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Author Topic: Do Tax Cuts Lead to Economic Growth?  (Read 2210 times)
Beet
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« on: September 16, 2012, 09:11:12 am »
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http://www.nytimes.com/imagepages/2012/09/15/opinion/15captial-graph.html?ref=sunday
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Politico
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« Reply #1 on: September 16, 2012, 12:50:04 pm »
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Correlation does not necessarily imply causality, and obviously a national economy is a complex system with thousands of known and unknown endogenous and exogenous variables. With that said, anybody who knows anything about human behavior can tell you that strong incentives to work more and harder (e.g., tax cuts in Reagan's America or threats of death/disappearance in the Soviet Union/Cuba) should, for the average person, lead to greater production ceteris paribus.

There is also the philosophical argument that a worker should keep most of the fruits of their labor, and be free to choose how to spend those resources as they see fit in accordance with their own individual tastes and preferences. An environment that embraces this viewpoint will have evident market diversity; a more tax-and-spend heavy approach will be more characterized by government conformity. Lastly, if one holds the view that most or all government agencies are inherently inefficient (nullifying the second fundamental theorem of welfare economics) then one should be in favor of tax cuts at any time for any reason, although perhaps this is a bit blunt.
« Last Edit: September 16, 2012, 02:20:33 pm by Politico »Logged

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« Reply #2 on: September 16, 2012, 01:16:16 pm »
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Some specifically targeted cuts sometimes help stimulating growth. The idea that they are always the magic formula for growth is just plain stupid.
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« Reply #3 on: September 16, 2012, 02:21:42 pm »
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There is also the philosophical argument that a worker should keep most of the fruits of their labor, and be free to choose how to spend those resources as they see fit in accordance with their own individual tastes and preferences.

Firstly, the class to which the rates under discussion here are applied are not 'workers', but rather the privileged (as in privileged relatively by the State at the expense of the workers).

Secondly, to attribute incomes as 'belonging' to an 'individual' is erroneous - all incomes are created by the hive together, with each toiler working ant-like, in tandem.

Finally, 'freedom to choose' and 'individual tastes and preferences' are also highly dubious constructs; in fact these things are also dictated by power.
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Beet
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« Reply #4 on: September 16, 2012, 04:06:20 pm »
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So basically, we're just going to ignore empirical evidence and repeat our religion of Mammon. Makes sense.
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Gustaf
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« Reply #5 on: September 16, 2012, 05:59:11 pm »
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I'm disappointed, Beet. Surely, you know as well as I do that this graph doesn't really constitute 'empirical evidence'?
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« Reply #6 on: September 16, 2012, 06:24:34 pm »
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I don't know if you could make the argument that tax cuts hurt economic growth, but maybe that tax rates don't effect the economy as much as one might expect? Huh
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« Reply #7 on: September 16, 2012, 06:42:29 pm »
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Way I'd always understood was if you're growing, business tax cuts strengthen the growth. If you're not, better off building infrastructure and even raising taxes on the non-governmental job-providers. Personal tax cuts are basically only good for winning votes and maybe getting people to make high-cost purchases, in a good economy.
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Beet
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« Reply #8 on: September 16, 2012, 07:04:57 pm »
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I'm disappointed, Beet. Surely, you know as well as I do that this graph doesn't really constitute 'empirical evidence'?

Well, that's true. I must admit I put on different hats depending on who I'm talking to. Still, the chart speaks against tax cuts as being an overwhelming or dominant variable in recent growth.
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« Reply #9 on: September 16, 2012, 07:15:22 pm »
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The graph is obviously not the end-all for the debate, but it's certainly not worth discounting. The answer to the thread question just seems to be "They can, but not always, and probably not income tax cut specifically, unless present rates are rather high, which they haven't been in decades."

Also, what Scott said. That tax rates don't really affect the economy as much as people suggest. (I'd say "regulations" can be included right along in that sentence, for that matter.)
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« Reply #10 on: September 16, 2012, 07:20:12 pm »
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I should clarify what I said: while tax rates probably have some type of effect on the economy (because obviously if you tax everything at 100%, it'll tank), the rates we've been seeing these past few decades don't seem to have much of an impact.  Likewise, Reagan started overseeing economic growth after he cut taxes, but none of the gains were lost when he raised them.
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« Reply #11 on: September 16, 2012, 10:57:02 pm »
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I don't know if you could make the argument that tax cuts hurt economic growth, but maybe that tax rates don't effect the economy as much as one might expect? Huh

Diminishing returns, really. I mean, we cut taxes a lot in the early 1980s and it had positive behavioral ramifications, and obviously there is not room to cut taxes to such a large degree nowadays. Tax reform, as proposed by Romney, needs to be the new approach. A lot of resources are basically wasted satiating the demanded rent-seeking levels of lawyers/accountants with regards to our insanely bureaucratic tax code. Listening to the same people we listened to in 2009, especially under the current administration, will only lead to the same results we have today, if not worse. The current administration is captured by lawyers and public unions, and that's what a lot of economists are missing because they're unaware of the Washington Way.

Too many people have ignored price signals for too long in the past 10-20 years, and now they wonder why they're in debt up to their eyeballs? We need more research on how many people in the west no longer pay attention to prices (largely because of a culture of "easy" credit, of course, and mind you I am NOT of the Austrian School but I think there is good reason to look into this more). None of this is rocket science, really.

I do have sincere sympathy for those who are victims of the entire mess, but "The Man" does not exist. If he did, Obama never would have came anywhere near the White House.
« Last Edit: September 16, 2012, 11:24:16 pm by Politico »Logged

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« Reply #12 on: September 16, 2012, 11:13:05 pm »
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So basically, we're just going to ignore empirical evidence and repeat our religion of Mammon. Makes sense.

Way to inject religious rhetoric into a scientific discussion, buddy. If you really believe correlation between economic growth and tax cuts means a damn thing on its own, you've hopefully never taken a class in Econometrics (or more than second year Macroeconomics for that matter). A national economy is a complex system of the highest magnitude with thousands of known and unknown variables, especially after you open up to world trade. Even the most brilliant physicist in the world could not possibly explain it fully even if he devoted the rest of his life to it. Paul Krugman, an economist of the highest caliber in his top area of specialty (i.e., international trade), is a hack for pretending to be that guy and fooling a lot of people in the process. He's the 21st Century Wizard of Oz (don't pay attention to that man behind the curtain!)
« Last Edit: September 16, 2012, 11:21:01 pm by Politico »Logged

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Gustaf
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« Reply #13 on: September 17, 2012, 01:40:28 am »
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I'm disappointed, Beet. Surely, you know as well as I do that this graph doesn't really constitute 'empirical evidence'?

Well, that's true. I must admit I put on different hats depending on who I'm talking to. Still, the chart speaks against tax cuts as being an overwhelming or dominant variable in recent growth.

No, there is something to that point. But to establish correlation, one would like to see a graph that included the tax rate as an explanatory variable rather than just pointing out points in time.
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« Reply #14 on: September 17, 2012, 06:58:36 am »
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I don't know if you could make the argument that tax cuts hurt economic growth, but maybe that tax rates don't effect the economy as much as one might expect? Huh

And the reason is - the public/private dichotomy is erroneous. 
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Beet
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« Reply #15 on: September 17, 2012, 08:30:24 am »
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I'm disappointed, Beet. Surely, you know as well as I do that this graph doesn't really constitute 'empirical evidence'?

Well, that's true. I must admit I put on different hats depending on who I'm talking to. Still, the chart speaks against tax cuts as being an overwhelming or dominant variable in recent growth.

No, there is something to that point. But to establish correlation, one would like to see a graph that included the tax rate as an explanatory variable rather than just pointing out points in time.

Of course I'm aware of that. But of course, it's not easy to determine which explanatory variables to include, for I don't think even economists have divined the formula for economic growth. And as you know, if you don't include the right variables you will get spurious results. Some economists, being human, unfortunately also have agendas, although this can be mitigated in the case of peer review. Bottom line, there's some value to showing that tax cuts are not the dominant variable in terms of stimulating growth; because if the claim is that the solution to improve the economy is lower taxehen and that alone, then that would need to be true.
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Beet
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« Reply #16 on: September 17, 2012, 02:16:59 pm »
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And what do you know, this is what I get for posting things from my smartphone where I look at the picture and don't even look at the actual article. This image is backed up by a study after all. The study spans 65 years and it's from the Congressional Research Service. They found:

Analysis of six decades of data found that top tax rates "have had little association with saving, investment, or productivity growth." However, the study found that reductions of capital gains taxes and top marginal rate taxes have led to greater income inequality. Past studies cited in the report have suggested that a broad-based tax rate reduction can have "a small to modest, positive effect on economic growth" or "no effect on economic growth."

Table A-I and A-II at the end of the report do include regression analyses. Let's hope someone over there has taken econometrics Smiley

Also, it's worth noting:

"These results are generally consistent with previous research on tax cuts. Some studies find that a broad based tax rate reduction has a small to modest, positive effect on economic growth.25 Other studies have found that a broad based tax reduction, such as the Bush tax cuts, has no effect on economic growth.26 It would be reasonable to assume that a tax rate change limited to a small group of taxpayers at the top of the income distribution would have a negligible effect on
economic growth."

What they are referring to @ 26 are the following citations:

"Martin Feldstein and Douglas W. Elmendorf, “Budget Deficits, Tax Incentives, and Inflation: A Surprising Lesson
from the 1983-1984 Recovery,” in Tax Policy and the Economy, ed. Lawrence H. Summers, vol. 3 (Cambridge, MA:
MIT Press, 1989), pp. 1-23; William G. Gale and Samara R. Potter, “An Economic Evaluation of the Economic Growth
and Tax Relief Reconciliation Act of 2001,” National Tax Journal, vol. 55, no. 1 (March 2002), pp. 133-186; and
William G. Gale and Peter R. Orszag, “Economic Effects of Making the 2001 and 2003 Tax Cuts Permanent,”
International Tax and Public Finance, vol. 12 (2005), pp. 193-232."

Since Martin Felstein was Ronald Reagan's director at the Council of Economic Advisors, I don't think this analysis could be skewed by any sort of liberal agenda. In their 1989 abstract of the paper (http://www.nber.org/papers/w2819) on the Reagan recovery, they write:

"The first two years of the economic expansion that began in 1983 were unusually strong and were accompanied by better inflation performance than would have been expected on the basis of experience in past recoveries. Our evidence contradicts the popular view that the recovery was the result of a consumer boom financed by reductions in the personal income tax. We also find no support for the proposition that the recovery reflected an increase in the supply of labor induced by the reduction in personal marginal tax rates. The driving force behind the recovery of nominal demand was the shift to an expansionary monetary policy"

Of course, I don't expect any of this to sway a certain poster, who has proved himself impervious to actual argument.
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Gustaf
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« Reply #17 on: September 18, 2012, 01:45:19 pm »
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I hope that poster is not me. Tongue

Certainly looks like a legit study, but I don't have time to look at it in-depth right now.
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« Reply #18 on: September 18, 2012, 02:47:51 pm »
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I hope that poster is not me. Tongue

It's not. Wink
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Sibboleth
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« Reply #19 on: September 18, 2012, 03:37:23 pm »
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*raises hand*
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« Reply #20 on: September 18, 2012, 06:01:45 pm »
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I hope that poster is not me. Tongue

It's not. Wink

Hardy-har.
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« Reply #21 on: September 19, 2012, 06:29:29 am »
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I'd like to discuss this more in-depth but right now PhD math is kind of sucking up all my time (as well as a lot of personal stuff going on).

Beet, do you have an opinion on all the stuff done by Prescott and his disciples about how tax rates affect labour supply and thus GDP?
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« Reply #22 on: September 19, 2012, 09:01:27 pm »
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I'd like to discuss this more in-depth but right now PhD math is kind of sucking up all my time (as well as a lot of personal stuff going on).

Beet, do you have an opinion on all the stuff done by Prescott and his disciples about how tax rates affect labour supply and thus GDP?

It seems to me that most of his work is about a fixed marginal tax on labor supply, whereas the "tax cuts" being discussed here are primarily about how progressive the tax curve is. I'm more sympathetic to the notion that across-the-board tax cuts could increase labor supply than I am that cuts in marginal rates would increase labor supply. The former question is essentially the same as asking what the elasticity of labor is. Also there is a disconnect in economics between macroeconomic models like those of Prescott, which tend to find larger overall elasticities of labor supply, and microeconomic models which find small elasticities. I found this paper which seems to suggest that Prescott's methodology is flawed, but you still get high labor elasticitiy if programs such as social security were reformed to make the retirement age more flexible.
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« Reply #23 on: September 20, 2012, 10:32:51 am »
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I'd like to discuss this more in-depth but right now PhD math is kind of sucking up all my time (as well as a lot of personal stuff going on).

Beet, do you have an opinion on all the stuff done by Prescott and his disciples about how tax rates affect labour supply and thus GDP?

It seems to me that most of his work is about a fixed marginal tax on labor supply, whereas the "tax cuts" being discussed here are primarily about how progressive the tax curve is. I'm more sympathetic to the notion that across-the-board tax cuts could increase labor supply than I am that cuts in marginal rates would increase labor supply. The former question is essentially the same as asking what the elasticity of labor is. Also there is a disconnect in economics between macroeconomic models like those of Prescott, which tend to find larger overall elasticities of labor supply, and microeconomic models which find small elasticities. I found this paper which seems to suggest that Prescott's methodology is flawed, but you still get high labor elasticitiy if programs such as social security were reformed to make the retirement age more flexible.

From what I've understood the mismatch between micro and macro can largely be explained through more refined methodology. It has to do with things like household action, binary nature of employment, the so-called shadow wage, etc.

Incidentally, Ljungqvist is one of my professors - he taught me in Macro a couple of years ago. Smiley The paper you link was part of my course literature last year too.
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« Reply #24 on: September 20, 2012, 02:12:04 pm »
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This graph is ridiculously misleading. The reason why the graph shoots down in 2003 is because it's a five year average for the following five years and takes into account the 2008 recession. Magically the outcome is that the Bush tax cuts corresponds with a decline in growth... I could do the same thing by taking a 10 year forward average and blaming a fall in 1998 due to the French winning the World Cup.

On the question itself, the answer is not necessarily. I don't agree with Ricardian equivalence - the doctrine that tax cuts have no impact on spending - because people are short-sighted and have a need for immediate gratification (inclining them to spend additional income rather than save it). On the other hand - in terms of the present economic context - the existence of high levels of consumer debt may mean tax cuts are ineffective, because additional income is used to pay down debt rather than on consumption. This means the money is channeled towards banks who then channel the money to pay overseas debtors - i.e. a massive leakage and a minimal stimulative effect on the domestic economy.


 
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