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NEWSFLASH: High Deficits Mean High Taxes

By: Brian Faughnan (Diary)  |  June 22nd, 2009 at 02:22 PM  | 

RESIZE: AAA

This comes as a surprise to no one of course, except for an Obama administration which seems to believe that taxes can stay at more or less current levels despite their extraordinary spending binge. Instead, history suggests that if Washington wants to run historically-high deficits, then much higher taxes inevitably follow:

taxratesvsdebts-0.71x0.71

As Blodget says:

We don’t know about you, but we’re not excited about the apparent correlation here between massive government debt and deficits (blue and dotted blue lines) and sky-high marginal tax rates (red).

Yes, in previous eras, it appears that high taxes preceded the exploding debt and deficits. But we have this sneaking suspicion that that apparently comforting pattern will be reversed this time.

I suspect President Obama will wait to push for a massive tax increase until his lame duck term.

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  • gonzo55

    When I look at that graph, it seems just as likely, if not more, that high taxes cause high deficits, and not the other way around. It’s reasonably well-accepted that the Reagan and Bush tax cuts actually increased tax revenue, so it makes sense that during periods of high taxes, tax revenue goes down, without a commensurate drop in spending, spurring high deficits/debt.

    • 6eorge Jetson

      nt

    • repub2012

      When we ban you patriot2030, we mean it. ??NS

      Re:
      “It?s reasonably well-accepted that the Reagan and Bush tax cuts actually increased tax revenue”

      No, that myth is just a persistent myth. There is a strong consensus among prominent conservative economists — including Bush’s own top economists — that the net effect of the Bush tax cuts (and of tax cuts generally from rates anywhere near current rates) is much LESS revenue than we would otherwise have collected. Part of the reason some people believe in this myth is because they simply observe tax revenues going up over some period following tax cuts, but this misses the most basic element of correlation analysis by ignoring what happens when the independent variable changes — i.e., what happens to revenues when tax rates are unchanged or even increased; it turns out, revenues generally rise regardless of tax policy, because the economy is more often in expansion than recession.

      I suggest that anyone believing that the Bush tax cuts had a net positive impact on revenues (or believing that “tax cuts [always or generally] increase revenue”) check what actual economists — including almost all conservative economists and including Bush’s own top economists — have said on this very question. See htp://www.swordscrossed2.org/diary/20081017/no-bush-tax-cuts-have-not-generated-higher-revenues and see this video by Dan Mitchell of Cato htp://www.youtube.com/watch?v=fIqyCpCPrvU The money quote from Mitchell?s video: ?Let?s consider some of the implications of the Laffer Curve, and also dismiss some of the myths?Notwithstanding the exaggerated claims of some politicians, the Laffer Curve does not mean that all tax cuts pay for themselves. Indeed, it is only in very rare cases that this happens.? [Mitchell does then point out a couple of supposed exceptions to the general rule, although his arguments are dubious, perhaps an attempt to salvage a small bit of the ?higher revenue? rationale for tax cuts that his target audience wishes to maintain].

      There are benefits to cutting taxes, but increased revenue is NOT one of them (other than a temporary boost from a capital gains tax cut that essentially just shifts revenues from the future to the present by incentivizing earlier realization of gains from selling appreciated assets). Better to argue on a valid basis than on one that almost all the experts across the political spectrum have declared obviously invalid.

      The left has its persistent, pervasive myths, and so does the right*, and one of the biggest on the right is the “tax cuts increase revenues” myth. To quote you quoting Reagan, “facts are stubborn things”. Although the above is not a matter of “fact” per se (since it inherently deals with a counterfactual — what revenues would be and would have been under one tax rate scenario vs. another — almost all the experts, across the political spectrum, applying all their analytical tools (empirical analysis, theory, math, etc.), agree that your contention is highly unlikely to be valid.

      * Examples of each provided just the other day by (conservative columnist) Ross Douthat: “just as Bush-era conservatives couldn?t really make tax cuts pay for themselves, Obama-era Democrats aren?t really going to be able to finance universal health care without substantial middle-class tax increases, or substantial spending cuts.” htp://www.nytimes.com/2009/06/22/opinion/22ross.html

      • Martin Knight

        Still pimping the same old anti-tax cut arguments, eh? And using the same disingenuous debating style as well, I see.

        The above, folks, is an example of coming to a conclusion and then going back to cherry-pick the evidence to fit the conclusion. A perfect illustration of this is this idiot’s deciding to cite CATO’s Dan Mitchell as supporting Keynesian-Krugmanism and then the snarky charge that Mitchell is obviously lying (to allow his rube “target audience” to continue live in their fantasy) when he diverges from the Keynesian-Krugmanist storyline.

        Note also that even the part where “repub2012″ {heh heh} claims Mitchell supports the Keynesian-Krugmanist argument is stated (deliberately?) wrong – I don’t know of any Republican who claims that all tax cuts result in government revenue growth.

        The funny thing about the argument presented by the fraud above is that we’re actually put in the situation where we’re supposed to believe him and his cited “conservative economists” (e.g. Ross Douthat) over our lying eyes, the fact that revenue rates significantly increase immediately following a tax cut is simply our minds playing tricks on us – we’re supposed to believe, completely dismissing the role of incentives and its effect on behavior in the economy, that this would have happened anyway.

        And the fraud’s evidence of this is that the American economy is generally in a state of growth – while conveniently neglecting to mention the effect of tax rates on business activity and growth rates.

        Please take special care to note the fraud’s “clever” screen-name and repeated peppering of his comment with assertions that Keynesian-Krugmanism is supported by a consensus conservative economists – except when they don’t (and he accuses them of lying). Appeals to (non-existent) authority and claims of “consensus” (sound familiar?) are staple elements of Leftist argument tactics as well as wearing a false flag.

        PS: I know you’re probably not BrooksRob, but this gives you notice that this argument has been advanced before and destroyed on RedState almost two years ago.

        PPS: Ross Douthat is not a conservative. The New York Times doesn’t hire conservatives, he was hired to replace Bill Kristol because Kristol wouldn’t play ball and attack Republicans and Conservatives on cue like David Brooks, Douthat clearly must have given them assurances that he would toe the (liberal) line.

        • Achance

          Don’t know why people are compelled to show up here and deliver lectures like that.

        • repub2012
          The numerous personal attacks in your reply don?t bother me, and I won?t respond in kind (I?ll keep my comments focused on facts and arguments, not personal attacks), but it would be nice if you offered arguments that weren?t so transparently invalid. And if my preference matters to you, I’d prefer civil discourse focused on facts and arguments.

          There?s no cherry-picking on my part. I encourage anyone who wants to see what Bush?s top economists and others among America?s most prominent conservative economists have said on this matter to go to that link I provided ? again for convenience, it?s htp://www.swordscrossed2.org/diary/20081017/no-bush-tax-cuts-have-not-generated-higher-revenues . Thing is, other than literally a couple of economists who have made a career out of perpetuating this myth that tax cuts generally increase revenues (e.g., Stephen Moore), there is strong consensus among economists on this point. Anyone can quickly see all the big names quoted at that link clearly stating that tax cuts generally do NOT pay for themselves (i.e., that they cause a net LOSS of revenue), and if anyone can find credentialled economists who contend otherwise, let?s hear it. Otherwise, if the only folks one can cite are talk show hosts and politicians, I think common sense would say those clear statements by that lineup of America?s most prominent conservative economists carries much more weight and credibility, right?

          Re: ?Note also that even the part where ?repub2012? {heh heh} claims Mitchell supports the Keynesian-Krugmanist argument is stated (deliberately?) wrong – I don?t know of any Republican who claims that all tax cuts result in government revenue growth.?

          I’m not saying it’s deliberate on your part, but that is obviously a straw man misrepresentation of what Mitchell said and of the point I?m making. Mitchell didn?t just say that it?s a myth that ?all? tax cuts result in revenue growth. As I clearly stated, Mitchell said that ?it is only in very rare cases that this happens.? I don?t know how Mitchell (or I) could be much clearer than that. Not ?all? tax cuts, not generally, not most, not even is a substantial minority of cases, but ?only in very rare cases? do tax cuts generate higher revenues. Isn?t that crystal clear?

          Mitchell does then point out that capital gains tax cuts generate immediate revenue growth, but he neglects to point out that this increase in revenues is only temporary, and yes, I snarkily speculated that he may have made that omission deliberately, but what?s important with regard to the revenue impact of capital gains tax cuts is not my snarky side-comment regarding Mitchell?s possible motivation, but rather whether or not capital gains tax cuts generally have a net positive or net negative impact on revenues over a longer period of time than a few months or a year. Greg Mankiw, prominent conservative Harvard economist and former Chairman of W. Bush?s Council of Economic Advisors is one of the economists, is one of the economists quoted at that link, and he concluded in a paper that ?in the long run, about 17 percent of a cut in labor taxes is recouped through higher economic growth. The comparable figure for a cut in capital taxes is about 50 percent.? htp://www.nber.org/digest/jul05/w11000.html ?Matthew Weinzierl and I estimated that a broad-based income tax cut (applying to both capital and labor income) would recoup only about a quarter of the lost revenue through supply-side growth effects. For a cut in capital income taxes, the feedback is larger–about 50 percent–but still well under 100 percent. A chapter on dynamic scoring in the 2004 Economic Report of the President says about the the same thing.? htp://gregmankiw.blogspot.com/2007/07/on-charlatons-and-cranks.html

          Re: “The funny thing about the argument presented by the fraud above is that we?re actually put in the situation where we?re supposed to believe him and his cited ?conservative economists? (e.g. Ross Douthat) over our lying eyes, the fact that revenue rates significantly increase immediately following a tax cut is simply our minds playing tricks on us – we?re supposed to believe, completely dismissing the role of incentives and its effect on behavior in the economy, that this would have happened anyway.”

          First of all, I didn?t claim or imply that Ross Douthat was one of the prominent conservative economists quoted at that link. Douthat isn?t even an economist at all as far as I know. Did you even bother to check the link? It really wouldn?t kill ya? just to at least scan to see who is quoted.

          Second, I just explained why some people have the mistaken belief that you do. You see that tax revenues generally increase in the years following a tax cut, and you assume a correlation and, in turn, causation. But you make the most basic mistake one could make. You ignore what happens to the dependent variable (revenue) when the independent variable (tax cuts) is not present (no tax cuts) or when the opposite is present (tax increases). To establish a correlation and infer causation, one would at least start by comparing how revenue reacts to each of these three states of the independent variable (and then there?s still consideration of other factors impacting revenues that vary across the time periods, such as how aggressively the Fed lowered or raised interest rates or other major macroeconomic dynamics). As I explained, our economy is more often growing then in recession, and revenues therefore generally trend upward regardless of whether tax rates are increased, cut, or left the same.

          Third, re: ?completely dismissing the role of incentives and its effect on behavior in the economy?, no one is suggesting that tax cuts don?t increase incentives and, in turn, grow the economy, and in turn, generate revenue feedback effects. The point is that the incremental economic growth and growth of the tax base (growth in the income and reduced tax avoidance) is not sufficient to offset the reduction in tax rates applied to that new, higher tax base. Just to illustrate with a simplified example, if Joe earns $100,000 taxable income at an average 22% tax rate, he pays $22,000. If income tax rates are cut across the board by 10%, bringing his average tax rate down from 22% to 20%, and Joe responds to this added incentive by earning $105,000, he will end up paying less in taxes ($21,000). You see, there are two factors, the tax rate and the amount of taxable income. One goes down, the other goes up, and what almost all economists agree on is that the latter doesn?t go up enough to offset the reduction in the former.

          Re: ?And the fraud?s evidence of this is that the American economy is generally in a state of growth – while conveniently neglecting to mention the effect of tax rates on business activity and growth rates.?

          See above and perhaps you?ll see what you?re not getting.

          • repub2012
            Minor note: minor error in the math of my illustration (10% reduction in average tax rate from 22% would be to just under 20%), but it doesn’t significantly change the illustration.
          • Martin Knight

            Just to illustrate with a simplified example, if Joe earns $100,000 taxable income at an average 22% tax rate, he pays $22,000. If income tax rates are cut across the board by 10%, bringing his average tax rate down from 22% to 20%, and Joe responds to this added incentive by earning $105,000, he will end up paying less in taxes ($21,000).

            Heh … Extending your example …

            That 10% income rate tax cut means that many small business owners (which employ about 75% of the American workforce) and file their business income as personal income, would now be able to hire more people and boost up their output for higher profits.

            Meaning that Joe pays $21,000 and Jim, who thanks to the tax cut was previously unemployed is now hired by small business owner John, is now earning (let’s say) $50,000 which means that he in turn pays $5000 in taxes. Total going into the treasury pre-tax cut was $22,000. Now, post-tax cut, it’s $26,000.

      • http://impudent.blognation.us/blog kyle8

        If you truly beleive that neo-keynsian crap then can you tell me exactly where the point of equilibrium is on the laffer curve? I thought not.

        You would have me believe that the economy would have increased to the same extent or nearly the same extent that it did all throughout the eighties and nineties without the Reagan tax cuts. But of course that is lunacy.

        Our economy was an anemic sputtering piece of crap, not unlike your analysis, before those tax cuts. By the way, current taxes are still too high, The entrepreneurial class in most cases pay nearly 50% of their income in all combined taxes. I am not sure where the equilibrium point is, but I am damn sure that its below 50%

        So before you go talking about myths and use a regression analysis that can never be proven because it measures a timeline that never happened, You might want to ask your elders to provide you with some real data about events that really happened,. Like when taxes were slashed in the 1960′s, the 1980′s and also in Britain and other nations and the result was huge growth in the private sector and huge new revenues into the
        public sector.

        Don’t try and tell me that I don’t understand what I saw with my own eyes.

        • gonzo55

          “No, that myth is just a persistent myth.”

          I’m not up on your fancy book learning, but that might just be a circular argument.

          Others have responded to your specific points much more ably than I possibly could, but I think we need to wait on judging the Bush tax cuts until we have the perspective to measure their effect on long-term growth. Reagan ran deficits after his tax cuts, but their positive effect on the growth of the 90′s is hard to overlook. And I think it’s generally acknowledged that the Kennedy (give credit where it’s due…) tax cuts had similar positive effects. Once we can look past the current recession and that of the tech bust, I think we’ll see robust growth that will more than make up for the small temporary increase in the deficit following the Bush cuts.

          Unless, of course, Supreme Leader Obama undoes all of them. Not even sure why I’m saying unless, it’s already begun…

  • Kyle-MI

    If a government agency does not spend all the money it was budgeted, then it’s next budget gets cut. That means you have less power the next budget cycle. Everyone from top management to the lowliest worker has no incentive to save even a penny. They get paid as long as they do what their job description asks. In fact, it is almost better if you go a little over budget. Then you can complain in the next cycle that you didn’t have enough to do your job the last time around.

    Bottom line is the government will spend however much money it gets through taxes. Everyone in government will always push to get more.

    • 6eorge Jetson

      to address the ∅debtama is spending.

      What a novel idea.

  • rbdwiggins
  • Jim

    This runaway spending will do nothing good for the taxpayer, but let us not forget that taxation is only one of three main methods for the government to raise revenue (the other two being borrowing and inflation). The rest of the world is starting to cut us off (how have those Treasury auctions been going lately?) so we cannot go further and further into debt forever.

    That leaves us with massive inflation of the money supply, thus devaluing the dollar and destroying people’s purchasing power. If you look at the money supply figures over the past few months the Fed has been creating new money and credit like there is no tomorrow.

    Combine big-time inflation and higher taxes and you get one angry population!