7.08.2006

Oh those irresponsible Bush tax cuts…

The NYTimes of all places:

An unexpectedly steep rise in tax revenues from corporations and the wealthy is
driving down the projected budget deficit this year, even though spending has
climbed sharply because of the war in Iraq and the cost of hurricane
relief.
On Tuesday, White House officials are expected to announce that the
tax receipts will be about $250 billion above last year's levels and that the
deficit will be about $100 billion less than what they projected six months ago.
The rising tide in tax payments has been building for months, but the increased
scale is surprising even seasoned budget analysts and making it easier for both
the administration and Congress to finesse the big run-up in spending over the
past year.
Tax revenues are climbing twice as fast as the administration
predicted in February, so fast that the budget deficit could actually decline
this year.
The main reason is a big spike in corporate tax receipts, which
have nearly tripled since 2003, as well as what appears to be a big rise in
individual taxes on stock market profits and executive bonuses.

Despite this revelation, I’m quite certain we’ll be hearing flawed analysis from Krugman wannabes like this in the NYTimes and NPR all through the 2006 election.

If we cut taxes for the rich, either A) we raise other taxes or B) we increase
debt or C) we cut spending. A), B) and C) have incentive effects too; we must
consider net incentives.
A tax cut for the rich has minimal incentive effect.
That's because much income at the top is "passive." Corporate shareowners can't
increase their capital gains if tax rates fall--though they may change their tax
accounting.

11 comments:

Anonymous said...

So does this mean that corporations and executives are making sooo much more money that lower tax rates are increasing tax revenues?

Anonymous said...

So how much longer do the lower & middle economic demographics have to eek through until they get to see some of that growth? Last I knew economic growth for the vast, vast majority of us comes through payroll, not so much corporate windfall.

It's like getting an additional 10 mpg out of a already efficient hybrid when you really would like more efficiency where there isn't very much..

Anonymous said...

It would actually improve my quality of living quite a bit. Working with Weatherization (wx) my livelihood depends upon federal spending & utility $s. Next year wx budgets are getting slashed significantly because we are still running up huge budget deficits (despite tax revenues being what they are). Wx is a program that helps improve the quality of life for those in poverty, in absolute terms, not just relative ones. Seeing as how Buffet is turning to philanthropy something makes me think he wouldn't mind paying more taxes as long as they were spent wisely.

(and my wife is getting a degree in early childhood education, so once again slightly higher taxes at the cost of slower economic growth for the financially successful would be a positive for me.)

Joe said...

Andrew is making the assumption that recent economic growth in the U.S. is a result of the Bush tax cuts. This certainly may be true (fitting the Laffer curve theory). But, it may also be true that U.S. growth is just part of the natural recovery from the bust of dot-com and 9-11 years, and that it would have happened regardless of the Bush tax cuts. If so, then tax receipts would have been higher today without the tax cuts.

The Laffer theory lead Reagan to introduce tax cuts without seeing the accompanying rise in revenues. The problem with the Laffer curve is that there is no way to determine where we fall on it.

To respond to the general poverty issue, Dan and Andrew are both right. Since 1980, the return to a year of education has increased, with 4 year college graduates earing more, on average, than their parents. This rise comes from the increase in high-skill, high-wage jobs, as well as from the rise in general income per capita (so that people can pay for those skills). And it is true that the very wealthy have increased their lead on the middle-class, which as Andrew's body builder analogy suggests, is not necessarily bad economics, even if it is morally questionable.

The problem is that life for the unskilled worker has become more difficult than it was for his parents. There are simply far fewer jobs that offer decent pay for low-skilled work. This would be sad, but not necessarily unfair, if it weren't for the fact that poor people are much less likely to acquire the requisite training to compete in the high-skill labor market. So, they are stuck with low-wage, low-benefit jobs, with few prospects of acquiring more skills and thus better jobs. The minimum wage is worth less now than it was in the late 70s, when adjusted for purchasing power.

I wrote a long paper about all of this (which I got an A on), so if anyone wants a copy, or if anyone knows how to post it somewhere, let me know.

Joe said...

According to John Mikesell (professor at my school and one of the foremost experts on public finance in the world) you're wrong. "President Reagan's 1981 tax reductions were based in part on the view, argued most effectively by Arthur Laffer...that federal personal income tax rates were above t* (the point of inflection on the laffer curve) and hence the rate reduction would help close the budget deficit by increasing tax revenue...Careful analysis has shown yields to have been reduced by the Reagan reductions, however." (Mikesell, Fiscal Administration, 6th edition, 2003).

Joe said...

The argument isn't that the tax cuts caused a decline in revenues. It's that the increase in revenues did not come from the tax cuts. I asked my own Public Finance professor to explain the situation, and this is what he wrote to me.

"That is a hotly debated question. The evidence is not clear one way or the other. Reagan not only cut taxes which supply siders believed would increase economic growth resulting in higher income and higher tax revenues but he also increased spending, primarily defense, which would have the same result on income and tax revenues. Which policy resulted in the higher revenues during the Reagan administration is an empirical matter which means its will be debated until we’re all dead."

Anonymous said...

Andrew, back to the cow & away from Quantitative Methods :) I realize the 'economy' is doing just swell if you are a corporation or own a significant portion of one. However, poverty has also increased almost every year since 2000 in the midwest.
That troubles me more than the relief I feel from knowing we are marginally less in debt due to the economy's growth. btw, where is this growth coming from? I don't have a good feel of that..

Anonymous said...

Yup, my concern is about political philosophy more than economics in this situation. But I'm still not sure where this growth is going to? Does anyone have insights on that, to bring this back to economics..

Anonymous said...

It's been a while, but here is the limited number crunching I was able to do:

table

source

With regards to your "poor are getting richer too" theme, the cost of living keeps on rising as well. Housing, fuel, education, health care are all rather expensive.

But that doesn't matter because I don't trust this particular admin to do anything positive with these circumstances. So we are left to the market to bumble along and hope consumers make well informed decisions. If they don't, buyer beware and a mistake can be come a very expensive one.

Anonymous said...

I thought thanks to the omnipresence of the global market place we are all interconnected and everything is inter-related. Therefore, all those issues and many more are inter-related to our tax policy.
By the way, would your view of the world be altered if you didn't happen to work in a profession that is on a wonderful upswing?
Working in the field of energy efficiency and housing is very exciting and promising for the most part, but there are several friends and family that haven't been as blessed as I. Those are the people that come to mind when I hear how wonderful things are for the economy. What do you think of when that economic good news is at the top of your google news search?

Anonymous said...

I would agree with you there that this gov't wouldn't have help your situation one bit. But 400 people applying for the same position. In a field with a labor situation such as that organization might have been an option with long term benefits.

I'm sorry for being tangential, but there was a blub on the Rachel Maddow show this morning (about 20 minutes in) that referenced this study. They even have a small summary for Indy. (The steaming will only work for today, after that it will be archived.) Basically, comparable goods cost more in areas of poverty compared to areas of greater wealth. So despite not paying much if any taxes, having possible other gov't aid, and having rising incomes, the surrounding market is still a disadvantage to their improvement in quality of life.

I don't have anything else to add in regards to marginal tax rates. So if you want to end the discussion that is fine with me. I've enjoyed this. It is always a pleasure to converse with someone smarter than myself. I look forward to it again in the future!

p.s. joe, i just realized i've had a class with your public finance prof. i enjoyed it quite a bit (as far as pub finance goes).