Asymmetrical Information

It would be the "responsible thing" under this formulation:

(1) Arguably, the tax cuts spurred the growth of the domestic economy, and actual tax receipts have increased.
(2) Therefore, allowing the tax cuts to expire (i.e., enabling a tax increase) will constrict economic growth and actual tax receipts will *decrease*. Causing a decline in economic growth and a concomitant decrease in tax receipts would be irresponsible.

I understand that many dispute that tax cuts had any causal relationship to the reinvigorated economy, but am surprised to see you completely dismissing the idea.

They still make Tang?

Maybe she has some astronaut friends

When I saw the dems clapping about social security reform being shot down, the first thing I thought was "gee guys, thanks for applauding the fact that I'm paying into a system that will not exist by the time I retire." It didn't fill me with happy feelings...

I understand that many dispute that tax cuts had any causal relationship to the reinvigorated economy, but am surprised to see you completely dismissing the idea.

It is irresponsible to continue to inflate the economy via incurring more debt.

My wife and daughters are not very interested in politics. They only start to listen to such matters a week or two before an election. In other words, they are part of the vast group of undecided voters who are the target of both parties. I think the Democrats could profit from my female relations' take on the SOTU (which they politely allowed me to watch since American Idol was not yet on):

* They were struck by the many times the camera showed all the Democrats sitting on their hands while the rest of the audience was standing and clapping.

* They were struck by the Democrat response to the President's speech. The good Governor, while smiling, talked about how poorly President Bush has done with just about everything under the sun. (The solution was to spend more money on more government programs while, at the same time, reducing the budget deficit. My wife asked me how it would be possible to do both. I told her they would raise taxes. She did not like my explanation.)

In short, my wife and daughters found the Democrats to be rude, mean spirited, and not very optimistic about our future. Not the kind of people they'd want to associate with. Nor, do I think, the kind of people they'd want to vote for.

Ok, maybe I'm shallow, but did anybody else find themselves unable to listen to the Governor's response because his left eyebrow was consistantly raised a full inch higher than his right?

I don't know if it was unintentional, or he was trying to look simultaneously sarcastic and serious, but I found it really unnatural and disturbing.

I'm curious as to why reducing taxes should be considered irresponsible. What strikes me as irresponsible is refusing to cut spending, which both parties are guilty of.

For those of you who are camped in MP's land of doom and gloom (Jane?), take a look around this site:

http://www.optimist123.com/optimist/

You can safely ignore the bridge-related posts, but not this one:

http://www.optimist123.com/optimist/2006/01/sqna005_snappy_.html

or this one:

http://www.optimist123.com/optimist/2006/01/the_disappearin.html

or this one:

http://www.optimist123.com/optimist/2006/01/lets_end_the_da.html

And before you dismiss this guy as a red-state Rethuglican, read this:

http://www.optimist123.com/optimist/2005/12/reflections_on_.html

(Actually, MP, I was just being facetious. I knew you'd already dismissed him. Anything to avoid staring facts in the face.)

Jane,

"But, in keeping with the role of teen rebel who is not paying close attention to teacher, they kept applauding."

I'm pretty sure that that's not right. It was the Republicans who stood up and applauded the second line about entitlement problems. You can watch it again here:

http://www.backlashliberal.com/2006/02/01/in-case-you-missed-it/

Oh yes, "Americans" would have voted in "their own" (i.e. not Democrats). Americans don't vote for Democrats, eh?

YAWN

First, there were the Democrats, clapping joyously at the news that they'd voted down Social Security reform...

I didn't catch the whole speech, but I caught that bit. It was 'effing brilliant. The Democrats obviously thought they caught him out accidentally leaving enough of a gap to do a standing ovation where Bush didn't want one. The 'adolescents mocking authority' sense came from that -- that they'd put one over on him. But Bush (or, rather, his speechwriters who I imagined high-fiving eachother) planned for it. And sure enough, there came the lethal counter-attack that will provide grist for Republican campaign commercials for some years to come. For some reason, I thought of George C Scott as Patton yelling, "Rommel, you magnificent bastard! I read your book!"

Technically, you have to be 25 to be elected to the House of Representatives and 30 to be a Senator, so you can't quite send the rebellious adolescents to Congress. Now, the boomerangs...

Ted, unless the Republicans have the same senator in the red dress as the Democrats, it looks to me like those are still the Democrats applauding.

Interesting, isn't it, how one's political views color one's perceptions? Watching that video, it looks to me like Bush is smirking because he knows the Dems are about to put their foot in it . . . but I don't catch the whole "demonic, hunched over ape" mode. I've never thought that Bush was particularly attractive or effective on the stump, but he doesn't annoy me *that* much.

Oh yes, "Americans" would have voted in "their own" (i.e. not Democrats).

Their own "sullen, rebellious adolescents." I.e., their children.

They were struck by the many times the camera showed all the Democrats sitting on their hands while the rest of the audience was standing and clapping.

This is exactly what the Republicans did during Clinton's SOTU addresses, and it's what opposition parties will do to future presidents for the foreseeable future. And, honestly, it is hard to applaud statements you forcefully disagree with.

Now, David, perhaps your wife and daughter are genuine swing voters who went into the SOTU looking for a party to support. If so, the Democrats already lost from the get-go, because the entire event is staged by the executive to put himself in the best light. I have to wonder if they would have been equally disillusioned with Republican behavior in the 1990s. If so, then perhaps they should consider identifying political principles and voting on that instead of letting themselves be swayed by superficial comparisons.

So, we should raise taxes so that the federal government can continue to grow beyond the 25% of our economy it occupies and remove any incentive to reform our entitlement programs. Great Jane!

Stealing less of my money is always the responsible thing to do. What's irresponsible is continuting to borrow money that will have to be repaid through stealing more of my money in the future.

do the responsible thing

America has three financial problems:

1. High deficits


2. High spending


3. High taxes

AT and Koenicke -

Jane is exactly right, it is laughable that Bush calls extending the tax cuts 'responsible'. By any measure, his tax cuts have increased the deficit and therefore the burden that we are placing on future generations.

Keep chugging that supply-side laffer curve kool aid, though! I'm sure divorcing yourself from reality is deeeeeeelicious!

The funniest part (you must have missed it, Jane) was when W said, re: social security, "it concerns two of my father's favorite people, me and President Clinton." The camera cut to Hillary, who was definitely not laughing. Now I like hillary and think she should run, but I also think Democrats can sometimes be humorless.

Brittain33 - You are correct, the Republicans sat on their hands through most of Clinton's speeches, too. However, my daughters were too young to watch the SOTU speech, let alone vote in those years. Since I am aware such behavior is par for the course, I was not bothered by it nor did I mention it. My wife and my two daughters did mention it and were genuinely offended by the behavior. Much like, I suppose, many were offended by Newt's complaint that he had had to get off the back of the airplane. It wasn't that Newt did not have a legitimate gripe. It's that the complaining made him look small and petty.

Since my female relations are not interested in politics, I was struck by their reaction. And, yes, there are lessons for both parties to learn. The primary one being: Don't act like a jerk. It may play well to your own base, but it just turns off everyone else.

Look again, Jane. The Democratic woman in a red dress is a slightly overweight brunette, while the Republican woman in a red dress is a slim older blonde. They're two different women.

Not to belabor the point, but there's a woman in purple sitting to the right of the Democratic woman in red, and a man in a black suit in about the same place for the Republican woman in red.

Wallster:

Jane is exactly right, it is laughable that Bush calls extending the tax cuts 'responsible'. By any measure, his tax cuts have increased the deficit and therefore the burden that we are placing on future generations.

I am future generations.

I would gladly support a tax increase~if it was coupled with a balanced budget amendment. Paying more taxes only gives the Feds more money to buy bridges in Alaska, and still run a deficit.

Giving money and power to government
is like giving whiskey and car keys
to teenage boys.
P. J. O'Rourke

As an aside, the Q&A session of the British prime minister in front of the House of Commons is much more entertaining than any SOTU address you'll see. I've been watching since John Major was around. No doubt in my mind, Tony Blair is the greatest statesman of our time.

Why would you want a balanced budget amendment, Reagan Fan? That just gives Congress a blank check to raise taxes without limit. What you want is a spending growth limitation amendment.

Ok, maybe I'm shallow, but did anybody else find themselves unable to listen to the Governor's response because his left eyebrow was consistantly raised a full inch higher than his right?

I don't know if it was unintentional, or he was trying to look simultaneously sarcastic and serious, but I found it really unnatural and disturbing.

Perhaps he suffered a mild stroke shortly before the feed went live, which would explain both the eyebrow and the response?

AT,

Check out the Balanced Budget Veto.

MP~

After reading the executive summary, that sounds like a great idea.

However, wouldn't that give a president too much power? It seems that it wouldn't take a president too much (say one hurricane response or possibly Grenada II?) to make sure that the feds stayed in the red so that he would retain that power.

And under the category of "unintended consequences", if such a law were enacted, would Congress ever pass another tax cut?

Certainly, George Bush wouldn't have gotten his first tax cuts passed if this law had been in place.

I'm willing to be proven wrong, Ted, but when I watched it last night one of the people applauding was Charlie Rangel, who AFAIK, is still a Democrat.

However, wouldn't that give a president too much power?

A fiscally responsible Congress would be able to avoid granting the Executive too much power.

And under the category of "unintended consequences", if such a law were enacted, would Congress ever pass another tax cut?

They'd still be under the same political pressures as now. People will still demand tax cuts.

If I have to choose between the government taking on debt and raising taxes, I choose debt. Why? Leverage. As long as we can find investors willing to buy bonds at low rates of interest, we should take advantage of it. Such investors can be paid back at least partially in growth. The trick, of course, is to somehow keep the government from just throwing the money down a rat hole.

But also because taxes are involuntary and debt is voluntary. That is, the holders of government debt choose to accept the risk. I simply prefer free will to the use of force whenever possible.

OK let's cut spending, we have 300 to 500 billion to cut � you all start. And if the first thing you say is cut Social Security, I have two thoughts for you.

First, if you cut SS without also doing away with the payroll taxes that support it, you have just increased taxes in a big, big way (you also have insured that the party that does it stays out of power for our lifetime).

Second, if you do way with the payroll taxes along with SS you make the number I mentioned at the out set closer to the 500 billion then the 300 billion and you have to cut even more.

But I would be more then willing to listen to any proposal for cutting spending, but let�s face it, it simply won�t happen. Hell I would argue that the deficit spending is the only thing keeping this turkey of an economy afloat in the first place, but that�s an unsubstantiated opinion. But then again so is the idea that the tax cuts are mainly responsible for keeping the economy afloat.

Well, what would convince you? You've said that you were distracted by helping your coworker. I've surfed around, and as far as I can tell, there's only one video feed. It focused on the Republican side of the room after his line about entitlement growth. You can't see the Democratic side of the room at all. I have no idea where Charlie Rangel was sitting, but unless you saw a different video feed than I can find, he wasn't in the shot.

You're entitled to a low opinion of the intelligence of Democrats, but it's somewhat hard to believe that they're so very stupid as to explode in applause at the mention of growth of entitlement costs. Isn't it more likely that you were mistaken about a program you were only half-watching? It happens all the time to me.

Here's the whole thing.

http://video.google.com/videoplay?docid=5321538711475244202&q=bush+state+of+the+union

The lines in question are around the 46 minute mark. Or, here's C-SPAN with the same feed:

http://www.c-span.org/executive/stateoftheunion.asp

Look at the 35 minute mark.

I would take the simple approach of no growth in any department for 5 years. I was in the military during the downsizing of the 1990s. They took away our money and laid off about 20% of us. So we simply stopped doing things. If we didn't get yelled at for not doing something, we kept not doing it. That's how you cut government spending. The key is to stop believing that absolutely everything the government does is necessary. I know for a fact that it isn't.

Cut spending, eh?

DEA: Gone
BATF: Gone
Dept. of Ed: Gone

FDA: Remove phase III trials, regulatory capacity diminished.

SEC/OCC/FTC: Rolled into one agency to enforce reporting requirements, regulatory capacity diminished.

Dept of Energy: Gone.

Medicare drug benefit: Gone, the rest of medicare restructured for only the poor, on a dollars-per-year basis. Medicare pays market rate, rather than the reimbursement rate they choose.

Social Security: Give up, admit that it's welfare, make it welfare for the the old, means test it, and roll the taxes up with regular income tax. Eliminate the employer part of the payroll tax.

Dept. of Agrigulture: Gone.

Those things would reduce the size, scope, and cost of the Federal government pretty substantially, I would think. Of course, it'll never bloody happen.

Mike Koenecke says:
"actual tax receipts have increased"

Mike is wrong.

Real tax receipts (2005 dollars)
2000: $2271.5B
2005: $2153.9B

CBO forecast for 2005 tax receipts:
Jan 2001: $2570B
Jan 2002: $2342B
Jan 2003: $2225B
Jan 2004: $2049B
Jan 2005: $2057B

Here's a handy way to remember it: if you cut taxes, you cut the amount of money that taxes produce.

Whaa,

Re; Real tax receipts (2005 dollars)
2000: $2271.5B
2005: $2153.9B

I don't know about you, but that looks pretty darn good to me - considering the sizeable tax cuts in between. And of course you are assuming that the government is better at deciding how to spend my money than I am.

Re; "Here's a handy way to remember it: if you cut taxes, you cut the amount of money that taxes produce.

Here's a better way; To the extent that the government participates in value for value transactions, the government can create wealth. To the extent that the government participates in redistributive transactions, the government is just moving wealth around and incurring dead weight losses.

Jane -

Are you going to comment on the Economist's smackdown of Bush's health care plan?

http://www.economist.com/world/displaystory.cfm?story_id=
5436968

(sorry, I'm too dumb to make the hyperlink work)

"Unfortunately, it will not work. The Bush agenda may speed the reform of American health care, but only by hastening the day the current system falls apart."

Randy -

I'm not real clear on the "pretty darn good to me" standard, so let me present some other measures for comparison:

2000 - 2005:
Real GDP: UP 13.4%
Population: UP 5.0% (est)
Real Fed Govt Spending: UP 23.3%
Real Fed Tax Receipts: DOWN 5.2%

You also said, "And of course you are assuming that the government is better at deciding how to spend my money than I am."

I am assuming no such thing! I don't want high taxes any more than you do. All I'm trying to say is that 1) tax cuts produce less money, and 2) we should pay for our spending. I don't understand how these became outrageous (or, frankly, debatable) ideas.

Whaa,

There are two assumptions in that analysis. One, that the current system can somehow be propped up, and two, that the alternative is universal health insurance. Both assumptions are false. The current system cannot be saved, and the alternative is not universal healthcare, but rather, nothing at all. What I know is that a whole lot of people work for companies like the one I work for, which offers no health insurance at all. These folks could use a bit of help - even if it isn't perfect.

There was definitely more than one video feed, because I definitely saw Charlie Rangel, who appears neither before nor after on the CNN feed the White House used. I was watching it on CBS. That was the only part of the speech I watched. I commented on it to one of the friends I was messaging. Also, there were closeups of Hillary and a bunch of other famous Dems right before Bush made his remark, which do not appear on that feed.

As for whether Democrats could really manage their SOTU response that stupidly . . . well, this is the group that sat on their hands a couple years back when Bush said he wanted to give money to fight AIDS in Africa. They looked, if you were not a complete hard-liner, like complete crackheads during the first part of the Social Security response. Being in the opposition is hard.

Whaa,

Re; "All I'm trying to say is that 1) tax cuts produce less money, and 2) we should pay for our spending."

Tax cuts do not necessarily produce less money. Where we are on the Laffer curve is debateable, but the concept is not.

And why should we pay for our spending? Much of that spending was capricious. If I disagree with it, I have every right to vote for people who want to stop it. As I said above, I am all for borrowing money from willing investors as opposed to raising money by force from unwilling taxpayers. If the government learns how to spend wisely, the investors will get their money back. If the government continues to spend foolishly, the investors will lose their money. Seems fair to me.

Randy -

I presume you're referencing the Economist article. I didn't draw quite the same conclusion from it, but that's neither here nor there.

I'm curious to hear Jane's thoughts since she has recently posted in defense of HSAs and since she has (I believe) a close affiliation with that publication.

As long as we're digressing, how about thoughts on allowing people to buy into a single-provider system such as the VA?

Brendan (fka Whaa?)

Brendan,

I think a taxpayer funded VA like system is a good idea, but not all at once.

I have proposed attaching national free clinics to existing ERs. Think of going to the ER and if your problem is not serious you would be shunted off to the clinic, or allowed to make your own arrangements at your own cost. The clinics would be staffed primarily by RNs and PAs who are government employees. The service would be basic, free generic drugs, the waits long, and referrals would not be automatic (subject to a financial review process and probably another waiting period), but it would be available to all at public expense.

I think of this as a good start. We can't afford top quality health care for all at this time. But we can afford to provide basic services for all - and we need to do so before all the ERs lock their doors. The program could be expanded in time with economic growth.

Randy -

The Laffer curve is a cute paradox, and I suppose it's useful at extreme tax rates, but we're not there. I don't see how I can make it any more plain than by citing the data that I did, and I think it's ridiculous that we have to debate the existence of basic facts before we can work on philosophical differences.

I agree with you that you should be free to elect people who will vote against more spending. I can't imagine who would debate this.

You have made your choice on funding the government via investors or taxpayers. I wasn't aware that we got to choose. I was laboring under the impression that, if we borrowed lots of money, future taxpayers would be stuck paying the bill both for their own spending and for their predecessors'. Actually, I'm still laboring under that impression. There is no choice other than taxpayers -- the taxpayers always end up paying.

Randy -

Your national health clinic proposal sounds very interesting. It seems like it's fairly well developed. Do you know of any web sites where I could find out more?

I thought the Dems clapping for defeating SS reforms was silly, but for a different reason: they had nothing to do with the reforms not going anywhere. Bush took his reforms to the people, and the people roundly rejected them. They never got to the House or Senate.

>>>"A new study by Columbia University economist Joseph E. Stiglitz, who won the Nobel Prize in economics in 2001, and Harvard lecturer Linda Bilmes concludes that the total costs of the Iraq war could top the $2 trillion mark. Reuters reports this total, which is far above the US administration's prewar projections, takes into account the long term healthcare costs for the 16,000 US soldiers injured in Iraq so far.
"Even taking a conservative approach, we have been surprised at how large they are," the study said, referring to total war costs. "We can state, with some degree of confidence, that they exceed a trillion dollars."

The higher $2 trillion amount takes a 'moderate' approach. Both figures are based on the projection that US troops will remain in Iraq until 2010, with steadily decreasing numbers each year. The economists also used government data from past wars, and included such costs as the rise in the price of oil, a larger US deficit and greater global insecurity caused by the war, the loss to the economy from injured veterans who cannot contribute as productively as they would have done if not injured, and the increased costs of recruiting to replenish a military drained by repeated tours of duty in Iraq. These are items which are almost never included by the US government when determining the cost of the war."

$2,000,000,000,000 Reasons why there should be a moratorium on tax cuts.

I didn't hear this figure mentioned last night in the SOTU. I suppose a standing ovation would be in order, correct? And again, there was not ONE call for a sacrifice by this President. Just pile the debt on higher.

This is "conservativism?"

--Cobra

The Democratic woman in a red dress is a slightly overweight brunette, while the Republican woman in a red dress is a slim older blonde. They're two different women.

That may well be the best piece of political commentary of the year. :)

They still make Tang?

Of course they do. Haven't you heard of the Wu Tang Clan?

Whaa,

I looked at those CBO projections. 2001 was forecast off of the last of the bubble years and is a curious starting point for your data.

Here's what I found to be interesting. In 1999 the CBO forecast the following for 2005:

Personal Income Tax Receipts: $1035B
Corporate Income Tax Receipts: $238B
GDP: $11465B
Annualized CPI through 2005: 2.6%
Unemployment: 5.7%
10-Yr Treasury Rate: 5.4%

Here's what actually occured:
Personal Income Tax Receipts: $927B
Corporate Income Tax Receipts: $278B
GDP: $12494B
Annualized CPI since 1999: 2.6%
Unemployment: 5.0%
10-Yr Treasury Rate: 4.5%

So for $70B less in the tax receipts that were most impacted by tax changes (there were no changes to the policies governing payroll taxes - which are not taxes at all, but rather, in FDR's own words, contributions) we received over a trillion dollars more in GDP with lower unemployment, lower interest rates, and inline inflation. In fact, 2001 was the only year in which the CBO over-estimated what 2005 GDP was going to be. Unemployment and interest rates also ended up being better than any year forecast except for 2001 (unemployment forecast of 4.8%).

And the 2003 tax cuts? Well for 2005 they cost $100B less then they were forecast to cost at tbe beginning of 2004 and generated $250B more in GDP than was forecast at the beginning of 2004.

Since the main selling point for tax cuts is faster economic growth, it seems to me the data clearly point to success on that measure.

M. Jed -

You raise several points, almost all of them invlaid or misleading. I'll address them each in turn

The "curious starting point" of January 2001 that I used is both the forecast at the time that Bush took office and the last forecast before his first tax cuts passed in June 2001. I have no idea what you mean by curious.

I also included all of the subsequent forecasts both to show the effect of the series of Bush tax cuts and to show that the revenue still came in far below the levels of forecasts set forth after the recession. I'm aware of the errors in long-range forecasting, so I included more information in an attempt to present a more complete and balanced picture.

Your example, on the other hand, is from a year chosen apparently at random. 1999 makes no sense. The forecasts are older so they incorporate more error. No major policy or economic changes took place, and, of course, the economy and budget looked much different than when Bush came into office. It is a near perfect definition of "curious starting point"

M. Jed -

You seem to think that the tax cuts produced some great bonus growth that wasn't expected in 1999. We did get some great bonus growth, but not from the tax cuts.

Sources of Error in Jan 1999 CBO Economic Prjoections:
1999-2000 Growth:
- Projected: 3.9% annlzd
- Actual: 5.9% annlzd
2001-05 Growth:
- Projected: 4.4% annlzd
- Actual: 4.9% annlzd
Baseline:
+3% (Actual GDP in 1998 was 3% higher than CBO knew at the time of the projection)

As you can see, most of the bonus growth that we got (which was responsible for the much higher than projected 2005 GDP) came in 1999 and 2000 -- before the tax cuts passed.

Of course, even with their much smaller projected economy, CBO also forecast a huge surplus for 2005. Instead, we got a massive deficit.
2005 Budget Balance:
1999 Proj: $256 Billion
2005 Act: -$318 Billion
That's the real cost of the tax cuts

I don't like using the 1999 forecast for all the reasons cited in my previous post, but, even using them, it's clear that the tax cuts are not producing extra tax revenue. It's less clear what, if any, effect they're having on economic activity.

M. Jed -

Lastly, you present your rubric for analyzing the economic benefit of tax cuts -- you credit the above-projection economic growth of 2005 to the 2003 tax cuts.

Perhaps you can explain why the even larger 2001 tax cuts were such a miserable failure. 2003 GDP growth fell far short of the projections made in Jan. 2002.

2003 Nom GDP Growth:
Proj (1/02): 6.1%
Actual: 3.9%

Were the 2001 tax cuts a failure or is this method questionable?

I don't think that GDP growth two years subsequent to the passage of the tax cuts is the best way to measure their success, especially tax cuts like these that work indirectly (by lowering the cost of capital) and therefore take much longer to work.

Brendan,

Re; "There is no choice other than taxpayers -- the taxpayers always end up paying."

That is the common belief. That is what holders of government bonds, and believers in Social Security, are depending on. But it isn't true for two reasons.

First, the taxpayers will revolt at some point. They will simply refuse to cover the debt. I think we're pretty close to that point now. E.g., ask anyone under 30 if they are willing to pay higher payroll taxes.

Second, the Laffer curve is real. There is a peak at which higher tax rates will produce less revenue. My guess is that we are very near if not past the peak - M. Jed made the case for it very well.

Brendan,

Thanks for the comment on the free clinic proposal. Sorry, no link, I just sort of came up with this. I'm sure others have considered something similar, the VA proposal for example. My favorite part is the idea of attaching free clinics to existing ERs. Its simple and doable. I doubt that it will fly though - because it deliberately bypasses the idea of equal health care for all.

Brendan,

Curious in the sense that it was the peak of the bubble in the economy. Curious in the sense that, as I noted, 2005 actual GDP was better than all but the 2001 CBO projection. Curious in the sense that the 2001 projection didn't take into account the recession that started in late 2000/early 2001. The 2001 - 2005 growth (projected v. actual) you cite didn't contemplate that recession.

I chose 1999 for mainly because the projection pre-dated the combined IT bubble of both the internet and Y2K build-up, and thus is a "cleaner" year. Stock market strategists will often remove 1999-2000 from valuations to get a truer look at historical comparisons for the same reason.

I acknowledge that the CBO had projections for surpluses that have turned into deficits. But I'm not sure how you arrive at blaming a $70B shortfall in revenues as the cause of $574B swing in the budget surplus/deficit, as "the real cost of the tax cuts". Seems pretty evident that excessive spending is the cause of the swing. Even using the 2001 as the starting point for tax revenue projections, the revenue shortfall was $330B - again excessive spending had a significant impact on the swing.

Randy: Please tell us how the government is going to go deeper into debt without having to extort even more money from taxpayers later on to pay it back? Such a magical technique would greatly help my personal finances. Remember that, unlike business loans, the gov is not investing the loan money into things that are expected to bring in much more money later.

markm,

It really isn't that complicated. The government is never going to pay off the debt.

Imagine the politician who declares; "When I am elected, I promise to raise taxes on each of you by $20,000 per year for the next four years so that the government can meet its obligations". It ain't gonna happen.

And face it, the reason we are running up debt is because voters have already reached the limit of their willingness to pay taxes. We see how our money is spent. We're not going to give any more until we are shown that the government can be responsible with what it already has.

M. Jed -

The economy and the stock market are two different things. There was a significant bubble in the stock market in the late 90s, and many indexes have failed to regain their late 90s highs.

However, there was little or no bubble in the economy in the late 1990s. Actual GDP rose only slightly above potential GDP. The evidence for this is the lack of inflation in the 2000s.

The recession in 2001 was remarkably mild, and the economy exited it having given up almost none of the growth it experienced in 1999-2000. It had almost no effect on economic forecasts. When the CBO made its January 2002 report, it made only minor changes to its forecast of the size of the economy in 2010 because the 2001 recession was so insignificant.

To put it in another perspective: the growth in 2005 was comparable to the growth in 1999-2000, yet you use 2005 as a representative example of the benefits of tax cuts yet toss out 1999-2000 as unreliable data. What gives?

-The growth of the economy in 1999-2000 was real and it was sustained. It resulted largely from the productivity-enhancing effects of the internet and increased digitization.
-The CBO in Jan 1999 failed to appreciate this (as did many at the Fed)
- The projections made that year for economic growth were wildly off as a result of failing to anticipate these benefits, not failing to anticipate the Bush tax cuts -- I broke this down in a previous post

Randy -

I believe that M. Jed has demonstrated nothing except the greater error inherent in longer range forecasts, and the failure of the CBO in 1998 to appreciate the economic effects of the internet.

As I've made clear, I think that the Jan 2001 forecasts are the most logical baseline for the Bush tax cuts, but the point is just as clear if we use the Jan 2002 forecast.

The CBO believed that the economy was still in recession (although we now know that the recession ended in Q4 2001), and the country had just weathered the terror attacks of 9/11. The huge Bush tax cuts of 2001 had been passed and were already incorporated into projections.

2005 tax revenues:
Projected (1/2002): $2,342 Billion
Actual : $2,153 Billion

Although it's not listed, it's clear from the calculations that the CBO underestimated the size of the 2005 economy. Still, the tax revenues came in 8% below expectations. I don't see how this possibly supports the case that we are anywhere near the peak of the Laffer curve.

Randy -

I've already debated Winterspeak on this point at length, and I don't want to rehash all of it, so let me just say this:

Even in a world where governments never have to repay debt, the taxpayers still have to pay all the interest (almost $200 billion last year). Our interest payments are growing faster than the budget or the economy, and they will continue to do so.

Under the Bush administration, we have decreased that average maturity of our debt, which decreases interest costs in the very short term, but makes us more vulnerable to market swings -- with the current rise in interest rates, we are reaping what we have sown.

Finally, to your odd implication that, at some point in the future, voters might just decided its better to default ... the world banking system rests upon the market for U.S. Treasuries -- for example, this is the mechanism by which the Federal Reserve raises and lowers interest rates -- and the world economy rests upon the world banking system. It is hard to imagine a scenario in which the U.S. govt defaulting on its debts would be anything less than apocaplyptic to the economy.

Brendan,

I'm not going to claim to be an expert in this area. I have no idea if the numbers are valid, or how they were obtained. So let me regroup.

Remember that I said earlier that there are two limiting factors. They are; the Laffer curve (objective) and the willingness of voters to pay higher taxes (subjective). We may or may not be up against the objective limit, but I think the evidence is clear that we are up against the subjective limit. The evidence? We are running up the debt. And the reason we are running up debt is because the voters are refusing to pay higher taxes.

So, your primary argument, that the tax cuts are resulting in higher budget deficits, while possibly correct, is also irrelevant. Voters aren't concerned about running up debts - nor should they be. As I've said above, the idea that we will eventually have to pay up is incorrect. The government cannot force people to vote for higher taxes.

I disagree with Anne that making the tax cuts permanent is irresponsible. Allowing the government further lattitude to continue out of control spending - that is irresponsible.

All the government has to do to cut the interest payments, or to avoid default, is to cut spending. The potential for economic apocalypse is not the result of under-taxing, but of overspending.

This isn't complicated. The voters don't really mind big government, but there's a limit, and we've reached it.

Randy -

I understand better where you're coming from now, but I still don't agree with you. The reason is this: the voters who have to bear the consequence of the debt are different voters than those who get the benefit of the spending.

I'll use an example to explain:
Let's say that most of the Bush tax cuts are allowed to expire, and by 2012 we're paying down small amounts of publicly-held debt each year. Then a terrorist attack on oil pipelines in the Caspian Sea basin causes a huge spike in oil prices, leading to inflation. The federal reserve raises interest rates dramatically in order to stop the inflation, and, over the next three years, the interest paid on the debt doubles from $400 billion to $800 billion. Voters in 2012 are forced to decide whether to allow the formation of another debt spiral or to cut other spending by $400 billion. They're forced to make this decision not because of spending choices made by them (remember, they were running a balanced budget) but in order to pay for the taxing and spending choices made ten years before, when all the debt was accumulated.

Debt is just a surprise tax on your descendants.

An analogy also springs to mind:
Think of it as owning skyscraper and neglecting to do maintenance on your sprinkler system. Sure, it let's you do more with your money now, and it might not cause any serious problems for a long, long time. If you don't plan to be around for very long, it might even be a rational choice. But it's not the right thing to do, and it's not the best thing for the building or the people who live in it.

Brendan,

Re; "Debt is just a surprise tax on your descendants."

I absolutely agree. Which is exactly why I think our descendants are going to refuse to pay. Just like they are going to refuse to pay higher payroll taxes to keep Social Security going. If any of my descendants are listening, I hereby advise you to refuse to pay.

What the voters are trying to do is to get the government to stop spending. Instead, they keep right on spending via borrowing, and then have the balls to tell us they absolutely must raise taxes to maintain our honor. Bullshit! Just stop spending.

"The federal reserve raises interest rates dramatically in order to stop the inflation, and, over the next three years, the interest paid on the debt doubles from $400 billion to $800 billion."

The Fed raising interest rates would have zero impact on interest payments on debt that's been previously issued. It would only impact payments on new issuances of debt. And given the scenario you proposed, markets would anticipate that the oil pipelines would be rebuilt and long-term interest rates wouldn't budge because long-term inflation expectations wouldn't change.

Randy -

I feel like we're beginning to go in circles here, but I'm not quite following ...

We're running up huge debts now. Those debts will produce huge costs for our descendants. In order to pay those costs, our descendants will either have to
1) cut spending for their own programs
2) raise their own taxes
3) default on the debt and trigger resulting economic collapse

I don't see forcing them to make that choice is fair.

I think that the only way to stop people from spending is to make them pay for it at the same time. You want to cut taxes? Fine. Cut spending too. You want to raise spending? Fine. Raise taxes.

All the voters are doing is getting a free lunch at others' expense: sure, go ahead and fight a war - I'll support it as long as I don't have to pay for it. Send my kids the bill. That's bullshit.

M. Jed -

Here's how it works ...

U.S. TREASURY DEBT STATS:
Average Maturity, 2000: 4.6 years
Average Maturity, 2005: 3.0 years
Avg Maturity of Issuance, 2000: 6.5 years
Avg Maturity of Issuance, 2005: 3.1 years
Total Debt, ex-Trust Funds: $4.7 Trillion
% of Debt Maturing in next 36 months: 60%

The fed dramatically raising interest rates forces all interest rates higher. (Why lend money for a year and get 5% when you can lend for a month and get 7%?)

Because we have chosen to short-fund our debt, almost a trillion dollars matures each year and has to be replaced with a trillion dollars of new issuance. As you can see, our average maturity is getting shorter, not longer. As a result, we are much more vulnerable to market interest rates and interest rate hikes work their way into higher interest costs fairly quickly (the example in my post was 3 years).

As far as the validity of my example, it has many flaws, but it was meant to be simple. If you want an event that would raise long-term inflation expectations, how about terrorists smuggling in a WMD via container ship and intermodal transport. The government responds with tighter security measures for our ports, trains, and trucks. Our ever-lenghtening supply chains get slower and much more expensive. The relative advantage of moving production overseas reverses. It's a supply-side shock that would send prices soaring and the fed would be forced to raise interest rates until inflation receded.

Substitute this example for my previous one and everything else is just as valid.

Brendan,

Re; "You want to cut taxes? Fine. Cut spending too."

Amen to that. Unfortunately, because the government can't seem to stop spending on its own, we are going to have to force the issue. We must hold the line on taxes. The government can't keep borrowing forever. With tax increases off the table, decision time will come quickly. The idea isn't to bankrupt our kids, the idea is to give them the gift of a sane government.

Then again, per Friedman, "inflation is always and everywhere a monetary phenomenon." The Fed cut rates after 9/11. Besides there are no WMD.

The Fed has raised short-term rates 14 times since June of 2004, for what I believe is a record. The US Treasury website is down so I can't view what long-term rates were when the Fed started. But I had already pulled up 2003 and 2005 yields. The one-month rate is up 390 bps. The 10 yr is up 12 bps and the 20 yr is down 49 bps. So, choosing to fund debt on a shorter term basis seems to have been a wise decision, as we can now refi that debt at essentially the same long-term rates as we could have in 2003. This to me doesn't indicate a structural change in debt maturity, but a wise fiscal decision.

Randy -

Now I see where you're coming from. To me it's crazy, but maybe it's the only way left. I sure hope not. Either way, the next decade or so could be very scary watching this play out.

M. Jed -

WMD jokes aside, your post is well-taken. You place me in the difficult postion of having to disagree with the great Milton Friedman. And so I must. Having worked as an economist for three years, I've found no evidence to support Friedman's theory and no true adherents practicing on Wall Street.

The Fed cut rates on 9/11 because the principle effect of 9/11 was a demand-side shock. I submit that the principle effect of an attack on our supply chains would be a supply-side shock, which would require a interest rate hike.

The interest rate data are also available at the Fed website -- check the H.15 release on the Economic Data page. Your point is made though -- the overnight rate has gone from 1.00% to 4.50% while the 10-year has gone from 4.70% to 4.56%. However, the 2-year note, the mainstay of the Treasury debt auctions these last few years has gone from 2.74% to 4.57%. Still, I'd be lying if I said I had any idea what was going on in the treasury bond market right now.

As for the supposed wisdom of the debt policy ... we can now issue 30-year bonds at about the same rate of interest as 3-year bonds, but we keep issuing the latter, not the former. Maybe the folks at the BPD have perfect knowledge of the future, and, if so, of course, they should continue to use it. But if not, I don't understand why they won't term out this debt so that we won't be vulnerable to the obviously peculiar workings of the bond market.

Brendan:

Why should I have to pay more in taxes than the 45% I already have to pay so that you Boomers and oldsters can pay yourselves the benefits you pay yourselves at my expense?

AT -

Dude, I'm 27.

Seriously though, the on-budget budget deficit (excluding Social Security and Medicare) was $494 Billion dollars last year, so the problem is a lot more than just benefits for old people.

As for you paying 45% in taxes, I can only conclude that you are either fabulously wealthy and generous and are therefore incurring gift taxes or that you need a new accountant.

AT -

I ran some quick numbers, and even making the most extreme assumptions possible, I can't get a higher average federal tax rate than 38% for income and self-employment taxes. I'm kinda curious what I'm missing.

Brendan:
-Customs and excise taxes. You pay these when you buy the goods affected. Some of the higher rates can be avoided (e.g., I don't buy tobacco or alcoholic beverages), but I sure can't avoid buying gasoline.
-Taxes on corporations and other businesses, which are also passed on to consumers.

Nor do I see any reason why state and local taxes should be excluded from the total. A good chunk of these budgets comes from the federal government - but always with strings attached that require them to tax and spend more:

-State income tax: 4%. Sales tax: 6%. Except for money that I haven't spent before I die, that's a 10% bite of my income - and the state inheritance tax might mean an even bigger bite on the rest of it.
-State excise taxes: That's another piece of my gasoline dollars, and probably a number of other things I'm not even aware of.
-Local property taxes: About 3% of income, and I suspect that's lower than average.
-Fees and permits: Car registration and drivers license takes about $100/year, which must be considerably more than my share of the DMV office expenses. Every business has to pay many fees, and they pass it on to the consumer. The price of a new house will include thousands of dollars for zoning permits and building inspections, and of course that added cost increases your property taxes. (A good building inspection might be worth a thousand - but friends recently moved into a new house and turned the water on to discover that the plumbers hadn't tightened any of the pipe joints. Did the inspector even look at the pipes when he signed off on the plumbing?)

markm,

I did a similar calculation a few months back, adding every tax or fee from every level of government and I came up with 42%. I make almost exactly the median income by the way.

And I think this is a good time to bring up the idea that taxes on the rich are, to a significant degree, actually paid in the form of a hidden sales tax. So add about 15% worth of hidden sales taxes for every dollar you spend. Do this and you see that the average median income earner is paying somewhere around 60% in taxes. Its possible that this is balanced out by the value of government services, but I'm not really seeing it.

Markm and Randy -

I limited myself to federal taxes because this whole discussion has been about the federal budget. I assumed (and I know what happens when I assume) that AT was staying on that topic.

As far as excise taxes go, I tried running those through my calculations and the only way that they make much difference in the average tax rate is if AT spends more money on gasoline, booze and tobacco than he makes altogether.

As for the actual amount of taxes paid by the taxpayer ...

Aggregate personal income in 2005 was $10.3T

There are several different ways to look at how much was paid in taxes:

Total current personal taxes paid: $1.2T
- This is the BEA's measure of personal taxes paid. It includes all income taxes (and I'm not sure what else) but excludes payroll taxes.

Total federal government receipts: $2.2T
- This includes lots of taxes only indirectly borne by the individual, like corporate income tax, estate tax, and customs duties

Total tax receipts (+ social insurance payments), all levels of govt: $3.3T?
- The BEA hasn't yet published a number for 2005, but all of the components except corporate income taxes are available, so I increased the 2004 number by 20% in order to be conservative and added them up. Again this number includes taxes only indirectly borne by the individual.

As you can see, the average tax rate paid by all Americans is somewhere in the neighborhood of 32%.

Because of the progressivity of income taxes, we would expect a somewhat higher rate for those with very high incomes. Because of the regressivity of property and sales taxes, we might see a higher rate for those with very low incomes (I'm thinking mainly of elderly spending down their assets). It would be highly unusual for someone near the median to face an effective tax rate of 60%, and, indeed, even an effective tax rate of 45% would place someone at the extremes of the population.

Food for thought

Brendan,

More food for thought. My point in using the 60% figure is that progressive taxes aren't really progressive at all. That taxes turned into the government by those in the highest tax brackets, are actually paid by those of us in the middle in the form of a hidden sales tax (or in some cases, a hidden income tax, if wages are reduced instead of prices increased).

In your 32% figure, I'm curious as to whether you included vehicle registration fees and vehicle property taxes, gas taxes, sales taxes, utility charges, hidden property tax included in rent. Did you include the employers share of social security, medicare, and unemployment insurance as a hidden income tax?

Randy -

I went through the footnotes on the BEA site, and I can't find anything specifically addressing vehicle registration fees, but it does include user taxes, which I imagine would sweep up all fees. All the rest of the taxes you mentioned are included, including the employer's share of payroll taxes.

Also, keep in mind that since capital gains are not included in personal income (and neither is, among other things, the corporate income that generates capital gains in the stock market), the 32% effectively overstates the tax burden to Americans with investments.

I don't quite follow your argument about the upper class passing through their tax burden to the middle class. I certainly recognize that the middle class pays more for products because executive pay has skyrocketed, but I'm not sure that it's fair to pin this on the tax system since the increases have been orders of magnitude larger than is necessary to compensate for the executives' tax burden.

My thinking goes something like this;

If you hire me to paint your house, and I have to clear $2,000 to make it worth my time, and my total tax bill is 33%, then I have to charge you $3,000 dollars. You're paying the tax, not me. Of course, you may be able to ask your boss for a raise to cover such increases, and your boss may be able to pass it on to his or her customers. When the process stops, that's where the tax gets paid.

Pricing power is essential to the equation. I may not have sufficient pricing power to charge you $3,000. If I can only charge you $2,500, then I pay half of the tax and you pay half. Or maybe I have an employee that I can pay $250 less in wages and only pay half of my half.

But it really does come down to power. Those with very great power are going to be very likely to pass on the entire cost of taxes, while those with very little power are very likely to end up paying not only their own taxes, but all the taxes that have been passed on by the powerful. Not all of the rich have great pricing power, and therefore progressive taxes probably are to some extent truly progressive, but far less progressive than is commonly thought.

January 27, 2006, 9:46 a.m.
The 2003 Tax Cut on Capital Gains Entirely Paid for Itself
I’m not just saying it — CBO is.

On Thursday the Congressional Budget Office released its annual Budget and Economic Outlook, and buried in one of its nearly impenetrable tables of numbers is a remarkable story that has gone entirely unreported by the mainstream media: The 2003 tax cut on capital gains has entirely paid for itself. More than paid for itself. Way more.

To appreciate this story, we have to go back in time to January 2003, before the tax cut was enacted. Table 3-5 on page 60 in CBO’s Budget and Economic Outlook published in 2003 estimated that capital-gains tax liabilities would be $60 billion in 2004 and $65 billion in 2005, for a two-year total of $125 billion.

Now let’s move forward a year, to January 2004, after the capital-gains tax cut had been enacted. Table 4-4 on page 82 in CBO’s Budget and Economic Outlook of that year shows that the estimates for capital-gains tax liabilities had been lowered to $46 billion in 2004 and $52 billion in 2005, for a two-year total of $98 billion. Compare the original $125 billion total to the new $98 billion total, and we can infer that CBO was forecasting that the tax cut would cost the government $27 billion in revenues.

Those are the estimates. Now let’s see how things really turned out. Take a look at Table 4-4 on page 92 of the Budget and Economic Outlook released this week. You’ll see that actual liabilities from capital-gains taxes were $71 billion in 2004, and $80 billion in 2005, for a two-year total of $151 billion. So let’s do the math one more time: Subtract the originally estimated two-year liability of $125 billion from the actual liability of $151 billion, and you get a $26 billion upside surprise for the government. Yes, instead of costing the government $27 billion in revenues, the tax cuts actually earned the government $26 billion extra.

CBO’s estimate of the “cost” of the tax cut was virtually 180 degrees wrong. The Laffer curve lives!

This straight-A report card on supply-side tax-cutting was noted Thursday by Daniel Clifton of the American Shareholders Association — the man who predicted that exactly this would happen when the tax cuts were first enacted. Clifton wrote on his blog,

a capital gains tax cut spurs the growth of new businesses, increases the wage of workers, enhances consumer purchasing power, and grows the economy at large, resulting in more overall gains to be taxed. When capital is taxed at a lower rate, any revenue losses are offset because there is more overall capital being produced, and thus more total revenue being generated.
Using the same kind of analysis, we can see that attempts to raise tax revenues by raising tax rates simply doesn’t work. Consider the massive increase in personal income-tax rates imposed by President Clinton and a Democratic Congress in 1993. Compare actual total tax revenues for the four years from 1993 to 1996 to what had been estimated by CBO in 1992 before the tax hikes took effect. Despite increasing the top tax rate on incomes by 16 percent to 28 percent, actual revenues only beat the 1992 estimate by less than 1 percent.

So what led to the gusher of tax revenues in the late 1990s that helped to put the federal budget into surplus? Simple: It was the capital-gains tax cut engineered by a Republican Congress in 1997. Compare actual total tax revenues for the three years from 1997 to 1999 to what had been previously estimated by CBO in January 1997. Despite cutting the capital-gains tax rate by 28 percent, actual total revenues beat the 1997 estimate by more than 11 percent.

These are the numbers. They don’t lie. It’s the Left that lies — just like former Clinton Treasury Secretary Robert Rubin did this week in an op-ed in the Wall Street Journal when he said

The proponents of supply-side theory who assert that tax cuts will wholly — or even significantly — pay for themselves (through increased growth and federal tax revenues), appear to be no more accurate now than they were in the ’90s.
The numbers show that supply-side theory is accurate now and that it was accurate in the ’90s. With the latest evidence from the CBO in hand, as Daniel Clifton says, “It’s time to make the capital gains and dividend tax cuts permanent. Congress has no excuse at this point.”

— Donald Luskin is chief investment officer of Trend Macrolytics LLC, an independent economics and investment-research firm. He welcomes your visit to his blog and your comments at don@trendmacro.com.

I've worked with Donald Luskin, so I know he's a smart man. That's why I find it hard to believe that even he believes this poppycock.

Suffice it to say that cherry picking one small tax change dealing with a tax that produces a very variable revenue stream does not represent proof that we are on the right side of the Laffer curve.

The big macro-level numbers don't lie -- the tax cuts have caused revenue declines versus the historical baselines and especially versus the predicted present-day values. We've already covered this in depth.

Also, "lie" is a pretty strong word to toss around, especially when Rubin is right: the tax cuts have not paid for themselves. It's disappointing to read something like that.

Randy -

You make a very interesting point. I should like to give it more thought. Thank you for explaining it to me.

I appreciate that Brendan.

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