.
By definition, if revenues went up, it’s not a tax “cut.” It’s a tax increase, achieved through lower rates but faster economic growth and an increase in GDP.
There is a fatal attraction in Reaganite circles to the idea that all you have to do raise revenue is cut tax rates. Everybody wins: taxes are less onerous and the government can spend more.
If it sounds too good to be true, that’s because it is. In reality, whenever the government spends money, someone will feel the pain. You can’t write off herds of white elephants with rock-em, sock-em tax rate cuts. In particular, the war in Iraq will cost a trillion dollars by the end. You won’t spot a trillion dollars just walking down the street.
Absent new taxes, the largesse can come from three places. It can come out of the value of the dollar, or out of the capital markets, or it can be made up with future taxes. Keynes advised that the government should loosen its belt in bad times and tighten it again in good times; that way the government can be a counterweight to boom and bust. Unfortunately, Bush loosened the government’s belt in good times. That is one reason that the dollar has lost a third of its value against foreign currencies. Now that times are turning bad, Bernanke must choose between inflation and stagnation, or take half of both, which is called stagflation.
Meanwhile Reagan is no longer with us, while Bush will soon have a blissful, simple retirement.
Who could have ever suspected that you Jim, would be a ‘zero sum’ kinda guy? Shocked, I ain’t.
Well, if I had supported Bush’s outrageous overspending, you might have a point, Jim. You might also have a point if our deficit had anything to do with lack of tax revenues.
Sadly (for you), neither is the case.
Well, if I had supported Bush’s outrageous overspending, you might have a point, Jim.
You certainly supported some of it, namely, the Iraq war. The cost of that war is indeed outrageous, all the more so because Bush didn’t scratch up revenue to pay for it.
As for any other spending, you do keep coming back to the idea that if they just cut tax rates, that will give them more to spend. That is a bogus economic theory. Government spending is the same long-term burden on the economy regardless of the tax rate. You can’t just cut tax rates and say, presto, the burden is lifted. That is a dangerous and false conflation of Keynesianism — that deficits and surpluses should move opposite to the economy — with correct small-government theory. That correct version is that if you keep government spending low and keep taxes proportionate to spending, then in the long term the economy will grow faster.
It’s correct, that is, unless the government’s spending mitigates some other, even greater burden on the economy. For instance, yes, police departments are government spending and a drag on the economy, but they may not be as big a drag on the economy as anarchy. This argument doesn’t apply to the Iraq war though. The war will just be a trillion dollars down the rabbit hole.
As for any other spending, you do keep coming back to the idea that if they just cut tax rates, that will give them more to spend. That is a bogus economic theory.
Unfortunately for your thesis, rates were cut, and revenues are up. They’re at record highs.
Unfortunately for your thesis, rates were cut, and revenues are up. They’re at record highs.
Well yes, but the population is also at a record high, and so are prices. Everyone understands that government revenue goes up with population and with inflation. You are assuming credit for things that would have happened anyway.
Rand,
I’ll guess commenter “Jim” is very happy internet clue bats are physically weightless!
The following only covers two years, and I’ll not bother trying to equate it to population growth. Of course it’s from a Repub politician!
“Ever since the Senate approved the last major tax relief bill, in 2003, revenues have increased every year. In 2004, they went up 5.5%. Last year, they rose 14.5%, the largest increase in nearly 25 years.”
Also, Donk or Repub,the more money government collects, they will find the need to spend even more!
Mike
http://www.usatoday.com/news/opinion/editorials/2006-02-20-debate-oppose_x.htm
I’ve been thinking about this recently…
Pretend that the country is a company you own. You have your gross revenue (GDP), your gross profit (taxes), and your net (account balance) – I think everyone sees that. But in a business, there is also cash flow – accounts receivable, and accounts payable. Although imbalances can cause cash flow problems if it is hard to take on debt, everyone counts their accounts receivable as an asset, and their accounts payable as a negative asset – so if your accounts payable are $20M, and your accounts receivable are $10B, your company is doing really well even if the net profit is currently negative.
So what is the “accounts receivable” of the US government? Well, I propose that the unrealized gains on the stock market are the accounts receivable. They are owed the government, and will be paid eventually – but they are just pushed into the future. This easily explains why lowering taxes on capital gains brought in so much revenue – we were just cleaning up some of our receivables and realizing the gain on our financial statements.
So the obvious question is, how much accounts receivable is out there for the US government? I’m going to assume that the primary receivables are the US stock market (valued at $15T) and the US housing market (valued at another $15T) (all these numbers are rounded – I am not attempting precision, but rather a order of magnitude estimate).
The turnover in the stock market is about 6% (using the wilshire 5000 index as a proxy for the entire market) – so 95% or so of all capital gains on the stock market are not realized in a year. So the unrealized income of the US government in an average year is about 8% growth times $15T times 95%, or about $1T each year. The current “accounts receivable” due to the stock market is about $1T/5%*20% tax rate, or $4T. (These numbers are estimates, but should be close).
The turnover in the housing market is 30%, say, and house prices rise 5% a year on average. That leads to $0.5T per year growth in “accounts receivable”. The estimated total accounts receivable would be $0.5T/30%*20% tax rate, or about $0.3T.
So this says that the US government has about $4T in accounts receivable. If you lower the taxes on those receivables, they come flying in. The current deficit is $9T, so we are running a net $5T negative.
I’m most likely missing some other important numbers, but a back of the envelope calculation gets rid of half the debt! We just need to work on the receivables – those are way out of hand!
Economics 101 lesson:
Taxes influence behavior.
When tax rates are above an ‘optimum’, people avoid the taxed activity, or evade the tax itself, resulting in a net reduction in tax revenues with increasing rates. Economic conservatives, myself included, believe that the rates on many taxes in this country are above the optimum rate for revenue collection.