Do Tax Cuts Lead to Economic Growth?

[Beet]

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. The paper you link was part of my course literature last year too.

Sometimes I envy you guys... then I think of all the math that you have to do.

[Gustaf]

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. The paper you link was part of my course literature last year too.

Sometimes I envy you guys... then I think of all the math that you have to do.

Yep, I'm currently drowning in math problems.

[Link]

Some specifically targeted cuts sometimes help stimulating growth. The idea that they are always the magic formula for growth is just plain stupid.

I bolded the two key words.  In complex systems how often can a gross one way adjustment ALWAYS have a substantial desirable effect?  I mean even a ten year old could tell us the answer.  The question is what kind of tax cuts and where are we on the curve.  A marginal tax rate of 90% on people making $80+K can probably be cut and result in generally positive things.  A guy with $200 million in the bank and raking in $20 million in retirement and only paying 13%... well cutting that guy's taxes probably isn't going to result in any sort of substantial benefit to the country as a whole.

[mondale84]

Not to as much growth as as government spending. The multiplier is smaller because a portion of the extra money people have as a result of the tax cuts will be saved and not spent.

[Politico]

Not to as much [little] growth as as government spending. The multiplier is smaller [for government spending] because a [large] portion of [it is wasted on bureaucracy, transfers, rent-seekers, special interest groups and so forth.] [T]he extra money people have as a result of the tax cuts will be saved and not spent. [is spent and/or invested in labor/capital, both of which contribute to economic growth. It is not stuffed under mattresses nor is it wasted on useless bureaucrats and perverse boondoggles like "Obama Phones."]

Fixed.

[opebo]

....

Fixed.

That schtick is getting old, no one finds it funny.

[Oldiesfreak1854]

I've talked to quite a few business owners, and they say that tax cuts make them more likely to hire, so I would say they probably do.

[opebo]

I've talked to quite a few business owners, and they say that tax cuts make them more likely to hire, so I would say they probably do.

More custom is what makes them hire, Oldie.  Don't pay any attention to what they say - they're liars.

[DC Al Fine]

Probably not at today's rates. In the 1950's and 60's, absolutely. The graph there is horribly misleading since it only shows data from the 1990's. Stretch it back to 1945 and you see massive growth along with the Kennedy tax cuts in the 1960's.

[opebo]

Stretch it back to 1945 and you see massive growth along with the Kennedy tax cuts in the 1960's.

Growth in the 1960s was caused by demand-led Keynesian government-spending growth.

[Beet]

The Kennedy tax cuts also didn't take place until 1964-- well after the expansion had already started.

[DC Al Fine]

Stretch it back to 1945 and you see massive growth along with the Kennedy tax cuts in the 1960's.

Growth in the 1960s was caused by demand-led Keynesian government-spending growth.

Keynesian government spending growth also occurred in the 1970's with stagflation as the result. But hey I'll take your word for it. I mean it's not like we haven't massively increased government spending in the current recession. If only we had done that, the economy would be booming

[opebo]

Stretch it back to 1945 and you see massive growth along with the Kennedy tax cuts in the 1960's.

Growth in the 1960s was caused by demand-led Keynesian government-spending growth.

Keynesian government spending growth also occurred in the 1970's with stagflation as the result. But hey I'll take your word for it. I mean it's not like we haven't massively increased government spending in the current recession. If only we had done that, the economy would be booming

You have described three different contexts, friend.  Can you understand that there are different economic problems, not just one economic problem?

In 1960 we already had largely good policy in place ever since the 1930s (high/increasing government spending, highly progressive taxation, high and increasing levels of unionization and thus increasing demand through mass consumption, a side effect of rapidly increasing wages) - and thus the Keynesian boom of the 1960s was just incremental in nature.  It wasn't really the 'solving of a problem' or crisis, rather just the fine tuning of an already well-ordered society.

The 'stagflation' of the 1970s, while enormously exaggerated by right winger in retrospect (in fact the 70s were far better for the bottom 95% of the population than any decade since), was entirely caused by one factor: oil.  Some amount of painful adjustment was inevitable regardless of which economic management policy was in effect at the time - in point of fact 'stagflation' was a very mild ailment and far superior to even the best of all possible worlds under neoliberalism. 

Lastly, the current situation is a debt-deflation depression, analogous to the Great Depression of the 1930s or the 1990s in Japan.  The deflationary 'hole' created by the collapse of capitalism (itself caused by bad neoliberal policy) is very difficult to fill, and would require government spending many, many times the feeble amount which has been spent in the last four years.  What is required is State 'takeover' of a very large share of the 'private' economy, as in WWII.

[DC Al Fine]

Post WW2 was a once in a lifetime economic opportunity, combining a drastically reduced labour force, with pent up consumer demand, with the result being wage growth. Also, you contradict yourself. There were massive cuts as soldiers came home in the mid 1940's, yet there was no massive depression. By the same token, government spending as a percentage of GDP was greater in the so called "neoliberal" Reagan years than it was throughout the 1960's or 1970's.

Furthermore you are either ignorant or outright lying when it comes to your claim that the current recession in the USA is deflationary. Inflation certainly decreased over the 2000's but it didn't drop below zero. In fact the real inflation rate is probably higher than the low numbers since CPI's core inflation excludes items with prices outpacing inflation. The end result of Keynesian policies is too many dollars chasing not enough goods and services and malinvestment to boot.

[opebo]

Post WW2 was a once in a lifetime economic opportunity, combining a drastically reduced labour force, with pent up consumer demand, with the result being wage growth.

So?  'reducing the labor force' can be simply caused by erecting a massive tarrif wall (or of course WWIII would also get rid of a lot of them).

Furthermore you are either ignorant or outright lying when it comes to your claim that the current recession in the USA is deflationary. Inflation certainly decreased over the 2000's but it didn't drop below zero. In fact the real inflation rate is probably higher than the low numbers since CPI's core inflation excludes items with prices outpacing inflation.

Nonsense, my ignorant friend.  The deflation to which I refer is that of real property.  The cost of a candy bar or a computer machine is not important.

The end result of Keynesian policies is too many dollars chasing not enough goods and services and malinvestment to boot.

No.  Capitalism by definition can only create malinvestment because it inevitably creates excess production and a lack of demand.

[DC Al Fine]

So?  'reducing the labor force' can be simply caused by erecting a massive tarrif wall (or of course WWIII would also get rid of a lot of them).

Reduced supply, with similar demand=higher price. My point is that my little cousin could achieve fairly reasonable economic growth if you made her treasury secretary in 1945. Keynesianism had nothing to do with it. Furthermore Keynesianism is suspect due to it being implemented in the 1930's and taking a massive war and the best economic conditions ever to get decent growth.

The deflation to which I refer is that of real property.  The cost of a candy bar or a computer machine is not important.

Housing makes up 15-20% GDP correct? It seems that computers, food, gas, and everything else make up a huge part of the decline in real incomes.

Capitalism by definition can only create malinvestment because it inevitably creates excess production and a lack of demand.
...
What is required is State 'takeover' of a very large share of the 'private' economy

Yes because the Soviet command economy was SOOOO efficient and good at creating prosperity.

Getting back to your original point on even more massive spending being needed to remedy the current situation: US government spending was about 2.9 trillion in 2008 and around 3.8 trillion in 2012. I have two questions for you.

1) About what level of government spending would be appropriate in order to get the economy going again?

2) How would you avoid austerity in everything when the government cannot afford to service it's debt a few years down the line?

[opebo]

So?  'reducing the labor force' can be simply caused by erecting a massive tarrif wall (or of course WWIII would also get rid of a lot of them).

Reduced supply, with similar demand=higher price.

So why did you just say that was a positive after WWII?

Getting back to your original point on even more massive spending being needed to remedy the current situation: US government spending was about 2.9 trillion in 2008 and around 3.8 trillion in 2012. I have two questions for you.

1) About what level of government spending would be appropriate in order to get the economy going again?

It isn't necessary to know the answer to that question beforehand - you just get started increasing spending and only 'stop' when things improve.  Open-ended in other words.

2) How would you avoid austerity in everything when the government cannot afford to service it's debt a few years down the line?

What debt?  We have a printing press, my fine feathered friend.

[DC Al Fine]

So why did you just say that was a positive after WWII?

Obviously massive die-offs are not positive, but they tend to increase wages, which is positive for the survivors. Hence the wage growth post 1945. The same could be said for the black plague. Not great for the people living in it, but wages increased after.

What debt?  We have a printing press

Great, please tell me about the morons who will accept rapidly devaluing assets for their efforts. I have some ocean front property in Wyoming to sell them.

[opebo]

So why did you just say that was a positive after WWII?

Obviously massive die-offs are not positive, but they tend to increase wages, which is positive for the survivors. Hence the wage growth post 1945. The same could be said for the black plague. Not great for the people living in it, but wages increased after.

But you just said reducing supply will increase prices.  You can't have it both ways.  Raising the tarrif wall is the same as a die off, and you objected.  

What debt?  We have a printing press

Great, please tell me about the morons who will accept rapidly devaluing assets for their efforts. I have some ocean front property in Wyoming to sell them.

Dude, the man with the printing press is also the man with the gun.  The commoners have to accept everything - hence capitalist slavery in the first place.

[DC Al Fine]

I disputed that the income tax structure was good for the economy, not a tariff wall.

As for your monetary policy, around 25% of US treasuries are held by foreigners. If the US hyperinflates it's debt, all that is gone. The elites sure won't take negative returns, so they're gone. Now let's try and force the working classes who take home $30 000 a year to finance that multi trillion deficit. I give you maybe 3 years before Canada and Mexico walk in split America between them.

[Ghyl Tarvoke]

Tautologically? Let's not get silly here.

[Gustaf]

Well, Gully, I'd interpret the question as "in general and in the Western world"