Excellent Article About Taxes

[Lemur]

Hooray for empiricism.

The lesson, then, is that it is indeed irresponsible to think of a tax cut as a free lunch. If citizens wish to enjoy lower taxes, and do not wish to foist their debt on the next generation, they cannot avoid the responsibility of also cutting spending. This is how it should be. Truly "free" tax cuts make big government too much of a bargain. If you care about nothing more than getting out from under high tax rates, then self-funding tax cuts are a political dream come true: you don't have to ask anyone to give anything up. But if you worry about the intrusions, abuses, and injustices other than the confiscatory tax rates enabled by a massive state, you should not want too much slack in the relationship between the spending levels and tax rates.

It's nice when research confirms the obvious.

[Ice]

Hooray for empiricism.

The lesson, then, is that it is indeed irresponsible to think of a tax cut as a free lunch. If citizens wish to enjoy lower taxes, and do not wish to foist their debt on the next generation, they cannot avoid the responsibility of also cutting spending. This is how it should be. Truly "free" tax cuts make big government too much of a bargain. If you care about nothing more than getting out from under high tax rates, then self-funding tax cuts are a political dream come true: you don't have to ask anyone to give anything up. But if you worry about the intrusions, abuses, and injustices other than the confiscatory tax rates enabled by a massive state, you should not want too much slack in the relationship between the spending levels and tax rates.

It's nice when research confirms the obvious.

I found this part fairly interesting:

So there you have it. Tax cuts don't exactly "pay for themselves", but they also don't diminish revenue after about two years. That is, after about two years, the government receives revenues equal to what it would have received at the higher rate, but taxpayers enjoy a lower burden. It is an important advance to discover that because cuts do lead to an immediate dip in revenue, they often inspire offsetting tax increases that retard the growth effect of the original cut. Nevertheless, the effect of cuts on output is generally strong enough to bring revenue back to where it would have been otherwise.

Looks good for the long term, but not so good for the short term.

Good Find, Lemur. A rarely seen balanced article.

[Crazed Rabbit]

Well said. The thing I like about tax cuts is that they - in theory - force spending cuts by the government. Of course, common sense isn't always common in the government.

The report also said this;
tax increases appear to have a very large, sustained, and highly significant negative impact on output. Since most of our exogenous tax changes are in fact reductions, the more intuitive way to express this result is that tax cuts have very large and persistent positive output effects.



CR

[Ice]

Well said.

The report also said this;
tax increases appear to have a very large, sustained, and highly significant negative impact on output. Since most of our exogenous tax changes are in fact reductions, the more intuitive way to express this result is that tax cuts have very large and persistent positive output effects.



CR

Indeed. Lower the taxes on things, and they will, most of the time, work more efficiently . Only problem is the lack of revenue. The government does need tax money to pay for essential things.

[Lemur]

The thing I like about tax cuts is that they - in theory - force spending cuts by the government.

Are you talking about the much-discredited "starve the beast" theory? Tax cuts do not force any spending cuts. Period. Deficit spending does not create a smaller government. From the article:

In another fascinating new working paper on the "starve the beast" hypothesis (it is false, FYI), the Romer duo directly discuss the revenue effects of tax cuts.

If you follow the link, there's a large-ish study about the whole "starve the beast" philosophy.

It sure must be fun to cut taxes without cutting spending! It's like every day is your birthday, and everything is free, free, free!

[macsen rufus]

Am I the only temporarily dyslexic one here, who wanted to see what Lemur had found that was so great about Texas??

IMHO the big issue that has to be grasped is not how much you tax, but WHAT you tax. Folks go to all sorts of effort to avoid tax. Tax the 'bad' stuff like wasteful resource use, pernicious pollutants and various recreational drugs of choice, not the 'good' stuff like jobs, enterprise and income, and everyone will be much better off (except maybe accountants )

[HoreTore]

Am I the only temporarily dyslexic one here, who wanted to see what Lemur had found that was so great about Texas??

Nah, you're not the only one...

The article says nothing about the other point of taxes though; redistribution of wealth.

[Xiahou]

Don't the two passages quoted in Ice's post seem to contradict each other somewhat?

[Devastatin Dave]

Am I the only temporarily dyslexic one here, who wanted to see what Lemur had found that was so great about Texas??

Ha!!! I thought I read the same thing. I was wondering if Strike for the South and Lemur had run off to Boston and got married or something...

[Crazed Rabbit]

Are you talking about the much-discredited "starve the beast" theory? Tax cuts do not force any spending cuts. Period. Deficit spending does not create a smaller government.

It sure must be fun to cut taxes without cutting spending! It's like every day is your birthday, and everything is free, free, free!

Um ... that's why I said 'in theory'.

And where did I say I support cutting taxes without cutting spending?!

CR

[Byzantine Mercenary]

Im no expert on tax but ive always wondered what would happen if the rate of vat was reduced. Would you would get roughly same amount of revenue just from more people?

[Strike For The South]

Ha!!! I thought I read the same thing. I was wondering if Strike for the South and Lemur had run off to Boston and got married or something...

Well louis wouldnt like that much

[Ice]

The article says nothing about the other point of taxes though; redistribution of wealth.

Somewhat. Taxes are also used on projects for everyone, not just redistributed

Roads, Sanitation, Police, Military, etc.

[Seamus Fermanagh]

The article says nothing about the other point of taxes though; redistribution of wealth.

Most Americans do not consider this a valid purpose for taxation.

Sadly, we fall prone to it via political pandering, but our system is not predicated on this value.

[Lemur]

Don't the two passages quoted in Ice's post seem to contradict each other somewhat?

This bit from the article helps square the circle:

Tax increases specifically intended to offset budget deficits largely avoid the negative effects of other kinds of increases, in part by improving the climate of investor confidence.

So not all tax cuts are created equal. Lowered taxes that are not compensated by lower spending will yield growth, but at the expense of deficit and lost investor confidence. Tax increases used to pay back deficits = happy investors.

I'm grossly oversimplifying, of course, but then there's some lovely in-depth studies referenced in the article if ya wanna get serious about crunching the figures.

[Ice]

I saw something on the Business News channel the other day (sorry no link).

It pretty much said tax cuts help the economy much more when the lower brackets are cut. Those people usually tend to spend most of the money they earn, this pumping money into the economy. They used some stats and historical examples.

It seemed logical to me because the super wealthy pretty much have most of what they want and just put the money into investments or savings.

Although it pains me to say this, perhaps it is good to tax the rich at a higher amount to get revenue for the common good.

I never thought I'd say that.

[HoreTore]

Most Americans do not consider this a valid purpose for taxation.

Sadly, we fall prone to it via political pandering, but our system is not predicated on this value.

Bah, capitalists.

[Xiahou]

Tax hikes that inspire confidence in investors? That kind of flies in the face of reason.

[Lemur]

Tax hikes that inspire confidence in investors? That kind of flies in the face of reason.

Are you being deliberately obtuse? Tax hikes made for the purpose of bringing down deficits sit better, overall, with investors than tax hikes made as a free lunch.

Is that such a difficult concept? Would you rather sink your money into a Freedonian market where the government is deeply in debt and issuing bonds faster than it can print them, or a Freedonia where they've got their spending and taxing under control?

[Xiahou]

Are you being deliberately obtuse? Tax hikes made for the purpose of bringing down deficits sit better, overall, with investors than tax hikes made as a free lunch.

Is that such a difficult concept? Would you rather sink your money into a Freedonian market where the government is deeply in debt and issuing bonds faster than it can print them, or a Freedonia where they've got their spending and taxing under control?

Two points: 1)I don't think most investors care if a government is running a deficit, so long as it's just a tiny portion of the GDP and their is low inflation. 2)How do you make a tax hike "specifically for the purpose of brining down deficits"? And further, how do you convince investors that's the only reason you're taking their money? Investors don't like tax hikes because it directly means less money for them.

Our government obviously has a spending problem, but it's going to be the long-term commitments of medicare/social security that will ultimately cause us trouble imo. It'd warm my small-government heart to see pork-barrel spending controlled, but that's not what poses the most serious risk to our well-being.

[Lemur]

Xiahou, I honestly urge you to read the article, and if that sticks in your craw, read the underlying research. Not all tax cuts are created equal. Not all tax hikes are created equal. These guys spent years teasing out the reality, and it's a shame to see it lost on anyone.

Our government obviously has a spending problem, but it's going to be the long-term commitments of medicare/social security that will ultimately cause us trouble imo. It'd warm my small-government heart to see pork-barrel spending controlled, but that's not what poses the most serious risk to our well-being.

Both forms of spending need to be brought under control. A million here, a million there, pretty soon you're talking about real money.

Here's a snapshot of danger (even though it does fall into the "if current trends continue" fallacy):

[Ironside]

Although it pains me to say this, perhaps it is good to tax the rich at a higher amount to get revenue for the common good.

I never thought I'd say that.

Welcome to the dark side...

Both forms of spending need to be brought under control. A million here, a million there, pretty soon you're talking about real money.

Here's a snapshot of danger (even though it does fall into the "if current trends continue" fallacy):

Who are those Goverment Beneficiaries? People employed by the state somehow or + other stuff like unemployed etc or?

[Lemur]

Who are those Goverment Beneficiaries? People employed by the state somehow or + other stuff like unemployed etc or?

I believe it is all-inclusive. If your primary financial support comes from the government, you're counted in the green column.

[Xiahou]

Your chart proves my point. It's not bridges to nowhere that will get us- it's entitlements.
Here's a cheery read for you:

As the House of Representatives takes up debate on the budget resolution, Members should extend their focus beyond the short term budget window of 2011 to the real problem of long-term spending. Any serious budget proposal must not only rein in spending today but also tackle the problem posed by growing entitlement programs. Focusing on the deficit is no solution because it treats spending cuts the same as tax hikes and overlooks the significance of the entitlements. Of the four budget plans released by the Administration and Congress, three trim spending only at the margins and would not resolve the long-term spending crisis. Only the House Republican Study Committee’s budget proposal, which holds down future spending growth, especially in entitlements, seriously addresses long-term spending issues.

Even if discretionary spending were maintained at current levels, we'd still be crushed under the weight of entitlements. (linky)

*The Federal Budget Chartbook is tons of fun, btw.

[Ironside]

I believe it is all-inclusive. If your primary financial support comes from the government, you're counted in the green column.

I'm still curious on how those numbers are gotten. Sweden got that number between 65% (employed in private sector/total employed) and 30% (employed in private sector/total population) depending on what you count.

I mean for example children are a part of the US population, but not a part of the the Private workers. Does that make them a part of the Goverment beneficiaries? Or are they excluded from the US population?

Yeah, yeah I'm picky on that one, but I cannot really compare it with anything without knowledge on what's in it.