Ample supply

I join Ross in believing that the Republicans should stop spouting nonsense rhetoric about their plans to raise tax revenue by cutting tax rates. However, it's not clear to me that this is what Fred Thompson is doing here:

Former senator Fred Thompson (R-Tenn.) today proposed a series of tax cuts as a way to stimulate economic growth.

Speaking on Fox News Sunday, the presidential candidate recommended extending President Bush's tax cuts, due to expire in 2010, eliminating the estate tax, repealing the alternative minimum tax and lowering the corporate tax rate to no more than 27 percent from the current 35 percent.

Thompson also said that he would adopt the approach of the conservative Republican Study Committee in the House of Representatives that would offer, as an alternative to the current income tax, a two-rate income tax system stripped of deductions and credits.

Estimates devised earlier this year by the nonpartisan staff of the Congressional Joint Committee on Taxation indicate that major parts of Thompson's plan would lose at least $2.5 trillion over ten years, nearly as much as the entire federal government is expected to spend this fiscal year.

In the interview, Thompson said such official estimates are often wrong and that his tax cuts would stimulate "growth in the economy" and bring in more revenue than expected.

There are three kinds of tax cuts rolled together: personal income tax cuts, corporate income tax cuts, and tax simplification (aka base-broadening). The latter two could plausibly be revenue raising. It's hard to tell which estimate the WaPo is referring to, "major parts" being endearingly vague, but I have my money on extending the Bush tax cuts. Tax simplification and cutting the corporate income tax would spur growth, and tax simplification might, by itself, bring in a significant amount of money, so I'm not sure it's correct to characterize Fred Thompson as dishing out the supply side Kool-Aid.

Comments

I don't see the basis for claiming he's being a supply-sider here at all. He isn't claiming (or at least isn't being quoted as claiming) that his tax cuts will be revenue-positive; he's just saying that revenues will be higher than the CJCT predicts. $2.5 trillion over 10 years leaves a lot of room for the cuts to raise more revenue than predicted without actually being revenue-positive.

Posted by Dan | November 26, 2007 7:07 PM

Budget assessment does need to use dynamic scoring, as it's currently heavily biased towards tax increases, even though we know that they don't bring in the revenue expected. Just using interest rate modeling would be very useful, but no one does, they just use the straight line numbers like people don't respond to incentives.

Further, net net over the medium to long term supply-side arguments are right. It's just that they aren't over the short term except at ludicrous speed levels of taxes. 5 to 10 years starts to get into the range where we should expect positive returns to tax cuts.

Posted by Bulging Bracket | November 26, 2007 8:08 PM

today, for some strange reason we drove an hour away from my house. and we were in this rural area. i saw a CATT, so i got out of the car. then another came out, then another. a kitten, her mom. then 3 cats RAN at us from another street like full speed. in all, there were 8 CATTS just looking at us. then a few roosters showed up, and ducks. it was the best day of my life.

Posted by Kent | November 26, 2007 8:20 PM

I certainly think we should give a serious candidate like Fred Thompson the benefit of the doubt on the fiscal reliability of his tax proposals. The Republicans in general have proven to be extremely responsible in their tax policies over the past 7 years, and Thompson is one of the most experienced, intelligent and serious candidates in the lot, with an extensive background in economics and a stable of well-respected, top-tier economic advisers.

Well, said the sheep, the fact that the farmer is leading us towards the building on the far side of the yard does not necessarily mean that we are to be slaughtered. Perhaps he is going to feed us some clover.

Posted by brooksfoe | November 26, 2007 8:30 PM

Brooksfoe, nice try but I think your long form snark is wasted here.

Oh, and I love the 5-10 year time frame above. Hmm, convenient. I have learned from Greenspan 'tis better to be Wimpy and get the hamburger first. I think we should repeal tax levels to that of the Clinton era and give it 20 years. If our tax revenues are higher then than now it will be a success.

For funsies, I am going to combine two of my favorite topics, corporate taxes and Social Security. Here are corporate taxes and the Social Security surplus contributed to the general fund for the last 7 years, in billions:

Year Corp SS Surplus
2000 207 151
2001 151 163
2002 148 159
2003 131 155
2004 189 151
2005 278 173
2006 353 185

The SS surplus actually exceeded corporate taxes for 3 years. So, the working stiffs of America subsidize both our corporations and our wealthy tax payers.

Assuming these are proxies for profits and wages it apears that wages are up about 20% since 2000, probably just above inflation. Profits appear to be up about 75%. Whither trickle down? I guess it takes 5 to 10 years.

FWIW, of course Fred Thompson has drunk the supply side kool aid.

On the other hand since corporate taxes are such a pitiful percentage of our tax base, why not kill it? You could double it and you would still be almost 100b short of closing the yearly deficit for the general fund. Killing corporate income taxes and raising the personal rates might work for me. At the very least it would kill the distortions like leasing the sewers of Bochum, Germany.

As for the two tiered tax system: whose ox get gored? Even if the system was revenue neutral in aggregate, it will be a rarely be neutral for any given individual. If 'base-broadening' increases tax levels, who exactly is being broadened? Who isn't paying their fair share now that will under this system? Will Paris/Bill/Warren pay more or will the middle class?

Posted by Nat | November 26, 2007 9:19 PM

"Well, said the sheep, the fact that the farmer is leading us towards the building on the far side of the yard does not necessarily mean that we are to be slaughtered. Perhaps he is going to feed us some clover."

Brooksfoe, enough with your mixed metaphors and Marxist dogma.

Posted by Pete | November 26, 2007 9:51 PM

I've never before seen someone demonstrate in a single sentence that he knows neither what a 'mixed metaphor' is, nor what a Marxist is.

Posted by brooksfoe | November 26, 2007 9:58 PM

Yes because corporations pay taxes. Right... Further, assuming corporations actually pay taxes, where do half of social security receipts come from? Or is there some magical property whereby the employer half of SS comes out of worker wages but corporate taxes only come out of profits rather than worker benefits?

Leftist analysis of responses to taxation simply demonstrates their complete lack of any self awareness.

Posted by Bulging Bracket | November 26, 2007 11:09 PM

brooksfoe wrote: Well, said the sheep, the fact that the farmer is leading us towards the building on the far side of the yard does not necessarily mean that we are to be slaughtered. Perhaps he is going to feed us some clover.

I don't get it. Are you suggesting Fred Thompson is going to kill a talking sheep?

Posted by anony-mouse | November 26, 2007 11:55 PM

The SS surplus actually exceeded corporate taxes for 3 years. So, the working stiffs of America subsidize both our corporations and our wealthy tax payers.

I suppose that's true if by "subsidize" you mean that they pay a smaller share of the taxes than you, personally, think is appropriate. But by the standard definition, it is the wealthy taxpayers--who pay tens, hundreds, and even thousands of times more in taxes than "working stiffs"--are subsidizing the rest of us.

Posted by Brandon Berg | November 27, 2007 12:15 AM

Megan said:

I join Ross in believing that the Republicans should stop spouting nonsense rhetoric about their plans to raise tax revenue by cutting tax rates. However, it's not clear to me that this is what Fred Thompson is doing here:

TFA said:

In the interview, Thompson said such official estimates are often wrong and that his tax cuts would stimulate "growth in the economy" and bring in more revenue than expected.

So "bring in more revenue than expected" != "raise tax revenue"?

Also, I'm still waiting for someone to explain to me how eliminating the estate tax will do anything beneficial for the country, and in fact will not exacerbate the trend towards hereditary aristocracy in this country.

Posted by liberalrob | November 27, 2007 12:41 AM

Squeak:

I don't get it. Are you suggesting Fred Thompson is going to kill a talking sheep?

Boy, would THAT be a bonehead move.

I mean, come on, it's a TALKING SHEEP.

Posted by liberalrob | November 27, 2007 12:48 AM

Brooksfoe,

We're trying to discuss tax policy here. Please stop digressing into agricultural commentaries. It's a non sequitur to this thread.

Anyway, if sheeps had their first choice they would eat weed and not clover. I'm not sure who told you otherwise.

Posted by Pete | November 27, 2007 2:02 AM

Republican presidential candidates have spent the past 27 years promising to cut taxes, and forecasting that this will raise revenues. Their projections have become more dishonest with each campaign, to the point that the revenue forecasts employed by GWB in 2000 were overly optimistic by $3 trillion. Now, a candidate universally regarded as one of the dumber and lazier in the Republican field, even by Republicans, comes along and promises to cut taxes, and says this will stimulate the economy and thus raise more revenue. If your first instinct is to try to find the most favorable and responsible interpretation of his words, then "like sheep to the slaughter" would be the kindest simile I could find for you.

Posted by brooksfoe | November 27, 2007 2:48 AM

As a small business owner that has made payroll since '91, I am aware of how FICA works. When I hire an employee it is part of their cost. One can make the case that the full tax comes out of the employees hide because:

"Self-employed individuals pay the full 15.3% tax, but one half of the tax can be deducted as a business expense. Because the employer's portion of the payroll tax translates into lower wages for workers, it is most accurate to talk about the combined level of the payroll tax."

http://www.socialsecurityreform.org/history/taxes.cfm

BTW, I disagree with most of that site. It is pro-privatization.

The point is FICA and SECA are dedicated to Social Security and run a surplus that is loaned to the general fund. The general fund was short 434bn last year. It borrowed 185bn from Social Security and 248bn from the Chinese, Saudis, etc. Interestingly, the US Postal Service also ran a surplus of a little over a billion. Who knew?

In recent years the FICA & SECA surplus has exceeded the contribution of corporate taxes. That's fact. FICA and SECA are regressive when used to subsidize the general fund, especially when every effort is being made to renege on repayment. Our corporate taxes are relatively modest in comparison.

And Fred Thompson is either innumerate or counting on a free pass from a docile press. Even Mankiw (from the right) thinks tax cuts for the wealthy have about a 50% return, broad based cuts are about a 25% return.

Posted by Nat | November 27, 2007 3:53 AM

Nat:
In recent years the FICA & SECA surplus has exceeded the contribution of corporate taxes. That's fact.

Sure, I guess. But I haven't the slightest idea why you think it's a relevant or even meaningful fact. To me, this makes about as much sense as comparing the change you got from buying lunch to the amount under the cushions of your couch.

FICA and SECA are regressive when used to subsidize the general fund, especially when every effort is being made to renege on repayment.

Either they're regressive or not. Whether they "subsidize the general fund" has nothing to do with it. And the government has no more obligation to "repay" FICA taxes than it has to "repay" income taxes. Furthermore, while FICA taxes, viewed in isolation, are regressive, there's really no good reason to view them in isolation. Federal taxes taken as a whole are still quite progressive.

Posted by Brandon Berg | November 27, 2007 7:49 AM

"Our corporate taxes are relatively modest in comparison."

Our corporate taxes are the highest in the OECD, per this group http://www.taxfoundation.org/blog/show/1188.html

note that Ireland, with the lowest taxes on corporations, has earned the appellation of 'Celtic Tiger' vis a vis the EU..
http://www.worldwidewords.org/turnsofphrase/tp-cel1.htm

"The causes of Ireland's growth are the subject of some debate, but credit has been primarily given to free market capitalism: low corporate taxation; decades of investment in domestic higher education; a low-cost labour market; a policy of restraint in government spending; and EU membership - which provided transfer payments and export access to the Single Market."
http://en.wikipedia.org/wiki/Celtic_Tiger

America's true trade deficit has little to do with Japanese Cars, German Machine tools, or Chinese Gimcracks, but one of ideas: we've been exporting Capitalism and importing Socialism.

Posted by Mark E Hoffer | November 27, 2007 8:24 AM

Well, since we've decided Thompson isn't a radical supply sider, and since he's proposing tax cuts while we're already in deficit, what spending did he state he was cutting?

Posted by Njorl | November 27, 2007 8:59 AM

Bulging Bracket makes a good, and oft neglected, point early on here - many of the 'supply side' effects of tax rates take a generation or so to kick in.
A young Swedish doctor whose marginal tax rate jumps up to 87% isn't very likely to stop practicing or take his family and emigrate (he may very well work more); but you can bet that any young children are going to be much less inclined to bust their asses to become physicians in Sweden.

This is arguably one factor in why the massive increase in top tax rates that swept the world in the late 60's and the 70's were largely undone in the 80's and 90's.
http://www.econlib.org/LIBRARY/Enc/MarginalTaxRates.html#table%201

And liberalrob said:
Also, I'm still waiting for someone to explain to me how eliminating the estate tax will do anything beneficial for the country, and in fact will not exacerbate the trend towards hereditary aristocracy in this country.

Some benefits:
-Well there is the obvious benefit which goes to the people who would receive inheritances, and are in fact part of society.

-Much less deadweight loss from the activities of people like Noam Chomsky who are seeking to avoid the taxes. http://www.hoover.org/publications/digest/2912626.html

-Presumably less loss from the wealth-destroying activities of the state which such taxes fund.

-To the degree that people care about passing on wealth to their heirs or charitable organizations upon their death, estate taxes reduces their incentive to be productive and provide goods and services which society desires.

-Similarly it distorts investment decisions away from those that best encourage economic growth, and hence productivity, real wage growth, jobs, etc...

-Seeing as about 80% of inheritances are dissipated within two generations (http://www.ncpa.org/studies/s235/s235.html),
and given the high degree of social mobility characteristic of market economies, this seems like a non-issue to me.

All in all though, I think support for highly progressive taxation might be good from a classical liberal/libertarian standpoint. Sure it is harmful by most reasonable measures of social welfare, but it is so inefficient that it can act as a strong check on the ability of the state to raise revenue. It is no coincidence that FDR's shmorgasborg of totalitarian-inspired programs popped up along with the highly regressive payroll taxes.

Posted by bil. | November 27, 2007 9:25 AM

liberal rob:
So "bring in more revenue than expected" != "raise tax revenue"?

Read the TFA quote again, I'll help by making it more clear:
...Thompson said such official estimates are often wrong and that his tax cuts would... bring in more revenue than expected.

Obviously he is talking about brining in more revenue than the official estimates expect. Since the official estimates are that his cuts will cost $2.5 trillion, saying that they will bring in more revenue than that doesn't necessarily mean that they will actually raise the total tax revenue.

Posted by metis314 | November 27, 2007 9:49 AM

it's not clear to me that this is what Fred Thompson is doing here

You're being far too kind, Megan. Freddie is both making zero sense AND busting out the supply-side flavor aid.

Posted by Dhalgren | November 27, 2007 10:17 AM

metis:

Obviously he is talking about brining in more revenue than the official estimates expect...saying that they will bring in more revenue than that doesn't necessarily mean that they will actually raise the total tax revenue.

That seems to be reaching kind of far to justify Megan's statement; and even if true I'm supposed to support Fred Thompson for advocating a net decrease in revenues (even if they bring in more than expected) with no apparent corresponding spending cuts in a time of record deficits? And if Fred Thompson has indeed proposed massive spending cuts to bring the budget into balance, I'm 99% sure they would be cuts I wouldn't be in favor of. Which since I am a tax-and-spend liberal should not be surprising.

Posted by liberalrob | November 27, 2007 10:52 AM

liberalrob and brooksfoe,

As I read it:
CJCT says "your plan will cut net revenues by 2.5 trillion"
Fred says "no, it will do better than you think. Let's say we bring in more revenue than you expect, so that on net we're only down 0.5 trillion. I still think that's good, 'cause it grows the economy, not the government."

That makes him one of the regular tax-cutting Republicans that you dislike, not the crazy supply siders that we all dislike. And I can't vouch for the truth of his conclusion, but the point is that he's not supply-siding, just plain old tax-cuttin'.

Posted by Geoff | November 27, 2007 11:28 AM

bil:

To the degree that people care about passing on wealth to their heirs or charitable organizations upon their death, estate taxes reduces their incentive to be productive and provide goods and services which society desires.

If I hear one more time that higher taxes reduce individuals' desire to work...

Never, not once, nunca, have I turned down a promotion because it would kick me up into a higher tax bracket. Am I insane for not considering the tax implications of my raises? Maybe Alex Rodriguez should quit hitting home runs, because otherwise he might break the asterisks' record and get a lot of extra jack he'll have to pay taxes on. Good grief!

Same thing with "deadweight loss" this and "deadweight loss" that. Jibber jabber! I realize that this is in part an econo-geek blog and there's going to be a certain amount but every time I see that term my eyes glaze over. Is there no other way to justify your positions than appealing to esoteric economic concepts? Is it really that arcane of a territory, like quantum mechanics?

Posted by liberalrob | November 27, 2007 12:08 PM

I feel the need to ask an earnest, mostly non-rhetorical question:

By "supply-side Kool-Aid," what are you actually denigrating? The Laffer curve and/or the idea that there's an optimal taxation rate that maximizes revenue? Because that seems kinda intuitively obvious: 0% taxation yields $0 revenue and 100% taxation yields close to $0 revenue (at least in a market economy), so the optimal revenue lies somewhere in between those two extremes.

Are you arguing that the optimum rate lies close enough to 100% that any tax reduction always results in less revenue? I can buy that. That would obviously be an argument in opposition to the "supply-side wackos," whom I suspect think that the curve looks more like a boa constrictor digesting an elephant.

Also, I assume that we all agree that the economy has grown explosively since the mid-80's. Does a methodology exist for separating out the stimulative effects of a tax cut on the economy from other factors affecting growth? Seems to me you can't really answer the question of whether a tax cut produces more revenue without such a methodology.

Again, these aren't rhetorical questions. I'm too economically illiterate to know the answers, but I'm puzzled over how we arrived at a consensus that supply-side arguments don't hold water. I certainly understand how, if they're false, supply-side ideas provide an intellectually dishonest way of shilling for tax cuts. I just don't know how everybody's concluded that they're false.

Posted by TheRadicalModerate | November 27, 2007 12:25 PM

liberalrob: I really hope you're kidding about claiming that no one ever turns down work because of insufficient after-tax return.

As for deadweight loss -- I absolutely agree that people who use this term should be able to explain, in lay terminology, what it means, or they're just spouting buzzwords. I also believe it's misused from time to time. However, you've given no reason to believe anyone here doesn't understand what they're claiming with a reference to a DWL, and given the resources that exist today, like Wikipedia, you should spend maybe ten seconds of research to get acquainted before you spout off about terms you're afraid of.

Posted by Person | November 27, 2007 12:33 PM

"Maybe Alex Rodriguez should quit hitting home runs, because otherwise he might break the asterisks' record and get a lot of extra jack he'll have to pay taxes on. Good grief!"

Well, that would explain his performance in the playoffs every year.

Posted by Njorl | November 27, 2007 12:46 PM

liberalrob:Never, not once, nunca, have I turned down a promotion because it would kick me up into a higher tax bracket. Am I insane for not considering the tax implications of my raises?

If the marginal tax rate at the top was 90% like it was before the Reagan tax cuts, you might think long and hard about the trade-off of more work vs. more time off. It's a real effect.

RadicalModerate:The Laffer curve and/or the idea that there's an optimal taxation rate that maximizes revenue? Because that seems kinda intuitively obvious...

MM has said she thinks the current tax rates are on the left side of the peak in a Laffer curve. (i.e. a modest raise in taxes would bring in more revenue) and that in the past we were on the right side (i.e. a cut in taxes does bring in more revenue). The "kool-aid" she derides is that we are on the right side of the curve.

Does a methodology exist for separating out the stimulative effects of a tax cut on the economy from other factors affecting growth?

I'm not an economist, but I'm sure they could measure this if external events and tax policy would stay still long enough. The first of the current administration's tax cuts were made before the 9/11 attacks so it's hard to see it in isolation.

Posted by ech | November 27, 2007 1:00 PM

Same thing with "deadweight loss" this and "deadweight loss" that. Jibber jabber!

Except that trying to debate the economic result of more/less taxation with someone who refuses to learn the concept of deadweight loss is like trying to debate energy policy with someone who refuses to learn physics concepts like friction, gravity, and energy efficiency.

Deadweight loss isn't complicated or esoteric, it can be learned by staring at a single graph for 60 seconds.

Given some particular policy proposal, there are counter-arguments to be made, like "the deadweight loss isn't much of a concern here, it's outweighed by the public good". But "deadweight loss is jibba jabba" ranks right up there with "evolution is just a theory" in the realm of "let's ignore established science when making our policies"

Posted by Geoff | November 27, 2007 1:24 PM

Never, not once, nunca, have I turned down a promotion because it would kick me up into a higher tax bracket. Am I insane for not considering the tax implications of my raises? Maybe Alex Rodriguez should quit hitting home runs, because otherwise he might break the asterisks' record and get a lot of extra jack he'll have to pay taxes on. Good grief!

No, liberalrob, I don't suppose you -- or anyone else -- have ever turned down more money for doing the same amount of work. That's the case for most of us wage slaves. It's not the case for many professionals and business owners. Frequently, they can make more money by just working longer. Why do they ever quit working -- other than from sheer exhaustion? At some point, the next dollar of income is not worth the extra time and effort it would take to earn it, so quit working and go home.

The question before the class is do tax rates influence how long Mr. and Ms. professional or business owner will stay at work? The answer is yes, tax rates do affect how much people are willing to work. If someone is really poor and needs money for food and shelter, high tax rates might encourage him or her to work MORE (because it will take more time to earn the money necessary to meet basic needs). If someone is fairly well off and more income will go mainly to investments, a higher tax rate will cause leisure to seem a better bargain and he or she will tend to work less.

While most good liberals don't care too much about well off business owners, they too often fail to see that the decisions of business owners affect their employees, too. That is, if the business owner decides that the next project is just too much trouble and goes home, the business owner's employees, who might really want the extra work, will go home, too.

Posted by David Walser | November 27, 2007 1:27 PM

"If the marginal tax rate at the top was 90% like it was before the Reagan tax cuts, you might think long and hard about the trade-off of more work vs. more time off. It's a real effect."

That was Kennedy, not Reagan. Reagan cut it from 70 to 50.

As it is, the highest marginal taxes on income, combining federal, state and local, are under 50%. There is probably only a very small amount of labor that is dissuaded by taxes when you consider that each hour of leisure time you eliminate by working is more valuable than the previuous one. Only those leisure hours valued between the before and after tax levels are eliminated by taxation. In addition, labor tends to be closer to a zero-sum-game than entrepreneurship. Generally, labor is going to be done by someone. If the most efficient, and cost effective worker is dissuaded by taxation, the next most efficient laborer will do the job and take the pay. Costs will rise slightly, but the overall effect is small.

As I said, the arguement for income taxes deterring labor is weak compared to the argument for capital gains taxes deterring investment. Taxes can tip the scale of risk vs reward, making otherwise highly productive ventures unprofitable for any investor.

Posted by Njorl | November 27, 2007 1:40 PM

"...compared to the argument for capital gains taxes deterring investment. Taxes can tip the scale of risk vs reward, making otherwise highly productive ventures unprofitable for any investor." yes, no doubt. Though, high taxes on Labor increases its cost to the same, otherwise highly productive, ventures, no?

As an aside, what, exactly, is the goal? Maximizing Government revenue, or Maximizing the growth of the Economy/Raising standards of living?

Posted by MEH | November 27, 2007 2:07 PM

btw, Walser: "While most good liberals don't care too much about well off business owners, they too often fail to see that the decisions of business owners affect their employees, too. That is, if the business owner decides that the next project is just too much trouble and goes home, the business owner's employees, who might really want the extra work, will go home, too."

makes a fine, and real, point.

Posted by MEH | November 27, 2007 2:09 PM

" Though, high taxes on Labor increases its cost to the same, otherwise highly productive, ventures, no?"
Most of the income of the labor is not going to be at the highest marginal rates.

"As an aside, what, exactly, is the goal? Maximizing Government revenue, or Maximizing the growth of the Economy/Raising standards of living?"

Everybody gets to have their own goals. BTW, maximizing growth and raising the standard of living are quite different. A billionaire and 999 people living at the poverty line have a lower standard of living than 1000 millionaires, but probably represent a bigger economy.

Posted by Njorl | November 27, 2007 2:41 PM

Megan's favorite co-blogger, Clive Crook, thinks the idea that lowering taxes stimulates the economy enough to recoup any significant amount of revenue in either the short or the long term is hooey.

http://clivecrook.theatlantic.com/archives/2007/11/tax_cuts_myths_and_realities.php

He references, with his full approval, this report:

http://www.cbpp.org/9-27-06tax.htm

...which quotes Greg Mankiw and others to the effect that tax cuts decrease revenue, in both the short and long term. More important, they cite the Bush Treasury Dept's conclusion that income tax cuts can modestly stimulate the economy, but only as long as they are paid for with spending cuts. Treasury found that income tax cuts that are not paid for with spending cuts, e.g. the Bush tax cuts, actually cause the economy to grow less than it otherwise would have.

Posted by brooksfoe | November 27, 2007 2:56 PM

Why does McArdle continue to post on this? Each time she does, she gets hit with one of her own 2X4's.

Posted by SavageView | November 27, 2007 3:45 PM

As an aside, what, exactly, is the goal? Maximizing Government revenue, or Maximizing the growth of the Economy/Raising standards of living?

This isn't an aside; it's the crux of the issue.

Lots of arguments spin around about where we are on the Laffer curve, or if cutting this tax deters this or that. It's easy to get distracted by all the hoopla. But underneath most of this is the tacit (leftist) belief that Maximizing Government revenue = Maximizing the growth of the Economy/Raising standards of living.

Some of us happen to believe instead that tax cuts + spending cuts = Maximizing the growth of the Economy/Raising standards of living.

Posted by TakeFlight | November 27, 2007 3:46 PM

Is a tax cut not paid for by a spending cuts almost the same thing as a spending increase not paid for by a tax increase? Does the CBPP report mean that Keynesian stimuli ultimately result in lower growth than would occur without such stimuli? Sounds almost like something an Austrian would say.

Posted by henry evans | November 27, 2007 4:08 PM

ech--

Thanks for the info. So let me summarize:

1) Seems like the consensus is that there actually is an optimal tax rate that maximizes revenue, even if we can't quantify what it is. It even sounds like most people agree that the Laffer curve is a useful way of framing a subset of tax policy arguments.

2) If you're to the right of optimal, then there appears to be no reason at all not to reduce taxes at least to the optimal point.

3) If you're to the left of optimal, you need to have a discussion about whether maximizing revenue is the predominant goal. (Other goals might be minimizing government growth or stimulating the economy at the expense of government revenue.)

4) If you're to the left of optimal and you know it, then making supply-side arguments is disingenuous at best.

Have I got this right? Anything else on which we can all agree?

Posted by TheRadicalModerate | November 27, 2007 5:31 PM

David Walser:

The answer is yes, tax rates do affect how much people are willing to work.

Then I blame Ronald Reagan for the ridiculously skyrocketing salaries of sports professionals and the tarnishing of sports by performance-enhancing drugs. If Reagan hadn't reduced the top marginal tax rate to 50%, there would have been less incentive to fight for sky-high salaries and for ballplayers to juice up so they could exceed their natural talent levels. And we also may have been spared the excesses of Scott Boras.

Yet another thing to despise Reagan for: the existence of Scott Boras.

Posted by liberalrob | November 27, 2007 5:51 PM

Also David Walser:

No, liberalrob, I don't suppose you -- or anyone else -- have ever turned down more money for doing the same amount of work.

Note that I said "promotion," not simply "raise," though I think even raises generally imply working harder than the average expectation (how many jobs give "cost of living" raises vs. expecting improvement in productivity and quality, i.e. harder work, if you want a raise? my experience has always been the latter).

if the business owner decides that the next project is just too much trouble and goes home, the business owner's employees, who might really want the extra work, will go home, too.

My business owner lives 1000 miles away and goes outside to play with his cows whenever he wants; meanwhile his wage slaves work 9-5 plus whatever hours are necessary to meet the deadlines he sets. *We* don't get to go home...

I just don't believe people consult their tax professional before deciding whether to work that extra hour.

Posted by liberalrob | November 27, 2007 6:03 PM

RadicalModerate, I think what you have said is a fair summary. One slight modification and one addition, though:

If you're to the right of optimal, then there appears to be no reason at all not to reduce taxes at least to the optimal point.

There are those who think that it is a public good to have less variation in net income, so that high taxes serve the purpose of leveling the playing field. It's an egalitarian argument, a "fairness" argument. (Personally, I'm OK with a mildly progressive income tax like we have now. I'm not OK with current government expenditures.)

One addition: the exact location of the peak of the Laffer curve probably moves as the economy changes. An economy with different distribution of incomes, different mix of tax systems (sales vs property vs income vs capital gains vs individual vs corporate), different mobility would have a different point for maximum government revenue. There are even those that think it could have two peaks at different rates, one higher than the other. Like much in economics, it breaks down when you get to too fine a level of detail.

Posted by ech | November 27, 2007 7:02 PM

yes, I'm definitely a devotee of the Bactrian-Laffer 'Curve', the Dromedary Curve is tre` pedestrian..

Posted by MEH | November 27, 2007 7:41 PM

I just don't believe people consult their tax professional before deciding whether to work that extra hour.

Well, since I am a tax professional, perhaps my experience is more relevant than yours on this question. Many of our clients consult us before taking on any new project. Taxes are seldom the sole factor that determines whether or not they will go forward, but taxes are almost always a material factor. Taxes may not control, but they certainly influence behavior. Higher taxes tend to reduce the wealthy's willingness to take on new projects -- which reduces the less-rich's opportunity to work.

Posted by David Walser | November 27, 2007 9:34 PM

the tacit (leftist) belief that Maximizing Government revenue = Maximizing the growth of the Economy/Raising standards of living.

This is just silly. Nobody believes the arrows run in that direction in that simple fashion. It is a fact that if you let government revenue drop too far below government expenditures, you will hurt the economy; the Bush Treasury Dept. and Greg Mankiw agree with Robert Rubin and Larry Summers on this. It is also obviously a fact that if you raise taxes to confiscatory rates you will hurt the economy. The dispute in the US concerns where we stand right now, and the level of fury the debate has reached is a result of the willingness of the wealthiest people in the US to fudge the data, or simply lie, in order to win this debate and get themselves ever-lower top marginal rates.

In fact, since there are many other determinants of growth besides the level of taxation, it is entirely possible to raise taxes and see the economy grow faster, or to lower taxes and see it grow slower. If your taxes are so low that you can't afford to build roads or educate your kids, your economy will grow more slowly. (See under: Somalia.) If your taxes are so low that you must borrow vastly to pay for these things, interest payments on your debt will balloon, you will suck up private capital, and your economy will grow more slowly. (See under: the Bush I years.) The economy is complicated.

Posted by brooksfoe | November 28, 2007 3:43 AM

I don't understand the resistance to the idea that raising taxes discourages work.

Take, for example, the 60-year-old mechanical engineer. He and his wife have a good nest egg for retirement, and he's not sure if he wants to retire. He makes a good $100,000 a year designing more fuel-efficient engines for hybrid cars. Except he doesn't, really, because taxes take some of that money. He takes home, say, $60,000. Is he willing to work an extra year -- instead of enjoying an extra year of retirement -- for $60,000? Maybe. $50,000? Less likely. $40,000? Less likely still. Jack up the guy's taxes high enough and he retires, whereupon you get nothing from him at all -- and lose his expertise as a worker, too.

Here's a thought experiment for confused left-wingers: do you ever take vacations? Why? You know that you could choose to work that extra time instead and pocket more money, right? But you don't. Why? Because leisure time is worth money to you, that's why. There is some cash value, even if you aren't aware of exactly what it is, that you place on your free time. You'll cheerfully work an extra shift for ten thousand dollars and absolutely refuse for ten dollars. Somewhere in between is your price. Taxes lower take-home salaries, which pushes the salaries of some percentage of the population below the value they place on their free time, and those people quit working unless they HAVE to keep working. That hurts the economy; it hurts all of us. It kills the goose that lays the golden eggs.

Posted by Dan | November 28, 2007 5:20 AM

ech:
MM has said she thinks the current tax rates are on the left side of the peak in a Laffer curve. (i.e. a modest raise in taxes would bring in more revenue) and that in the past we were on the right side (i.e. a cut in taxes does bring in more revenue). The "kool-aid" she derides is that we are on the right side of the curve.

It seems to me that the "Kool-Aid" accusation is a bit harsh then, isn't it? I mean, MM grants that depending on the situation, lowering taxes can in principle raise revenue, correct? It's just that she thinks we're not in such a situation. But doesn't that mean that whether we're on the left or right of the Laffer curve is something a judgement call, rather than an easily deducible right/wrong answer, like the answer to "What's 1 + 1"? So why is the belief that we're on the right side of it so obviously wrong as to be indicative of drinking the Kool-Aid?

Also, shouldn't we always err on the left side of the Laffer curve when in doubt? I mean, from what I gather, there's no benefit to anyone from being on the right side (except perhaps those who are motivated primarily by envy).

henry evans:
Is a tax cut not paid for by a spending cuts almost the same thing as a spending increase not paid for by a tax increase?
Talk of "paying for tax cuts" with spending cuts always irks me, as does speaking of tax cuts as "giving money" to people (usually "The Rich"). It betrays the underlying inverted mindset that all the money in the world is the rightful property of the government, rather than the people who actually work for it, that anything left in your pocketbook after taxes is actually a gift the government has given you instead of something you've earned, and that the whole purpose of your existence and livelihood is to provide for the government's well-being, rather than the other way around. The correct phraseology, of course, is to say that a tax cut would result in the government not having enough money to pay for it's current spending. It's the spending that needs to be paid for, not the tax cuts.

TakeFlight:
It's easy to get distracted by all the hoopla. But underneath most of this is the tacit (leftist) belief that Maximizing Government revenue = Maximizing the growth of the Economy/Raising standards of living.
Or worse, they may not think that, but instead that maximizing government revenue is more important than the economy and standards of living.

Posted by The Deuce | November 28, 2007 9:20 AM

brooksfoe:

This is just silly...

I don't disagree with your reply at all. But I wasn't making an economic argument so much as a philosophical one. Everyone is trying to figure out how to get the most revenue for the gov't...raise taxes, lower taxes, Laffer curve makes sense, Laffer curve isn't applicable... But I was just pointing out that MEH's question about the "real goal" is more than an aside - there is more to consider.

Maybe I'm wrong, but it seems that once you're arguing about the best way to give the gov't the most revenue (and by inference allow more expenditures) then you've already agreed by default that that is the best thing to do. I'm just pointing out that that is (mostly) a Leftist view, one that we don't all necessarily agree with.

Posted by TakeFlight | November 28, 2007 9:36 AM

Well, since I am a tax professional, perhaps my experience is more relevant than yours on this question. Many of our clients consult us before taking on any new project.

Odd, you being a tax professional and all, that you would mostly see people who did decide to consult a tax professional before doing something.

Sigh. OK, I apologize, my bad. I should have said this:

I just don't believe MOST people consult their tax professional before deciding to work that extra hour.

Posted by liberalrob | November 28, 2007 3:09 PM

liberalrob--

I agree with you that the run-of-the-mill worker bee doesn't have to look at the marginal return of additional work. If he's an hourly employee, he's probably not in an upper income bracket. If he's salaried, he's working however much is needed to perform his job and/or get ahead.

But the part of the US economy that always grows the fastest is the part generated by entrepreneurs and small businesses. These people often file their taxes as independent contractors, sole proprietorships, and limited partnerships. If I understand the tax code right (and David Walser can correct me if I'm wrong), they all essentially pay individual, rather than corporate, tax rates, and many of them make enough money to be in the higher brackets.

These types of businesses absolutely look at the marginal return on taking on more work. More importantly, they are rabid about controlling costs and will look even harder at the marginal return on hiring additional employees. When they don't hire people, the economy doesn't grow as fast. Between the employer's 7.65% FICA contribution and the cost of labor, you're already dealing with a fairly low marginal return on an additional employee. If the profit that that employee returns is fairly small, an excessively high marginal tax rate can pretty much put a lid on how big a small business can be.

Posted by TheRadicalModerate | November 28, 2007 4:39 PM

That's great, Rad, but the thesis was that the estate tax reduces INDIVIDUALS' incentives to work harder, not businesses. And it strikes me as nonsense.

Posted by liberalrob | November 28, 2007 5:44 PM

I'll concede on entrepreneurs, by the way. But they are a tiny subset of individuals, just as people who pay the estate tax are a tiny subset of all taxpayers.

Posted by liberalrob | November 28, 2007 5:48 PM

How about producing some of these 'entreprenuers', and showing with specific numbers that these sorts of decisions happen with any material frequency? You know, evidence?

I know a few 'entreprenuers', some more successful than others, but none of them can make more money simply by 'working harder', whatever that means. They take what they can get, period, end of stop.

Once again, ideology meets reality, and refuses to recognize it.

Posted by ScentOfViolets | November 28, 2007 7:30 PM

liberalrob, where did estate taxes enter into the subject? Meagan's post, and most of this comment thread, was on the topic of whether or not INCOME tax rates affect tax revenues.

As for your concession that entrepreneurs are influenced by tax rates, I think you are conceding more than you think you are. Yes, entrepreneurs are a small subset of the population, but a large percentage of the public work for entrepreneurs. (Reliable statistics are hard to come by, but about 45% of all payroll and 60% - 80% of new jobs are connected with entrepreneurs. See this Forbes article.) So, as you've now conceded, when entrepreneurs choose to work less for tax reasons, their choice affects a lot of workers (who might want to work more).

Please forgive one personal story by way of example: When I was much younger, I worked in a furniture mill to help with school expenses. The mill had a chance to accept a large, for us, order. The order would require the mill to remain open for three Saturdays to get the extra work done. The owner asked how much extra income the order would generate. The answer, if I recall correctly, was about $10,000 (before taxes). The owner pursed his lips and shook his head and said, "Sorry boys. It's just not worth it if I've got to spend three Saturday's in a row away from the family." His decision "cost" about 80 of us the opportunity for three days worth of overtime. (I could have used the extra money. So could have most of the rest.)

Was this decision based solely on tax rates? I doubt it. What I do know is $10,000 was not enough to lure the owner to the mill for three Saturdays. Would he have accepted the order for another $20,000? I don't know, but I do know there was a "price" at which his answer would have been yes. Since taxes affect that "price", taxes affect these kind of decisions.

Posted by David Walser | November 28, 2007 7:31 PM

If this is true, let's see some actual numbers, and the theory behind them. Shouldn't be difficult. If the theory is correct, that is.

Posted by ScentOfViolets | November 28, 2007 7:49 PM

David Walser:

where did estate taxes enter into the subject?

bil's original comment back upthread was:

To the degree that people care about passing on wealth to their heirs or charitable organizations upon their death, estate taxes reduces their incentive to be productive and provide goods and services which society desires.

And that got me going.

Rad said:

But the part of the US economy that always grows the fastest is the part generated by entrepreneurs and small businesses. These people often file their taxes as independent contractors, sole proprietorships, and limited partnerships. [...]These types of businesses absolutely look at the marginal return on taking on more work.

That's what I'm conceding. That narrow sliver of the population that does look closely at the tax implications before taking an action does exist. For the rest of the populace (the vast, vast majority), the incentive to work harder is to make more money, period, and the tax implications of making more money are generally not a factor. We simply don't think about it (at least until April 15th rolls around).

Posted by liberalrob | November 28, 2007 8:24 PM

The unfortunate implication of that concession, liberalrob, is that lowering the top marginal rate is a greater stimulus to production than lowering the bottom rate. I believe this is where they get the term "supply-side", and it's why Greg Mankiw believes that a cut of $1 in the top marginal rate might stimulate $0.50 in extra economic activity, while a cut of $1 in the bottom rate might only stimulate $0.25. But notice that even Mankiw doesn't think a cut of $1 in taxes stimulates even $1 in extra economic activity. By contrast, an extra dollar of government spending stimulates, basically by definition, about $1 in extra economic activity. (I guess you have to reduce it very slightly by the inflationary effect.) Which is why government spending is a better economic stimulus than cutting taxes, if what we're talking about is temporary stimulus to get us through the low part of the business cycle.

Posted by brooksfoe | November 28, 2007 9:40 PM

I'm not interested in the macroeconomics of tax policy in this instance. I'm saying most people don't think about that stuff when deciding whether to work towards a raise or a promotion, and they don't need the "stimulus" of lower taxes to incentivize them to work harder. The calculus is, "I want more money so I can have a better life, ergo I will work harder." That's the end of it.

Posted by liberalrob | November 29, 2007 2:35 AM

"The unfortunate implication of that concession, liberalrob, is that lowering the top marginal rate is a greater stimulus to production than lowering the bottom rate."

Why is that unfortunate? It's either true or it isn't, but as a fact it's value-neutral.

Also, it's simply not true that government spending is 100% stimulative. You're neglecting opportunity cost. That dollar of government spending came from somewhere, and if it was diverted from a more productive use the government spending is actually a negative stimulus. See Bastiat's broken window parable.

That said, I'm in whole-hearted agreement with your earlier point that (at our current rates) any claim that a tax cut will boost revenues is dishonest.

Posted by SG | November 29, 2007 11:02 AM

Taxes lower take-home salaries, which pushes the salaries of some percentage of the population below the value they place on their free time, and those people quit working unless they HAVE to keep working. That hurts the economy; it hurts all of us. It kills the goose that lays the golden eggs

Economist-think in a nutshell. Tactically logical. Strategically, fantastically dumb. The shorter version is:

Anytime someone stops working, it hurts the economy.
The solution, then, buddy, is to post soldiers in the factories to shoot people who stop working. Then you can maximize economic output, the only thing you appear to be concerned about.

Meanwhile, the debate over whether "lower returns due to taxes makes people stop working" is inherently stupid. First of all, because whether or not taxes are cutting your income, you will make that decision to stop working eventually. Leisure time is inherently valued: making more or less money doesn't eliminate that value. Whether the wealthy person is making 500,000 or 400,000 due to higher or lower taxes is not only highly unlikely to swing their decision about the value of leisure - but a million different factors could change that decision at any time, regardless of taxes. That same guy could quit because he's making less money because business is bad. Without taxes, other reasons would substitute 100%.

Besides, the truly rich and powerful people have as much leisure time as they want already. Leisure time and making lots of money are in no way mutually exclusive. It's only wage slaves for whom there is a real tradeoff between leisure time and money. Who says boo when Carl Icann wants a day off, exactly? Anyone?

Posted by glasnost | November 29, 2007 12:52 PM

it's either true or it isn't, but as a fact it's value-neutral.

Wha? A brick either did or did not fall on my head. If it did, that was unfortunate. In this case, it'd be unfortunate if lowering the top rate would provide a bigger economic stimulus than lowering the bottom rate because an extra dollar of income provides less utility to Bill Gates than it does to Joe Schmoe, regular guy.

On the economic stimulus: rule-of-thumb multiplier effects for the effects of tax cuts vs. spending hikes in stimulating the US economy show that after one year, a government spending hike of 1% of GDP produces a little more than a 1% rise in GDP; while a tax cut of 1% produces about a 0.4% rise in GDP.

http://delong.typepad.com/sdj/2007/11/menzie-chinn-an.html

The effects change several years down the line. 5 years out, the spending hike's effect is virtually gone, while the tax cut's effect has gone up and then back down again to 0.4%. In the longer run, the Treasury analysis shows that the effect of either one can be negative if it isn't paid for.

Posted by brooksfoe | November 29, 2007 10:05 PM