Will Wilkinson quotes Martin Feldstein:
[F]inancing additional government spending by an acrosss the board rise in all marginal tax rates would make the cost per dollar of government spending equal to $1.76.These two facts — that the actual revenue is only 57 percent of the static gain and that the deadweight loss is 76 cents per dollar of revenue — should be central to any consideration of tax policy. And yet they are not.
It is possible that the state can make its citizens better off by taking $1.76 to spend $1.00, if those very expensive dollar bills are spent on highly valuable public goods folks can’t coordinate to provide privately. But I reckon this kind of bona fide public good is a pretty small part of the existing budget.
At the very least, it's the sort of thing you have to factor into arguments that we as a nation can save money via nationalised health care . . .
Your block-quote cut off a paragraph early.
First, those numbers apply only to "an across the board increase in marginal tax rates," not to tax increases in general. Second, and more importantly, Feldstein is not the only one to estimate the deadweight loss from tax increases, and others have found much smaller values. Harberger's famous finding was a deadweight loss of 2.5 cents per dollar of revenue, a far cry from Feldstein's 76 cents per dollar. Austin Goolsbee found a deadweight loss from the corporate income tax of 5-10 cents per dollar. Edgar Browning has famously shown that estimates of deadweight loss from tax increases have a severe sensitivity problem, so it would be dubious to take one point estimate as gospel, no matter how comforting it might be ideologically.
What about the deadweight losses stemming from our ridiculous current method of paying for health care? I had to quit a job I liked (and was very good at) for reasons purely to do with health insurance.
Will Wilkinson makes a lot of sense. Private property is the foundation of all liberty and the government ought to treat it with respect. The bias ought generally to be against tax and spending increases--both because of the deadweight losses and because of the lost liberty.
In some cases increases in government spending make sense--e. g. to fight Nazi Germany. And we have to pay for that spending somehow, either through taxes or borrowing. in general the government should be looking for ways to cut spending, not to increase it. Surely with government spending at around 1/3 of GDP, we aren't suffering from too little government.
So in my view the Republican reluctance to increase taxes is appropriate. If only they were as reluctant to increase spending.
One addendum to what I just wrote. One big reason that estimates of deadweight loss are so sensitive is that they depend on the elasticity of supply for labor. One thing I found when I checked into that particular issue a couple of years back is that no one is really sure what the elasticity of supply for labor is, and the range of estimated values is enormous.
Is this the same Martin Feldstein that, when talking about Clinton's balanced-budget plan in the 90's, said "there is no possibility that the Clinton plan will produce the deficit reduction that it projects"...just before it produced almost double what it initially projected?
The same Martin Feldstein who when discussing the Dubya tax cuts, said "the true cost of reducing the tax rates is likely to be substantially smaller than the costs projected in the official estimates"...just before the government plunged much further into deficit than anyone anticipated?
Feldstein's a serious guy, but with a track record like this on taxes, hes been shown to make errors consistently on the side of cutting taxes, and sometimes egregiously so. I think I'll pass on his estimations of deadweight loss and such.
Isocrates,
Come on, where do you get 1/3 of GDP. Government spending is hovering just below 20% of GDP.
Why doesn't anyone attempt to inject some empirical observations into this discussion? We aren't the only first world market economy; so why not look at what is working around the world and why (while controlling for other factors)?
Why doesn't anyone attempt to inject some empirical observations into this discussion?
This is a libertarian blog. If you want a health-care discussion based on reality, check in with Ezra Klein.
One thing I didn't make clear in context is that Feldstein is talking about just a 1% increase. The deadweight loss of larger increases would be larger.
Empiricism: Feldstein estimates the elasticity of taxable income by looking at the actual taxable income of a panel of randomly selected individuals before and after the 1986 tax reform act.
Private property is the foundation of all liberty
Ugh. I hate that argument, and it's made all the time. Why is it necessarily so that there is no liberty without private property? I have to be able to own things to be able to call myself free?
If only they were as reluctant to increase spending.
If only. Then they wouldn't be lying when they called themselves "conservatives."
liberalrob,
If you don't own things, then those things can be taken away from you as a matter of principle. For example, the means to sustain yourself can be taken away if it is not understood to be yours, and if it is taken away, on what basis do you object? It wasn't yours to begin with.
There is more to freedom than property, but freedom is pretty meaningless without some degree of rights to private property.
I dunno, but the fact that you didn’t provide a link to Feldstein actually making the quote suggests that he probably didn’t actually say it or if he said it, it wasn’t in the context in which you’re claiming he said it.
so if you aggregate all gov spending, efficient and inefficient, you get results that show somewhat inefficient results. This says you can never get efficient spending.
Typical hack argument.
Let's just do what the Republicans have been so good at and borrow from the Chinese. Indeed, think of the efficiency of simply allowing the PLA to take over Iraq.
I dunno, but the fact that you didn’t provide a link to Feldstein actually making the quote suggests that he probably didn’t actually say it or if he said it, it wasn’t in the context in which you’re claiming he said it.
A check of the footnotes for Chait's book reveals that Feldstein made the exact remark you refer to in an op-ed piece in the Wall Street Journal which appeared in the February 23, 1993 edition.
If you don't own things, then those things can be taken away from you as a matter of principle. For example, the means to sustain yourself can be taken away if it is not understood to be yours, and if it is taken away, on what basis do you object? It wasn't yours to begin with.
Yancy
I think the point is rather that just because you don't own property doesn't mean you should be denied basic rights. Should non-property owners be denied freedom of speech or religion or some other right we all take for granted? I'm sure you would disagree with that, which I think was what liberalrob was getting at.
There is more to freedom than property, but freedom is pretty meaningless without some degree of rights to private property.
Heh. I should have read your entire post before firing off a response in haste -- I see you already agreed with my basic point. That said, I guess my position is that your "more to freedom than property" assertion refers to the freedoms that are more basic than doing what you want with your property..i.e. speech, religion, assembly, etc. That's why I, and I suspect liberalrob, roll our eyes whenever we come across the "private property is the foundation of liberty" canard.
Thorley Winston - as Jestak correctly notes, the quote was pulled ad verbatim from the new Chait book, and was originally in a WSJ article titled "Board of Contributors: Clinton's Plan to Widen Deficits", published February 23rd, 1993. The title of the article alone should tell you the quote is not taken out of context.
And for completeness' sake, the other Feldstein quote concerning the Dubya cuts comes from testimony before the House Ways and Means Committee on February 13, 2001. And to preempt any dismissive complaints about lack of context, here's the context:
My second point is that the true cost of reducing the tax
rates is substantially smaller than the costs projected in the
official estimate. Studies of past tax rate reductions show
that taxpayers respond to lower marginal tax rates in various
ways that increase their taxable income. They work more and
harder and take more of their compensation in taxable form and
less in fringe benefits.
At the National Bureau of Economic Research, we have used a
large publicly available sample of anonymous tax returns
provided by the Treasury to estimate how the actual revenue
loss would compare to the official estimates that ignore most
of these behavioral responses. Our analysis shows that when the
proposed Bush tax cuts are fully phased in, the net revenue
loss would be only about 65 percent, only about two-thirds, of
the officially estimated costs.
Now, for a year like 2010, the Joint Committee on Taxation
staff estimated a $233 billion cost of the tax plan. Our
estimate implies that would be only about $150 billion. If you
apply that same ratio to each year, the $1.6 trillion would be
cut to only 1 trillion. Now, I think that because of the timing
of the tax cut and lags in taxpayer responses, a safer and
conservative estimate of the total 10-year revenue cost would
be about $1.2 trillion, so substantially less than the
officially estimated $1.6 trillion, which doesn't take any of
these economic behavior responses into account.
Note that current estimates (http://www.ctj.org/html/gwb0602.htm) place the 2010 estimated cost of the first Bush tax cut at $234 billion, meaning that so far it appears that the official estimates were off by a measly one billion dollars and Feldstein was um, totally wrong. And it should also be noted that this is just the first of six Dubya tax cuts we're talking about, and Feldstein has continued to be a tax cut cheerleader throughout, despite obvious signs that neither party in Congress has any intention of cutting spending to match the losses in tax revenue. It's a miserable track record for such a highly-regarded economist, and should give anyone pause when he starts spouting numbers that, again, are way to one side of the estimate range.
Well crud...the link I included in the last post is not only non-functional, but is also not the link I should have used: http://www.cbo.gov/ftpdocs/83xx/doc8337/07-20-EGTRRA-JGTRRA_and_Deficits.pdf
To summarize: as of this July, the 2001 Dubya tax cut (EGTRRA) is estimated by the CBO to cost $267 billion in revenue in 2010. So by that estimate Feldstein was off by $117 billion dollars.
In which case you were wrong to claim:
Because no such thing happened in 1993. Nor, shortly thereafter.
Revenues to the federal govt. were 17.5% of GDP in 93, the same as for 92. And, if you remember, the Clinton tax rate raises were retroactive to Jan 1, 1993.
The actual deficit reduction came in the late 90s, and was due to a combination of increased revenues from dot.com boomers and spending caps negotiated by Phil Gramm in the budget deal of 1990. Clinton was still apologizing for his deficits during the election campaign of 1996.
Federal deficit as a % of GDP
fiscal year.............change
1992 ........-4.7%
1993.........-3.9.......0.8
1994.........-2.9.......1.0
1995.........-2.2.......0.7
1996.........-1.4.......0.8
1997.........-0.3.......1.1
1998.........+0.8.......0.5
1999.........+1.4.......0.6
2000.........+2.4.......1.0
Maybe, there was a modestly larger reduction in the deficit after 1996. But in the four years 1993-96 the deficit fell some 3.3% of gdp while in the four years from 1997 to 2000 it fell some 3.2%
of GDP.
Can't you do any better then this Patrick?
source: OMB
Same numbers from the peak under Bush
2003...-3.5%
2004...-3.6
2005...-2.6
2006...-1.9
2007...-1.5
So from 2004 to 2007 Bush reduced the deficit some
2.1% of GDP, or about two-thirds of the deficit reduction under Clinton.
Boy, this data really supports the arguments you are making Megan.
We need something we can use when blogging that
shows sarcasm like we can with tone of voice in
speaking.
Two words, Spencer: Business Cycle.
1993 (-3.9%)and 2004 (-3.6%) are both the third year of an expansion. Your figures show Clinton's deficit higher than Bush's, as % of GDP.
1994 (-2.9%) v. 2005 (-2.6%)
1995 (-2.2%) v. 2006 (-1.9%)
1996 (-1.4% v. 2007 (-1.5%)
Three out of four years favor Bush's lower tax rates over Clinton's higher.
Oh, come on ... you're supposed to be an economist. Why the heck should I read your blog if you can't even bother to point out the fallacy of this ridiculous post? Don't you remember econ 101? The net effect of a tax cut vs. government spending regarding propensity to spend?
Wait, wait ... it gets worse. Did you read the original paper? Feldstein argues that higher taxes make us work less, apparently because we're so discouraged about making less money for the same amount of work, we decide it's just not worth the effort. But later he says we work more, to make up the difference in the loss of income from higher taxes. Then ... this is great ... he says ... I swear, I can't make this stuff up ... he says, "If I make a greater effort as I work – whether physical or mental or emotional – I forego some leisure – not in minutes of leisure but in units of effort."
Get that? We work harder when we work to make up the lost income, and that makes the time off work less fun. There's only so much "leisure" in a day, you see, and we use up so much extra - because of the tax - we don't have as much to enjoy after work.
Like, we also, you know, breathe more air when we work harder, see, and that means we can't breathe as well after work ... AND WE DIE. Oh, no! Higher taxes will kill us!! Where's the economy now, you crazy liberals!
He then goes on to explain that the loss of leisure should also be figured into the "dead weight" loss of the tax increase ... and then reduces the amount of taxable income to reflect this! Ha, ha, ha ... what a loon!
Seriously, is this what passes for scholarship in Economics? You guys wouldn't last two minutes in an engineering program. If you had to pass a course based on regurgitating this silliness, you have my deepest, deepest sympathies.
matt, if the total spending is inefficient, then the conclusion MUST be to spend less. If you had a Maxwell's Demon to choose the efficient from the inefficient, you could choose only the efficient. But you don't, so you have to take the inefficient with the efficient.
James, citing the CBO's estimate as proof that Feldstein was wrong doesn't make any sense. The CBO estimate doesn't measure the very thing that Feldstein argues is happening, so it can't either prove or disprove his hypothesis.
To quote someone else:
"So far as I can tell, Dembski's argument is just an example of something demonstrated time and again in various disciplines at various accredited universities: If you phrase your argument in mathematical symbolism and technical terms, some people, including other academics, can be counted on to lose track of what the exact connection is between the symbolism and the reality it's supposed to represent. Then they may conclude that your mathematical model proves something ... when in fact that's what your model assumes."
-- Robert Wright
You need data, not projections to disprove Feldstein's claims.