More taxes means more deficit
Posted by aogThursday, 18 February 2010 at 13:49 TrackBack Ping URL

According to Rasmussen polling 58% of of the American Street think that if the federal government raise taxes, the money will be spent on new projects, not reducing the deficit (that is, that raising taxes will at best not affect the deficit but likely will make it worse). I wonder why anyone would think that. Or possibly it is because our President thinks (via Brothers Judd)

“our real problem” is neither the spike in stimulus spending of the last year — as many Republicans charge–or the sharply lower tax collections from hard-hit businesses and individual taxpayers. “The real problem,” he [President Obama] said, “has to do with the fact that there is a just a mismatch between the amount of money coming in and the amount of money going out. And that is going to require some big, tough choices that, so far, the political system has been unable to deal with.”

I’ll bet that unlike our “intelligent and well educated” President, Sarah Palin, who ran a small business, grasps the concept that a mismatch between outflow and income is in fact related to revenues and expenses.

Comments — Formatting by Textile
Bret Friday, 19 February 2010 at 22:42

I don’t know. I think I partly agree with Obama, except for the minor detail that’s he’s one of those members of “the political system” that “has been been unable to deal with” the “big, tough choices” required to better balance money coming in and money going out.

Whether or not the budget balances in any given year hardly matters. And we can get away with running 2% deficits forever assuming nominal 5% GDP growth.

The real, long-term problem is hugely growing spending, especially those related to entitlements.

erp Saturday, 20 February 2010 at 08:26

Bret, I agree, especially about entitlements. Unlike tax breaks, entitlements are passed down from one generation to the next.

AVeryRoughRoadAhead Saturday, 20 February 2010 at 16:37

What Bret said.

What Obama was saying is that these acute problems (stimulus spending, lowered tax revenues) are less important than the tsunami of promised Boomer retirement benefits that are going to break the back of the current system.

IMO the political system will continue to be unable to deal with the “big, tough choices” until we as a nation hit rock bottom. Unfortunately, the Ron Pauls and David Walkers of our current situation aren’t as charismatic or telegenic as are the Palins and Obamas. While there’s a limit to how much responsibility and pain the electorate is willing to accept, it’s still available for a true leader to steer our Ship of State hard on to the “more responsible” side of the delta of what’s politically possible - as opposed to our current course.

But higher future taxes are a given.

David Cohen Sunday, 21 February 2010 at 10:21

Yes, but you’re pretending that we can raise taxes. We can’t. You might as well say that it would be nice if Pi = 3.

By the way, I’m not saying that we won’t. I’m saying that we can’t.

AVeryRoughRoadAhead Sunday, 21 February 2010 at 12:34

Are you saying that we can’t increase tax revenues, even if we increase tax rates or the number of taxes?

While there is certainly a point at which increased attempts to raise revenue are counter-productive, due to increased tax avoidance or depressed economic growth, we ain’t there yet.

Which is not to say that we won’t increase taxes well past that tipping point, wherever it is. That seems quite probable.

But in any case, whether or not the nation sees increased revenues from higher tax levies, it’s a sure bet that on an individual level, anyone who has an income during the coming decades will experience a much-higher personal tax burden.

Bret Sunday, 21 February 2010 at 13:54

Rough wrote: “…we ain’t there yet…

Yes, we probably are. There’s a time component to consider. Sure, the government could take basically everything they can find in a given year. However, in following years there will be nothing find. See the following paper (written by one of Obama’s economic advisors no less) for more info:

http://emlab.berkeley.edu/users/cromer/draft1108.pdf

It basically shows that a 1% increase in taxes reduces GDP growth by 3%. Doing the math, we see that in 20 years, the total federal receipts will by MUCH LOWER with higher taxes.

Rough wrote: “…anyone who has an income during the coming decades will experience a much-higher personal tax burden. …

People will adapt. For example, given that tax rates go up significantly, I’m planning to work just one month a year as a consultant. I’ll make my $20K+ and then collect food stamps and hang out at the beach the rest of the time, biding my time until it makes sense to work again. The beauty is that they tax the annual, not hourly, income.

Greece is a pretty case study of this sort of thing. The government can’t raise more revenue. Period.

David Cohen Sunday, 21 February 2010 at 13:57

Yes, I’m saying that revenues cannot get significantly larger than they are now, except that we can switch private health care costs for public health care costs, which will raise revenues, though not as much as costs will increase.

You say we’re not there yet, but taken together federal, state and local government, plus health care, raises as much revenue, as a percentage of GDP, as any OECD country. At the same time, our deficit as a percentage of GDP has historically been low among OECD countries and, this year, will be about average.

AVeryRoughRoadAhead Sunday, 21 February 2010 at 16:32

We shall see. Various studies put the revenue-maximizing tax rate on the Laffer Curve at somewhere between 35% - 65%. We’re now closer to the former, and not too far in the future, we’ll have moved hard on the latter. The empirical evidence of collected revenues will settle the debate about whether or not additional taxes will move us out of the “sweet spot”.

It basically shows that a 1% increase in taxes reduces GDP growth by 3%.

Like the Laffer Curve, where you end up depends on where you start, and guessing how much an economy would have grown absent increased taxes is an inherently dubious proposition. In the referenced paper, the Romers write that “it is important to note that our estimates are not highly precise,” and that “the confidence interval is generally quite wide.”

As David points out, the total tax burden on Americans is currently fairly low, and so a slightly increased tax burden may not erode growth by very much at all. And as the Romers point out, “our estimates suggest that the response of output is substantially smaller after 1980 than before”, and that “tax increases to reduce an inherited budget deficit do not have the large output costs…”

The Romers’ paper seems to indicate that the economy appears to be less-sensitive to small tax-burden shifts now, than it was between WWII and President Reagan, and further that raising taxes to replace borrowed monies for large current budget deficits doesn’t seem to be more harmful to the economy than borrowing the money was in the first place.

But since we’re going to run the experiment, it’ll be interesting to see how right the Romers got it.

People will adapt. For example, given that tax rates go up significantly, I’m planning to work just one month a year as a consultant. I’ll make my $20K+ and then collect food stamps and hang out at the beach the rest of the time, biding my time until it makes sense to work again.

If you make $20K/yr, you aren’t going to be collecting food stamps, but that’s a minor quibble.

An accountant might say that such a plan was indeed a successful tax-avoidance scheme, but any economist would know that eleven months of enforced idleness a year, even if it’s hangin’ at a beach, is a pretty steep burden for anyone who has ambition.

At the same time, our deficit as a percentage of GDP has historically been low among OECD countries and, this year, will be about average.

That’s a bit of a stretch. According to the Nov. ‘09 OECD forecast, both the median and average budget deficit will be 8.x% of GDP, whereas the U.S. is projected to be 11.x%. The only major economy with a higher projected deficit is that of Britain.

And size definitely matters. Even if the U.S. were anticipating a budget deficit of “only” 8% of GDP, that’s still OVER A TRILLION US$ of new borrowing, to say nothing of the trillions of US$ in current debt that needs to be rolled. There’s only so much available capital in the world…

erp Sunday, 21 February 2010 at 17:44

There’s only so much available capital in the world…

Not true Rough. The sky’s the limit for visionaries who work hard.

Bret Sunday, 21 February 2010 at 19:58

Rough quotes Romer: “…our estimates suggest that the response of output is substantially smaller after 1980 than before…

However, they also write “…the evidence of a change over time is only modest”, and while “substantially smaller” it’s still 3% GDP per 1% tax rate increase.

Rough wrote: “If you make $20K/yr, you aren’t going to be collecting food stamp…

In California for a family of four (which is what I have), the cutoff is about $35K. I’ve looked into it.

Rough wrote: “…hangin’ at a beach, is a pretty steep burden for anyone who has ambition…

First, I’ve proven beyond a shadow of doubt that I can love doing nothing but hangin’ at a beach for extended periods of time.

Second, like many people, I only have ambition if I’m not significantly taxed. In a socialist environment, my needs go to the moon, my abilities go to zero. In a low tax environment, my abilities elevate by orders of magnitude and my needs go down.

Under the high-tax Carter years, I worked a couple months a year programming, then bummed around motorcycling, hangin’ out, etc. the rest of the time and had a fabulous time. Reagan cut taxes and I’ve probably averaged 60 hours since, created dozens of jobs, and lots of technology, but it looks like it’s gettin’ time to revert to the old lifestyle. I’m perfectly happy to let others take care of me if that’s what they choose.

AVeryRoughRoadAhead Sunday, 21 February 2010 at 22:15

…it looks like it’s gettin’ time to revert to the old lifestyle. I’m perfectly happy to let others take care of me if that’s what they choose.

Yeah, I have a lot of that in me, as well, but I also like being a low-productive member of a dynamic society, not a low-productive member of a low-productive society.

If I’m still alive five years hence, I’ll look around and see if it makes any sense to be a permanent expat, or whether the U.S. seem to be working through their problems in a mature and timely manner.

The sky’s the limit for visionaries who work hard.

It seems that the “sky limit” can be quantified - in America it’s approximately US$25 trillion. Unfortunately, net on-and-off-balance-sheet liabilities total ~US$90 trillion. Too bad. So sad. If only the Moon were the limit!! Yeah, that’s the ticket…

Thus, “visionaries who work hard” must be code for “inflation”: A declassified paper by the IMF, authored by Guillermo A. Calvo: Is Inflation Effective for Liquidating Short-Term Nominal Debt? (PDF) (Answer: Yes.)

Bret Sunday, 21 February 2010 at 23:46

Rough wrote: “I also like being a low-productive member of a dynamic society, not a low-productive member of a low-productive society.

Picky, picky, picky. :-)

As long as I have an Internet connection, there’ll always be access to dynamic society, even if not in person.

I’ve considered the expat thing some as well. I think that window has probably passed for me, but I’m certainly encouraging my kids to keep the whole world in mind, not just the U.S. The kids are pretty well traveled and the 13-year-old is going to China next month (she’s taking Chinese in school so it’s a field trip).

My ancestors came here not too long ago for greener pastures. No reason the descendants can’t look for greener pastures too.

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