More taxes means more deficit
Posted by aogThursday, 18 February 2010 at 13:49
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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.
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…
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.