Talk Elections

http://www.nytimes.com/imagepages/2012/09/15/opinion/15captial-graph.html?ref=sunday

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.

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

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.

So basically, we're just going to ignore empirical evidence and repeat our religion of Mammon. Makes sense.

I'm disappointed, Beet. Surely, you know as well as I do that this graph doesn't really constitute 'empirical evidence'?

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? ???

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.

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.

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.)

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.

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.

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!)

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.

And the reason is - the public/private dichotomy is erroneous. 

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.

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 (http://www.theatlantic.com/business/archive/2012/09/tax-cuts-dont-lead-to-economic-growth-a-new-65-year-study-finds/262438/) 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 :)

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.

I hope that poster is not me. :P

Certainly looks like a legit study, but I don't have time to look at it in-depth right now.

It's not. ;)

*raises hand*

Hardy-har.

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 (https://files.nyu.edu/ts43/public/research/AER_PP_LjungqvistSargent_7.pdf) 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.

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.


 

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. :P

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.

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.

Fixed.

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

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.

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.

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

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

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 :P

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.

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.

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).


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.


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

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.


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.

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?

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


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.


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

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.

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.

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.  

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.

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.

Tautologically? Let's not get silly here.

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

Cutting the top rate from 98% to 40%, as Thatcher and Reagan did, is always going to hugely improve the economy and raise more revenue, but past that point, in most developed nations, you've "blown your load". Cutting taxes on higher and higest earners below 35% is very counterprodcutive. By that point you're on the left-hand side of the Laffer curve.

One thing that is missing is time horizons. It may be that it takes time for rate changes to change behaviors. Sometimes it might even affect career planning over time, or the economic return of a college education. But my impression is that the empirical data supporting the theory that tax changes at marginal levels below 50% (putting aside capital gains), have a substantial impact on future economic growth is very sparse.

It is not only about how much, but also what is being taxed. After the Reagan tax cuts, several German corporations found out that their US subsidiaries' effective tax burden had increased! Why? Because the tax cuts were accompanied with "simplification" that essentially did away with various accelerated depreciations, limited the scope of deferring profits / losses, etc.

Now, there are certain types of major investments (like, e.g., a German firm setting up a plant in the US) which take several years before generating a positive cash flow, and even longer to break even. These investments were discouraged and even penalised by the Reagan tax cuts. I saw a similar effect in Lithuania - they had massively reduced their corporate tax rate, but at the same time done away with various possibilities for tax deduction, including on certain marketing expenses (e.g. trade fair samples), insurance, warranty reserves, R&D investment etc. The effect: Enterprises get risk-adverse and adopt a rent-seeking behaviour.

To put it differently: Management is much more likely to venture into new technology when government takes over 50% of the investment cost & risk (which is the case at 50% corporate tax, combined with liberal depreciation / tax deduction rules and the possibility to defer losses over several years), than at 25% corporate tax with restrictive tax deductibility. At the same time, a higher corporate (& individual) tax makes shareholders more likely to focus on increasing the company value, while low taxes promote a tendency to distribute earnings as dividends instead of reinvesting them.

In short: Moderate taxes (I am not talking about confiscatory taxes above 50-55%) promote investment and risk-taking, which (if done properly) should increase economic growth.

Your hypo   Franknburger does not entail the government taking half the risk because if there are losses and no future profits, you/the corporation eat all the losses - unless you can sell the tax loss carryforwards to a third party for cash one way or the other. The US tax code and ancillary regulations has about 100 pages dealing with this issue, mostly in the context of mergers.

Your point is valid for a complete start-up, but not for a going concern that is already profitable (and be it only due to importing into the US, with the intention to shift some of the production there as well).

OK. You have profits from something else. I am not sure this is good policy by the way (the government, albeit even handedly - for once, subsidizing risk taking). I would be interested in a "dense" academic article on that point with real data, not just chat, if such a paper exists. Plus it creates an incentive for companies to become inefficient conglomerates - solely for tax reasons.

In fact, government would not be subsidising risk taking. It is just that government, by claiming a higher (nominal) share on profits, also takes a higher share of the risk that is associated with  profit generation.
To be clear: I am no friend of 'big government', but there are a number of (pretty costly) functions that government needs to assume (education, infrastructure, guaranteeing rule of law, etc.). If all that can be financed with 20% corporate tax - fine. But I don't know any country in the world that is able to maintain decent standards of public service provision at such a taxation level. So, tax decreases are typically financed by closing 'loopholes', which results in  effective tax rates that may be substantially higher than the nominal tax rate, thereby often penalising risk taking (which is never "business as usual", and as such typically not addressed properly by a "simplified" tax code).

I haven't seen (nor looked for) any academic article on that point, but I have myself done a few studies for organisations like the Asian Development Bank on individual countries' tax systems and their impact on business (especially small and medium enterprises).So, what I can offer you is a practioner's experience, and a plausible (though not empirically proven) explanation why tax reductions do not necessarily stimulate growth, and may on the long run even be counter-productive.

Otherwise: Your point on conglomerates is a good one. Haven't yet thought of it (I am more in the SME field). I may come back on it later, after giving it some more thought.

If taxable profits are calculated in a way that reflects really economic profits, then win or lose, it's tax neutral. If you artificially reduce taxable profits through accounting gimmicks (like accelerated depreciation), that loads the dice from an investment perspective. At the margin, it is a subsidy for investment. So, I'm hostile out of the gate, absent empirical data and more theory, that I don't possess at the moment.

Have you ever done a return-on-investment calculation? In  the "profitable going concern" case, higher taxes mean lower cash-out during the investment phase, and lower cash surplus after break-even.  As the surpluses occur later in time, they are discounted stronger, so higher taxes tend to result in a higher internal rate of return. The effect depends of course on the specific payment and revenue streams, the extent to which investment costs are tax-deductible, and the discount rate applied. The longer the investment period, and the higher the discount rate applied, the stronger it will be.
In practical terms, this means that especially R&D and software  investments, which are typically 
not depreciated but directly written to expense accounts, and may require some time before generating earning / cost savings, become less profitable when taxes decrease. Large capital investment, e.g. construction of a new plant, may also be positively affected by high taxes.

IIRC, one of the points criticised in the 1980s by German corporations  in relation to the Reagan tax cuts was the exclusion of loss referral (to they extent it was ever allowed in the US, which is beyond my knowledge). German tax laws at that time allowed to refer losses back for up to two years. These corporations compared their past and projected tax debt under the German (56% corporate tax, but possibility of loss referral) and new US tax legislation (33% corporate tax), and concluded that German regulation resulted in lower average tax payment.

It thus appears that you agree with me.

Yes because whether the increased revenue within the economy goes towards hiring people to handle investments, vacations, paying bills, or school, the money is spent somewhere and jobs are created at some point down the line. It then creates more tax dollars and an increase in revenue to pay off the deficit. Infrastructure is also a valuable quality in growing the economy as long as we don't hand out blank checks with no deadlines.

Yes, but not efficiently.

Tax cuts, like every other economic policy, is subject to the law of diminishing returns.  The first comprehensive income tax cuts under Kennedy and Reagan did wonders because taxes were high enough to begin with that the beneficial impact of tax cuts on the economy could be felt.  Now that taxes (at least on income) are relatively low compared to the rest of the developed world, the impact of further tax cuts (like George W. Bush's tax cuts in 2001 and 2003) are muted.

There is no economic case for further tax cuts.  Republicans and conservatives know this (I think), so they have turned to ideology instead. 

It also depends on the state of the economy at the time. In 2003 we saw an immediate rise in the stock market, but in 2001 we were in the middle of a recession and saw more decline. I know 9/11 had to do with it as well. It's not going to get the job done by itself. Infrastructure as I mentioned before helps a lot as long as it's not blank checks for projects without end like the big dig project. Another important factor that goes underestimated is consumer confidence. People have to have confidence to invest and spend their money which we haven't seen in about 15 years.

It 'can' but it depends on the circumstances... as I've written before, they have diminishing returns. Taxes can be too high and can impact on economic activity. But I find the view that taxes just need to keep going down... and there's some kind of ideological mind-block for them... there's no significant evidence that tax cuts inherently stimulate the economy. Basically, if you don't care about the direct causal connections of the tax cuts on the economy, then you're only in a ideological bog where taxes must always go down... "but what about..." "they must always go down!!!!"

Kennedy's tax cuts did lead to economic growth and Reagan's did too, although 'trickle-down' is largely a myth. But at the same time Clinton's tax increases did help the government balance the books, which did aid in business confidence. Bush's tax cuts were utter failures and left the US without the ability to respond to the GFC without massive financial consequences.

So, what I'm saying is there isn't a 'rule' some think tax cuts always boost economic growth others say taxes should be increased... and I think they're both wrong as a generalisation, but they can both be a correct avenue depending on the circumstances.

At the moment? The last thing the Government should be doing is reducing their revenues while trying to restore their economic position.