6 months from the largest tax increases in history (pg. 11)
Comrade Stalin
Fuuuu, Opus's posts are ing books man.
Shakka
If you read Opus'post (and I assume many on the left, or those that hate rich people;)) you find that the substance is more of an argument that it's not fair to cut rich people's taxes because they BENEFIT more, not because of the impact on federal revenues. It's a class warfare argument that, to me, suggests they are less concerned with balancing the budget and addressing deficits than they are concerned about making sure the affluent don't realize any financial windfalls. It's a bait-and-switch argument at its finest. Never mind that the real argument is that lower marginal tax rates actually help increase federal revenues over time because more private capital is able to be put to better use and letting all people keep more of their own money is a powerful incentive for people to continue to go out and spend and support the economy. In their eyes, if a rich person sees benefit, it must be bad policy. Because everyone knows that rich people didn't earn their money and all wealth is actually the property of the government to distribute as it best sees fit.
quote:
Originally posted by Opus
Furthermore, CBO indicated that extending the tax cuts for high-income households in particular would rate even lower in effectiveness than extending all of the tax cuts. This is because, as CBO explained, “higher-income households … would probably save [rather than spend] a larger fraction of their increase in after-tax income.”[3]
Whether they save it or spend it, that money still stays in the private sector. If they spend it, great. If they save it, the bank or financial institution they put it in will likely lend it out to businesses that need capital and will create jobs. If it goes to the government, it just gets confiscated and wasted on bull. However, with new FinReg, who knows how that incentive system will now be altered since the government wants to punish the financial sector. Some of the proposals are great and make sense (like limiting leverage and requiring bigger capital cushions, as well as providing a central clearing house for OTC derivatives), but others are less useful (like using the financial collapse as an excuse for greater oversight of hedge funds that did not cause the problems and did not take bailout money, as well as saying "too big to fail" would be fixed, even though the biggest banks have only gotten bigger).
As to the real argument that I've been making (that lower marginal tax rates are a bigger boon to long-term economic growth and that spending is the problem, not revenue). The article below also highlights things like lower incidents of tax avoidance/evasion with lower rates which helps raise tax receipts.:
April 1996
The Reagan Tax Cuts: Lessons for Tax Reform
During the summer of 1981 the central focus of policy debate was on the Economic Recovery Tax Act (ERTA) of 1981, the Reagan tax cuts. The core of this proposal was a version of the Kemp-Roth bill providing a 25 percent across-the-board cut in personal marginal tax rates. By reducing marginal tax rates and improving economic incentives, ERTA would increase the flow of resources into production, boosting economic growth. Opponents used static revenue projections to argue that ERTA would be a giveaway to the rich because their tax payments would fall.
The criticism that the tax payments of the rich would fall under ERTA was based on a static conception of human behavior. As a 1982 JEC study pointed out,[1] similar across-the-board tax cuts had been implemented in the 1920s as the Mellon tax cuts, and in the 1960s as the Kennedy tax cuts. In both cases the reduction of high marginal tax rates actually increased tax payments by "the rich," also increasing their share of total individual income taxes paid. Unfortunately, estimates of ERTA by the Democrat-controlled CBO continued to show falling tax payment by upper income taxpayers, even after actual IRS data had become available showing a surge of income tax payments by affluent taxpayers.
Given the current interest in tax reform and tax relief, a review of the effects of the Reagan tax cuts on taxpayer behavior and tax burden provides useful information. During the 1980s ERTA had reduced personal tax rates by about 25 percent, while the Tax Reform Act of 1986 chopped them yet again.
Tax Rates and Tax Revenues
High marginal tax rates discourage work effort, saving, and investment, and promote tax avoidance and tax evasion. A reduction in high marginal tax rates would boost long term economic growth, and reduce the attractiveness of tax shelters and other forms of tax avoidance. The economic benefits of ERTA were summarized by President Clinton's Council of Economic Advisers in 1994: "It is undeniable that the sharp reduction in taxes in the early 1980s was a strong impetus to economic growth." Unfortunately, the Council could not bring itself to acknowledge the counterproductive effects high marginal tax rates can have upon taxpayer behavior and tax avoidance activities.
Since 1984 the JEC has provided factual information about the impact of the tax cuts of the 1980s. For example, for many years the JEC has published IRS data on federal tax payments of the top 1 percent, top 5 percent, top 10 percent, and other taxpayers. These data show that after the high marginal tax rates of 1981 were cut, tax payments and the share of the tax burden borne by the top 1 percent climbed sharply. For example, in 1981 the top 1 percent paid 17.6 percent of all personal income taxes, but by 1988 their share had jumped to 27.5 percent, a 10 percentage point increase. The graph below illustrates changes in the tax burden during this period.
Click here to see Figure 1.
The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.
A middle class of taxpayers can be defined as those between the 50th percentile and the 95th percentile (those earning between $18,367 and $72,735 in 1988). Between 1981 and 1988, the income tax burden of the middle class declined from 57.5 percent in 1981 to 48.7 percent in 1988. This 8.8 percentage point decline in middle class tax burden is entirely accounted for by the increase borne by the top one percent.
Several conclusions follow from these data. First of all, reduction in high marginal tax rates can induce taxpayers to lessen their reliance on tax shelters and tax avoidance, and expose more of their income to taxation. The result in this case was a 51 percent increase in real tax payments by the top one percent. Meanwhile, the tax rate reduction reduced the tax payments of middle class and poor taxpayers. The net effect was a marked shift in the tax burden toward the top 1 percent amounting to about 10 percentage points. Lower top marginal tax rates had encouraged these taxpayers to generate more taxable income.
[i] The 1993 Clinton tax increase appears to having the opposite effect on the willingness of wealthy taxpayers to expose income to taxation. According to IRS data, the income generated by the top one percent of income earners actually declined in 1993. This decline is especially significant since the retroactivity of the Clinton tax increase in that year limited the ability of taxpayers to deploy tax avoidance strategies, temporarily resulting in an increase in their tax burden. Moreover, according to the FY 1997 Clinton budget submission, individual income tax revenues as a share of GDP will be lower during the first four years of the Clinton tax increase, which include the effects of the 1990 tax increase, than under the last four years of the Reagan tax changes (FY 1986-89). Furthermore, according to a study published by the National Bureau for Economic Research,[2] the Clinton tax hike is failing to collect over 40 percent of the projected revenue increases.[i]
Incidentally, the claim that unrealistic supply side Reagan Administration revenue projections caused large budget deficits during the 1980s is false. Nonetheless, this false allegation is often used against current tax reform proposals. The official Reagan revenue projections immediately following enactment of ERTA did not assume huge revenue increases, and were actually quite close to the CBO revenue projections. Even the Democrat-controlled CBO projected that deficits would fall after the enactment of the Reagan tax cuts. The real problem was a recession that neither CBO nor OMB could foresee. Even so, individual income tax revenues rose from $244 billion in 1980 to $446 billion in 1989.
Conclusion
The Reagan tax cuts, like similar measures enacted in the 1920s and 1960s, showed that reducing excessive tax rates stimulates growth, reduces tax avoidance, and can increase the amount and share of tax payments generated by the rich. High top tax rates can induce counterproductive behavior and suppress revenues, factors that are usually missed or understated in government static revenue analysis. Furthermore, the key assumption of static revenue analysis that economic growth is not affected by tax changes is disproved by the experience of previous tax reduction programs. There is little reason to expect static revenue analysis to evaluate the economic or distributional effects of current tax reform proposals much better than it evaluated the Reagan tax program 15 years ago.
Christopher Frenze
Chief Economist to the Vice-Chairman
Shakka
quote:
Principles for Economic Revival
Our prosperity has faded because policies have moved away from those that have proven to work. Here are the priorities that should guide policy makers as they seek to restore more rapid growth.
By GEORGE P. SHULTZ, MICHAEL J. BOSKIN, JOHN F. COGAN, ALLAN MELTZER AND JOHN B. TAYLOR
America's financial crisis, deep recession and anemic recovery have largely been driven by economic policies that have deviated from proven fact-based principles. To return to prosperity we must get back to these principles.
The most fundamental starting point is that people respond to incentives and disincentives. Tax rates are a great example because the data are so clear and the results so powerful. A wealth of evidence shows that high tax rates reduce work effort, retard investment and lower productivity growth. Raise taxes, and living standards stagnate.
Nobel Prize-winning economist Edward Prescott examined international labor market data and showed that changes in tax rates on labor are associated with changes in employment and hours worked. From the 1970s to the 1990s, the effective tax rate on work increased by an average of 28% in Germany, France and Italy. Over that same period, work hours fell by an average of 22% in those three countries. When higher taxes reduce the reward for work, you get less of it.
[shultz]
Long-lasting economic policies based on a long-term strategy work; temporary policies don't. The difference between the effect of permanent tax rate cuts and one-time temporary tax rebates is also well-documented. The former creates a sustainable increase in economic output, the latter at best only a transitory blip. Temporary policies create uncertainty that dampen economic output as market participants, unsure about whether and how policies might change, delay their decisions.
Having "skin in the game," unsurprisingly, leads to superior outcomes. As Milton Friedman famously observed: "Nobody spends somebody else's money as wisely as they spend their own." When legislators put other people's money at risk—as when Fannie Mae and Freddie Mac bought risky mortgages—crisis and economic hardship inevitably result. When minimal co-payments and low deductibles are mandated in the insurance market, wasteful health-care spending balloons.
Rule-based policies provide the foundation of a high-growth market economy. Abiding by such policies minimizes capricious discretionary actions, such as the recent ad hoc bailouts, which too often had deleterious consequences. For most of the 1980s and '90s monetary policy was conducted in a predictable rule-like manner. As a result, the economy was far more stable. We avoided lengthy economic contractions like the Great Depression of the 1930s and the rapid inflation of the 1970s.
The history of recent economic policy is one of massive deviations from these basic tenets. The result has been a crippling recession and now a weak, nearly nonexistent recovery. The deviations began with policies—like the Federal Reserve holding interest rates too low for too long—that fueled the unsustainable housing boom. Federal housing policies allowed down payments on home loans as low as zero. Banks were encouraged to make risky loans, and securitization separated lenders from their loans. Neither borrower nor lender had sufficient skin in the game. Lax enforcement of existing regulations allowed both investment and commercial banks to circumvent long-established banking rules to take on far too much leverage. Regulators, not regulations, failed.
The departures from sound principles continued when the Fed and the Treasury responded with arbitrary and unpredictable bailouts of banks, auto companies and financial institutions. They financed their actions with unprecedented money creation and massive issuance of debt. These frantic moves spooked already turbulent markets and led to the financial panic.
More deviations occurred when the government responded with ineffective temporary stimulus packages. The 2008 tax rebate and the 2009 spending stimulus bills failed to improve the economy. Cash for clunkers and the first-time home buyers tax credit merely moved purchases forward by a few months.
Then there's the recent health-care legislation, which imposes taxes on savings and investment and gives the government control over health-care decisions. Fannie Mae and Freddie Mac now sit with an estimated $400 billion cost to taxpayers and no path to resolution. Hundreds of new complex regulations lurk in the 2010 financial reform bill with most of the critical details left to regulators. So uncertainty reigns and nearly $2 trillion in cash sits in corporate coffers.
Since the onset of the financial crisis, annual federal spending has increased by an extraordinary $800 billion—more than $10,000 for every American family. This has driven the budget deficit to 10% of GDP, far above the previous peacetime record. The Obama administration has proposed to lock a sizable portion of that additional spending into government programs and to finance it with higher taxes and debt. The Fed recently announced it would continue buying long-term Treasury debt, adding to the risk of future inflation.
There is perhaps no better indicator of the destructive path that these policy deviations have put us on than the federal budget. The nearby chart puts the fiscal problem in perspective. It shows federal spending as a percent of GDP, which is now at 24%, up sharply from 18.2% in 2000.
Future federal spending, driven mainly by retirement and health-care promises, is likely to increase beyond 30% of GDP in 20 years and then keep rising, according to the Congressional Budget Office. The reckless expansions of both entitlements and discretionary programs in recent years have only added to our long-term fiscal problem.
As the chart shows, in all of U.S. history, there has been only one period of sustained decline in federal spending relative to GDP. From 1983 to 2001, federal spending relative to GDP declined by five percentage points. Two factors dominated this remarkable period. First was strong economic growth. Second was modest spending restraint—on domestic spending in the 1980s and on defense in the 1990s.
The good news is that we can change these destructive policies by adopting a strategy based on proven economic principles:
• First, take tax increases off the table. Higher tax rates are destructive to growth and would ratify the recent spending excesses. Our complex tax code is badly in need of overhaul to make America more competitive. For example, the U.S. corporate tax is one of the highest in the world. That's why many tax reform proposals integrate personal and corporate income taxes with fewer special tax breaks and lower tax rates.
But in the current climate, with the very credit-worthiness of the United States at stake, our program keeps the present tax regime in place while avoiding the severe economic drag of higher tax rates.
• Second, balance the federal budget by reducing spending. The publicly held debt must be brought down to the pre-crisis safety zone. To do this, the excessive spending of recent years must be removed before it becomes a permanent budget fixture. The government should begin by rescinding unspent "stimulus" and TARP funds, ratcheting down domestic appropriations to their pre-binge levels, and repealing entitlement expansions, most notably the subsidies in the health-care bill.
The next step is restructuring public activities between federal and state governments. The federal government has taken on more responsibilities than it can properly manage and efficiently finance. The 1996 welfare reform, which transferred authority and financing for welfare from the federal to the state level, should serve as the model. This reform reduced welfare dependency and lowered costs, benefiting taxpayers and welfare recipients.
• Third, modify Social Security and health-care entitlements to reduce their explosive future growth. Social Security now promises much higher benefits to future retirees than to today's retirees. The typical 30-year-old today is scheduled to get an inflation-adjusted retirement benefit that is 50% higher than the benefit for a typical current retiree.
Benefits paid to future retirees should remain at the same level, in terms of purchasing power, that today's retirees receive. A combination of indexing initial benefits to prices rather than to wages and increasing the program's retirement age would achieve this goal. They should be phased-in gradually so that current retirees and those nearing retirement are not affected.
Health care is far too important to the American economy to be left in its current state. In markets other than health care, the legendary American shopper, armed with money and information, has kept quality high and costs low. In health care, service providers, unaided by consumers with sufficient skin in the game, make the purchasing decisions. Third-party payers—employers, governments and insurance companies—have resorted to regulatory schemes and price controls to stem the resulting cost growth.
The key to making Medicare affordable while maintaining the quality of health care is more patient involvement, more choices among Medicare health plans, and more competition. Co-payments should be raised to make patients and their physicians more cost-conscious. Monthly premiums should be lowered to provide seniors with more disposable income to make these choices. A menu of additional Medicare plans, some with lower premiums, higher co-payments and improved catastrophic coverage, should be added to the current one-size-fits-all program to encourage competition.
Similarly for Medicaid, modest co-payments should be introduced except for preventive services. The program should be turned over entirely to the states with federal financing supplied by a "no strings attached" block grant. States should then allow Medicaid recipients to purchase a health plan of their choosing with a risk-adjusted Medicaid grant that phases out as income rises.
The 2010 health-care law undermined positive reforms underway since the late 1990s, including higher co-payments and health savings accounts. The law should be repealed before its regulations and price controls further damage availability and quality of care. It should be replaced with policies that target specific health market concerns: quality, affordability and access. Making out-of-pocket expenditures and individual purchases of health insurance tax deductible, enhancing health savings accounts, and improving access to medical information are keys to more consumer involvement. Allowing consumers to buy insurance across state lines will lower the cost of insurance.
• Fourth, enact a moratorium on all new regulations for the next three years, with an exception for national security and public safety. Going forward, regulations should be transparent and simple, pass rigorous cost-benefit tests, and rely to a maximum extent on market-based incentives instead of command and control. Direct and indirect cost estimates of regulations and subsidies should be published before new regulations are put into law.
Off-budget financing should end by closing Fannie Mae and Freddie Mac. The Bureau of Consumer Finance Protection and all other government agencies should be on the budget that Congress annually approves. An enhanced bankruptcy process for failing financial firms should be enacted in order to end the need for bailouts. Higher bank capital requirements that rise with the size of the bank should be phased in.
• Fifth, monetary policy should be less discretionary and more rule-like. The Federal Reserve should announce and follow a monetary policy rule, such as the Taylor rule, in which the short-term interest rate is determined by the supply and demand for money and is adjusted through changes in the money supply when inflation rises above or falls below the target, or when the economy goes into a recession. When monetary policy decisions follow such a rule, economic stability and growth increase.
In order to reduce the size of the Fed's bloated balance sheet without causing more market disruption, the Fed should announce and follow a clear and predictable exit rule, which describes a contingency path for bringing bank reserves back to normal levels. It should also announce and follow a lender-of-last-resort rule designed to protect the payment system and the economy—not failing banks. Such a rule would end the erratic bailout policy that leads to crises.
The United States should, along with other countries, agree to a target for inflation in order to increase expected price stability and exchange rate stability. A new accord between the Federal Reserve and Treasury should re-establish the Fed's independence and accountability so that it is not called on to monetize the debt or engage in credit allocation. A monetary rule is a requisite for restoring the Fed's independence.
These pro-growth policies provide the surest path back to prosperity.
Mr. Shultz, a former secretary of labor, secretary of Treasury and secretary of state, is a fellow at Stanford University's Hoover Institution. Mr. Boskin, a professor of economics at Stanford University and a senior fellow at the Hoover Institution, chaired the Council of Economic Advisers under President George H.W. Bush. Mr. Cogan, a senior fellow at the Hoover Institution, was deputy director of the Office of Management and Budget under President Ronald Reagan. Mr. Meltzer is professor of political economy at Carnegie Mellon University. Mr. Taylor, an economics professor at Stanford and a senior fellow at the Hoover Institution, was undersecretary of Treasury under President George W. Bush.
MisterOpus1
quote:
Originally posted by Shakka
If you read Opus'post (and I assume many on the left, or those that hate rich people;)) you find that the substance is more of an argument that it's not fair to cut rich people's taxes because they BENEFIT more, not because of the impact on federal revenues. It's a class warfare argument that, to me, suggests they are less concerned with balancing the budget and addressing deficits than they are concerned about making sure the affluent don't realize any financial windfalls. It's a bait-and-switch argument at its finest.
I'm pretty sure that you didn't read my arguments very carefully if this is what you're coming up with. No, this isn't a "class warfare" argument, and it's pretty pathetic although very predictable that's what you assumed I was attempting to say. In fact, you made a refutation against my point #2 in which I am directly arguing about what gives a better bang for the buck (which I contend is anything but the specific types of tax cuts imposed by Bush).
You're an intelligent guy - that's rather perplexing of you.
Busy as at work, try to get to the other stuff later.
Shakka
quote:
Originally posted by MisterOpus1
I'm pretty sure that you didn't read my arguments very carefully if this is what you're coming up with. No, this isn't a "class warfare" argument, and it's pretty pathetic although very predictable that's what you assumed I was attempting to say.
I admit I only read your most recent lengthy post, but it seemed that the items you were highlighting were arguing much more about who benefitted as opposed to how successful the cuts were at fostering growth and increasing tax revenues. I'll go back and read the other posts more closely. However I, like you, have been pretty busy at work too. Ever since 2007 I haven't gotten a break!
The17sss
quote:
Originally posted by Lebezniatnikov
Ok, let's be consistent. The $4.7 trillion dollar reduction in revenue caused by the Bush tax cuts far surpass any spending by Obama in terms of deficit-creation.
Wow. Stick to the classroom and saving Africa. More revenue went to the Fed than at any point in history following Buler's tax cuts. And as stated before, the deficit was reduced 60% down to $160 billion by 2007 largely for this reason. Spending, spending, spending = problem. This is a perfect illustration of you vs. the real world (you being the professor):
quote:
Originally posted by MisterOpus1
Please demonstrate for us now how tax cuts for the wealthy somehow trickle down and stimulate the economy better instead.
Uh Ohhhhh... someone didn't read part of the post demonstrating exactly that: ;)
quote:
Ok you want legitimate peer reviewed evidence shattering your Krugmanian beliefs? READ IT AND WEEP:
Harvard economists Alberto Alesina and Silvia Ardagna examined 91 attempts at stimulus since 1970 in 21 OECD countries (USA, Canada, Mexico, Germany, Japan, France, Italy, etc.) and found that tax cuts, NOT spending, stimulated. After witnessing the last 2 failed stimuli (including W's), Krugman's (and your) argument is that it should have been larger. Krugman also says that more jobs would have been lost if not for it. Per his first point, we might get a chance to see. His second point is completely unsupportable. And so we are back to an argument based on availability of evidence. Who should we go with... the two Harvard economists and their legitimate analysis of 91 events in 21 OECD countries that all show Keynesian economic failure, in all environments with respect to both spending and tax cuts? Or Krugman who admits to the failures of Keynesian economics in the current modern economic environment with this stimulus (http://krugman.blogs.nytimes.com/20...bs-not-created/) by way of making unsupportable assertions?
Large changes in fiscal policy: taxes versus spending.
by Alberto Alesina and Silvia Ardagna.
August 2009
Revised: October 2009
The bottom line, however, is when I read your sentiments above, much of it is anecdotal and speculative at best. It’s not that I think you’re lying. As misguided as I think you are much of the time, you seem honest. It’s just that I can’t apply your particular situation and speculation on what COULD possibly occur to your business or other businesses to everyone else, and it would be patently absurd to do so at this point. I think it’s best to hold such speculations on what could happen in the future under this current Administration until it actually happens. Until then it’s only just speculation and anecdotes.
I think it's just anecdotal and speculative sounding to you because you aren't the captain of the ship yet, rather an employee (and it's awesome btw that you've been offered a managing partner position- you will learn more than you imagined in that role). When you run a business, you have to plan 3 months, 6 months, 12 months out. We owners see what's coming down the pike and have to adjust accordingly. These 1 year tax breaks on this or that will not ramp up demand, and definitely won't encourage hiring for reasons I already explained. Like I said, why would someone hire new employees based on 1 year of increased bottom line, knowing that as soon as the break expired their costs to retain the new employees would jump through the roof? The people in charge have NO CLUE how to meet a payroll or run business... as explained by the founder of Home Depot the other day on CNBC. These are some very instructive, simple explanations... don't sweat the video length, it's worth the watch:
MisterOpus1
quote:
Originally posted by The17sss
Wow. Stick to the classroom and saving Africa. More revenue went to the Fed than at any point in history following Buler's tax cuts. And as stated before, the deficit was reduced 60% down to $160 billion by 2007 largely for this reason.
And you still haven't answered my reply as to why this little tidbit of yours is silly on the face. So since you seemingly tout this over and over again, I guess I'll continue to post my reply over and over again every time you say it:
quote:
Myth 2: Even if the tax cuts reduced revenues initially, they boosted revenues and lowered deficits in 2005 to 2007.
“Some in Washington say we had to choose between cutting taxes and cutting the deficit… Today’s numbers [the updated 2006 budget projections] show that that was a false choice. The economic growth fueled by tax relief has helped send our tax revenues soaring.” — President Bush, July 11, 2006
Reality: Robust revenue growth in 2005-2007 has not made up for extraordinarily weak revenue growth over the previous few years.
When discussing revenue growth since the enactment of the tax cuts, Administration officials typically focus only on revenue growth since 2004. This provides a convenient starting point for their arguments, as it sets a very low bar. In 2001, 2002, and 2003, revenues fell in nominal terms (i.e. without adjusting for inflation) for three straight years, the first time this has occurred since before World War II. Measured as a share of the economy, revenues in 2004 were at their lowest level since 1959. Given this historically low starting point, it is not surprising that revenues have recovered since then. Supporters of the tax cuts selectively cite revenue growth over just the past three years to argue that the tax cuts fueled increases in revenues.
Even taking into account the growth in revenues in fiscal years 2005-2007, total revenues have just barely increased over the 2001-2007 business cycle, after adjusting for inflation and population growth. (The business cycle began in March 2001, when the 1990s business cycle hit its peak and thereby came to an end.) In contrast, six and a half years after the peak of previous post-World War II business cycles, real per-capita revenues had increased by an average of 12 percent, and in the 1990s, real per-capita revenues were up 16 percent (see Table 1). Revenues in 2007 were still more than $250 billion short of where they would have been had they grown at the rates typical in other recoveries.
Further, while the Administration has credited the tax cuts with the drop in the fiscal year 2007 deficit to “only” $162 billion, the 2007 budget would have been in surplus were it not for the tax cuts. Based on Joint Committee on Taxation estimates, the total 2007 cost of tax cuts enacted since January 2001 was $300 billion (taking into account the increased interest costs on the debt that have resulted from the deficit financing of the tax cuts). This means that even with the spending for the wars in Iraq and Afghanistan, the federal budget would have been in surplus in 2007 if the tax cuts had not been enacted, or if their costs had been offset. While supporters of these tax cuts claim that their positive economic effects have lowered their cost, the non-partisan Congressional Research Service found in a September, 2006 report that “at the current time, as the stimulus effects have faded and the effect of added debt service has grown, the 2001-2004 tax cuts are probably costing more than their estimated revenue cost.”
Looking out over the next several decades, when deficits are projected to be far larger (because of the impact on the budget of the continued rise in health care costs and the retirement of the baby boomers), the tax cuts, if extended, will still be a major contributor to the nation’s fiscal problems. (http://www.cbpp.org/1-29-07bud.htm) To put the long-run cost of the tax cuts in perspective, the 75-year Social Security shortfall, about which the President and Congressional leaders have expressed grave concern, is less than one-third the cost of the tax cuts over the same period. (http://www.cbpp.org/3-31-08socsec.htm)
Spending, spending, spending = problem. This is a perfect illustration of you vs. the real world (you being the professor):
And I feel this is the perfect illustration of you vs. reality, you being the boy:
Kindly spare me your lectures about the "real world." The real world is when you have factual evidence to support your assertions. You are always entitled to your own opinions, but when you have little to support them, you're no better than that guy above.
quote:
Uh Ohhhhh... someone didn't read part of the post demonstrating exactly that: ;)
Well it's pretty wonky for me, and I'm pretty certain their paper (which isn't a peer-reviewed paper and published in a peer-reviewed journal, or did it get published somewhere?) is way too wonky for you, which is why you likely resorted to your conservative blogs for further explanation beyond the headline. So being that the case, I see no better of a person to give a refutation than Krugman himself to demonstrate some of the errors in their logic:
quote:
I notice that commenters keep citing this paper by Alesina and Ardagna as if it were a definitive rejection of Keynesian economics. So I guess I should explain why I’m not convinced.
First, the whole stimulus debate is supposed to be about what happens when interest rates are up against the zero bound. Everything is different if the central bank is busy adjusting rates in response to conditions, and may well raise rates to offset the effects of any fiscal expansion. Yet the Alesina-Ardagna analysis doesn’t make that distinction; Japan in the 90s, which was up against the zero bound, is treated the same as a batch of countries in the 70s and 80s, when interest rates were quite high.
Second, they use a statistical method to identify fiscal expansions — trying to identify large changes in the structural balance. But how well does that technique work? When I want to think about Japan, I go to the work of Adam Posen, who tells me that Japan’s only really serious stimulus plan came in 1995. So I turn to the appendix table in Alesina/Ardagna, and find that 1995 isn’t there — whereas 2005 and 2007, which I’ve never heard of as stimulus years, are.
So to put it bluntly, I’m not much persuaded by a paper that doesn’t even identify the one clear example we have in the postwar period of large Keynesian stimulus in a zero-rate environment.
Are there any papers that, in my view, do this right? Yes: Almunia et al, which uses data from the 30s — a zero-rate era — and uses defense spending as an instrument to identify spending changes. And their results look pretty Keynesian.
For more analysis, here's another paper that directly examines your conservative paper:
quote:
However, upon a further examination of the data such a
conclusion is unmerited. The overwhelming majority of the episodes used by A & A did not see deficit reduction in the middle of a slump. Where they did, it often resulted in a decline in the subsequent growth rate or an increase in the debt-to-GDP ratio. Of the 26 episodes that they identify as ‘expansionary’, in virtually none did
the country a)reduce the deficit when the economy was in a slump and b)increase growth rates while reducing the debt-to-GDP ratio. The sole example not covered by those two qualifiers can be explained by a combination of two policy maneuvers that are not easily
available to the U.S. at the moment: currency depreciation and interest rate reduction.
We expand on their initial examination and cover the entire data set of 107 observations, finding very little evidence for success when cutting in a slump—in our terminology, when the growth rate in the previous year was lower than the average growth rate over the past
three years. Only one additional case out of 107 can be seen as an example of success in fiscal consolidation, and we show that this does not bear scrutiny either.
Key Findings
• Countries historically do not cut their deficits in a slump, instead addressing these problems during a nonrecessionary time.
• When countries cut in a slump, it o#en results in lower growth and/or higher debt-to-GDP ratios. In very few circumstances are countries able to successfully cut during a slump, and this happens only when either interest rates and/or the exchange rates fall sharply.
• In our analysis, we find that there is no episode in which a country facing the same circumstances as the United States (recent recession, low interest rates, high unemployment) has cut its deficit and succeeded in reducing its debt through growth.
• We conclude that there is li!le evidence provided by A & A that cutting the federal deficit in the short-term, under the conditions the United States currently faces, would improve the country’s prospects. It may even make the United States’ situation far worse.
Some other commenters in Krugman's blog also noted a few things worth mentioning:
quote:
Alesina and Ardagna state right at the start of their paper that "it was also the case of the US in the nineties when without virtually any increase in tax rates or significant spending cuts, a large deficit turned in a large surplus."
Any paper that discards the fiscal actions taken by Clinton and a Republican congress to generated a budget surplus in the world largest economy as not "significant" makes you wonder exactly what they could have actually measured.
They manage to include only one United States event: the 2002 tax cuts that reversed the 1990's tax increases that were judged not "significant". How is one significant if the preceding is not?
I tried to read the Alesina rejection of Keynesian economics but had to laugh at the very first sentence, which was an obvious and unsubstantiated correlation fallacy.
"As a result of the fiscal response to the financial crisis of 2007-2009 the U.S. will experience the largest increases in deficits and debt accumulation in peacetime."
I mean, how many unsubstantiaties fallacies can an author put in the first line of a paper?
1) First of all, the fiscal response did not cause the largest increases in deficits and debt accumulation, the financial crisis caused the largest increases in deficit and debt accumulation. If Alesina had in fact done his homework, he would have know that we faced the largest increase in deficit and debt accumulation BEFORE the stimulus.
2) Fiscal response: we've had fiscal stimulus since 2001, when George W Bush and the Republicans decided to waste the surplus and spend more than we took in. This record after record, unfunded spending caused the greatest debt accumulation in our history; $8T and growing. The fiscal response to the entire 2007-2010 economic crisis has totalled less than $2T. Still a staggering amount, but only a fraction of the debt accumulation of the previous six years, during an economically stable era. In other words, the fiscal "response" is merely an adjustment of the previous fiscal stimulus packages and to ignore those betrays a bias from the get-go.
3) Peacetime
Peacetime? I had to re-read that three times to make sure my eyes were not deceiving me, but yes, in fact, Alesina is not even aware we are at war. GIGO. (Garbage In, Garbage Out)
t's important to note that this is the common thread tying together all empirical and theoretical work that purports to "disprove" the efficacy of fiscal stimulus. It's not just about Alesina by a long shot.
This is true of Cogan, Taylor, and Wieland.
This is true of Barro's empirical work
This is true of the more ad hoc dismissals from guys like Steve Horwitz
Their common assumption is the normal functioning of price adjustment in credit and/or labor markets. The theoretical work that doesn't model a liquidity trap consistently (and predictably) finds a weak impact for stimulus. The empirical work like Barro's that inexplicably uses data from periods when we weren't in a liquidity trap consistently (and predictably) finds a weak impact for stimulus.
What is the common thread between the theoretical and empirical work that finds strong impacts? This work doesn't compare apples to oranges and makes a point of modeling the dysfunctions in credit and labor markets that we're struggling with right now.
It's not rocket science. When the common thread between now just Alesina, but all the "disproofs" is that there's no liquidity trap, and when the common thread between all the studies finding a significant impact of fiscal stimulus is that they do look at liquidity traps, the obvious conclusion is that in liquidity traps stimulus works, and outside of liquidity traps fiscal stimulus is much more tenuous.
I know this is fundamentally your point, Paul, but I think the point can be made even more forcefully. It's not just Alesina. This is the common thread running through all disproofs.
I've seen the Alberto Alesina and Silvia Ardagna paper cited repeatedly in anti-stimulus blogs postings. The first thing that struck me about the paper was that out of the 91 incidents of fiscal expansion it considered only two occured during a financial crisis when fiscal stimulus might be most effective: Japan in 1998 and Sweden in 1992. Reading how Alesina and Ardagna selected the countries, the time period and then identified episodes of fiscal stimulus I came to the conclusion they seemed to be cherry picking cases where fiscal stimulus would be least effective. I'm glad to see I'm in fairly good company.
In any case there are literally hundreds of research papers that reach opposite conclusions. However, for what it's worth here's a free (earlier unpublished) version of the paper
What's clear is that these two cherry-picked the out of historical evidence, ignoring anything that would disprove their pre-conceived notions, and overall compared apples to oranges with other countries versus the U.S. economy. This must happen quite frequently in macro-economic papers or something, which is why I can't ing stand this subject most of the time and tend to read more towards biological sciences (which admittedly it also happens, but on far, far less frequent occurrences).
quote:
Regarding this statement:
I think it's just anecdotal and speculative sounding to you because you aren't the captain of the ship yet, rather an employee (and it's awesome btw that you've been offered a managing partner position- you will learn more than you imagined in that role). When you run a business, you have to plan 3 months, 6 months, 12 months out. We owners see what's coming down the pike and have to adjust accordingly. These 1 year tax breaks on this or that will not ramp up demand, and definitely won't encourage hiring for reasons I already explained. Like I said, why would someone hire new employees based on 1 year of increased bottom line, knowing that as soon as the break expired their costs to retain the new employees would jump through the roof? The people in charge have NO CLUE how to meet a payroll or run business... as explained by the founder of Home Depot the other day on CNBC. These are some very instructive, simple explanations... don't sweat the video length, it's worth the watch:
I'll do you the respect to make sure I watch it some time this week. Just an FYI, however - my partner's wife is primarily responsible for the books. I've briefly discussed some of these issues with him and his wife last week that you've mentioned, and their response at least initially was nothing compared to the doomsday depiction you've created. Perhaps it is yet another apples to oranges comparison, i.e. we're not interested in hiring anyone else right now, our overhead has been very manageable over the past 2 years, etc. But again, I stand by my statement that as much as I respect your position as a small business owner, it's still anecdotal and speculative as we need to wait for many of these things yet to pass in order to make correct judgements.
Comrade Stalin
Warren Buffett to CNBC: Country Should Get Needed Income from the 'People Who Have It'
Warren Buffett tells CNBC he doesn't buy the argument that raising taxes for the rich would derail the nation's economic recovery.
In a taped interview with Becky Quick, Buffett says that while $250,000 in annual income is not necessarily his definition of "rich", he does think it is a "little obscene" that the tax system has gotten "tilted toward guys like me" over the last 20 years.
"When a country needs more income, and we do -- we're only taking in 15 percent of GDP ... they should get it from the people that have it."
Wellllll....Warren Buffett said it, it must be the answer!
Comrade Stalin
quote:
Originally posted by Shakka
Wellllll....Warren Buffett said it, it must be the answer!
What do you have against tax cuts expiring for the top 2% of income earners? Gee, those millionaires are reeeeeally going to have a tough time huh? After all, Clinton-era tax rates for the top 2% did so much bad in the 1990's right?:o
Shakka
quote:
Originally posted by Comrade Stalin
What do you have against tax cuts expiring for the top 2% of income earners? Gee, those millionaires are reeeeeally going to have a tough time huh? After all, Clinton-era tax rates for the top 2% did so much bad in the 1990's right?:o
IT'S NOT THE GOVERNMENT'S ING MONEY.
You're not in their shoes so you don't know how tough it will or won't be for them, but that's not even the argument--that is the diversion. Furthermore, Buffett is hardly representative of the "rich" considering he is the second richest man in America. If he wants to give more money, nobody is stopping him, but it doesn't make the case for legal extortion by the government. Somehow that is a rationalization of what constitutes "fair."
IT IS NOT THE GOVERNMENT'S ING MONEY TO CONFISCATE AT WILL BECAUSE THEY CAN'T MANAGE TO CUT THE FAT.
If only I had a money tree in my back yard that I could shake-down every month when my expenses outstrip my income. But hey, I'm "rich" so I get no sympathy.
But if you must, and you certainly don't speak for me, please send this to all of your friends and encourage them to make a contribution since it's such a good idea.
How do I make a contribution to the U.S. government?
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Gifts to the United States
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Any tax-related questions regarding these contributions should be directed to the Internal Revenue ServiceExit the FMS Web site at (800) 829-1040
