[mgoetze]

phil_20686, on 2010-November-04, 06:07, said:

You are missing the point - Compound interest always wins. If I drop tax rates by 99% and get 1% extra growth per year, I will still win in the long run, it will just take 0.01*1.01^n>1 which by my calculation this is about 470 years. For all the years before that revenue is less, but for all the years after that revenue is more. Therefore, and over a millenia I will collect 20 000 times as much total revenue.

I have some words for you to think about:
"real growth"
"nominal growth"
"finite resources"

[phil_20686]

PassedOut, on 2010-November-04, 08:37, said:

Yes, the bracket creep (and other factors) had the same effect during the Clinton years, where receipts gradually rose as a percentage of the GDP, topping out at about 20.8%.

I absolutely agree that lowering taxes stimulates the economy, and appreciate any responsible spending cuts that allow that to happen. But the free lunch argument that lowering taxes increases tax revenues -- so that you don't have to make those spending cuts -- is dead wrong.

In your earlier post you seem to have overlooked that compounding also applies to the debt and debt services over time. That compounding overwhelms the effect you noted. There is no free lunch.

Ah yes, I am not in favour of structural deficits. We are in agreement then. I was merely pointing out that working out whether the bush tax cuts increased or decreased revenue is a bit of a mugs game. If they resulted in any growth then America will benefit from that for all subsequent years - although extra debt may retard growth by more less or a similar amount in the future. Also, you would have to be able to workout how much the economy would have grown without tax cuts. Seems to me that they could have resulted in less or more revenue being collected. I have literally no idea how you would go about trying to work that out though.

[phil_20686]

mgoetze, on 2010-November-04, 17:17, said:

I have some words for you to think about:
"real growth"
"nominal growth"
"finite resources"

I know what all these words mean, and yet I have no idea what you mean.

[PassedOut]

phil_20686, on 2010-November-05, 03:45, said:

Also, you would have to be able to workout how much the economy would have grown without tax cuts. Seems to me that they could have resulted in less or more revenue being collected. I have literally no idea how you would go about trying to work that out though.

Nor do I. Although I share the intuition (and believe) that lower tax rates stimulate the economy somewhat, there are so many other factors at work that US data does not actually demonstrate this directly. Just looking at tax rates vs. growth, you generally find higher growth under the higher tax rates. Of course you can clearly demonstrate that deficit spending stimulates the economy, at least for awhile, but that is a dead-end proposition that produces bigger problems down the road.

I think it perfectly proper to argue about what spending is appropriate, and the federal government often spends money in ways that I don't endorse. Every citizen, I'm sure, has similar feelings, often disagreeing with me about priorities. But once the spending is set, it is important to set the tax rates to match that spending. Deficit spending is the right tool to get through hard economic times, but that deficit must be chopped away during better times. Otherwise the effect of compounding bites hard.

There was broad bipartisan agreement in the US about this for many years after WWII left the US with a huge debt. Under every administration from Truman through Carter, the US debt as a percentage of GDP was reduced. Remarkably, this was even true during the Vietnam war while Lyndon Johnson's anti-poverty programs were simulaneously in full swing.

After Carter, fiscal irresponsibility took over and the US debt ballooned as a percentage of GDP. Jack Kemp, a popular republican politician (and former athlete who suffered too many head butts) famously said, "Deficits don't matter." Clinton restored fiscal responsibility over the unanimous opposition of the republicans, who swore that doing so would create another great depression. Bush the younger then campaigned on the promise of restoring fiscal irresponsibility, won, and fulfilled that promise at once.

Just to be clear, fiscal irresponsibility in this context means cutting taxes before cutting the spending. As you can see in this thread, the fiction that you can solve fiscal problems by cutting taxes alone has been repeated often enough in the US that quite a few folks here have fallen for it. Even though that claim flies in the face of common sense, simple arithmetic, and all historical evidence, it retains great appeal for the free lunch crowd.

[mike777]

If you have a few minutes take the time and read the whole interview.

http://www.rightwing...ws/friedman.php


"Milton Friedman: I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible. The reason I am is because I believe the big problem is not taxes, the big problem is spending. The question is, "How do you hold down government spending?" Government spending now amounts to close to 40% of national income not counting indirect spending through regulation and the like. If you include that, you get up to roughly half. The real danger we face is that number will creep up and up and up. The only effective way I think to hold it down, is to hold down the amount of income the government has. The way to do that is to cut taxes.

John Hawkins: Now let me ask you about that. In the Reagan years, we cut taxes and it ended up leading to economic growth which increased the amount of revenue that came into the government.

Milton Friedman: Well, economic growth will inevitably increase the amount of revenue coming into the government. But so far as the Reagan years were concerned, we have to be careful there. There were initial cuts in 1981-1982 and then there was a very good income tax law in 1986. But in between that, there were increases in taxes as well. So it's not an entirely clear picture that you can attribute the growth in revenue entirely to the tax reductions. But it's a hard thing to disentangle the effects of several things happening at the same time. In particular, there's no doubt that growth is very favorable to government revenue."

[awm]

Historically, there's a pretty strong correlation that higher tax rates on the top brackets leads to more economic growth. This contradicts the conventional wisdom about tax cuts.

There are a number of reasons that such correlation makes logical sense though. For example:

(1) Suppose I own a business. My business does particularly well this year and makes a profit of a million dollars. If the top tax rate is low, I may decide to pocket the million in profit as personal income, maybe use it to buy some expensive toys or put it into savings. If the top tax rate is high, then pocketing the million in profit means I have to pay an awful lot to the government. Instead, I may decide to pay myself only a few hundred thousand and invest the rest into growing my business (tax free for the most part) so that we will have more good years like this one in the future (perhaps when tax rates are lower). The latter course of action is generally better for the economy.

(2) Certain uses of money are better than others for economic growth. Stashing the money under your mattress is basically the worst, but there's a wide range. Generally spending the money is better than saving it, and spending the money to encourage other people to do something of general benefit (like say, building a high-speed rail) is better than spending it on vanity projects or foreign goods (at least as far as our national economy goes). Government is not necessarily the most efficient at spending money -- but neither is it necessarily the least efficient. Wealthy individuals are usually not very efficient in this respect, so taking some money from the wealthy and letting the government to spend it (i.e. on infrastructure) could easily be better for the economy as a whole. This suggests that tax cuts for the middle class are probably more stimulative than tax cuts for the rich, and that a high top income tax rate might be better for the economy (assuming the government spends the money in useful ways).

(3) Some people have stated that it's possible that people will choose not to work as hard if the tax rate is higher. Obviously if you go to some extreme (like a communist system or whatever) where the top tax rate is 100% it seems clear that people will choose to take some time off rather than working only in order to pay more money to the government. But at a more modest rate, it's possible that people will actually work harder with higher taxes! For example, suppose that I think my family needs $500,000 a year to live "in the style to which we are accustomed." Most likely I'm going to put in as many hours of work as I need to obtain this level of income... and not necessarily all that much more. So higher taxes give me incentive to make more money, in order to maintain my "take-home" income at the level I'd like. Again, it's easy to imagine frustration if the tax rate is close to 100%, but if taxes were raised from 30% to 35% you might see people deciding to take a week less of vacation in order to equalize their take-home income, rather than taking a week more of vacation because they're so frustrated about the tax rate.

[PassedOut]

Interesting post.

I always found it counter-intuitive that in real life higher US tax rates have been associated with higher growth, but I didn't think to consider how the higher tax rates might accomplish that favorable result. I always looked at other factors that I figured must have outweighed those higher rates. Now I see that I was (perhaps self-centeredly) overlooking some serious possibilities.

[tomlgoodwi]

awm, on 2010-November-05, 13:33, said:

Some people have stated that it's possible that people will choose not to work as hard if the tax rate is higher. Obviously if you go to some extreme (like a communist system or whatever) where the top tax rate is 100% it seems clear that people will choose to take some time off rather than working only in order to pay more money to the government. But at a more modest rate, it's possible that people will actually work harder with higher taxes! For example, suppose that I think my family needs $500,000 a year to live "in the style to which we are accustomed." Most likely I'm going to put in as many hours of work as I need to obtain this level of income... and not necessarily all that much more. So higher taxes give me incentive to make more money, in order to maintain my "take-home" income at the level I'd like. Again, it's easy to imagine frustration if the tax rate is close to 100%, but if taxes were raised from 30% to 35% you might see people deciding to take a week less of vacation in order to equalize their take-home income, rather than taking a week more of vacation because they're so frustrated about the tax rate.

Wouldn't a retrogressive tax structure -- the more you make, the lower percentage the government takes -- accomplish just as much? In such a system, if you are in a low-income/high-tax-bracket group, you will just have to work twice as hard (or twice as long) to increase your income and escape into the next (i.e., lower) tax bracket.

There is of course a fallacy here, but it isn't much different from the fallacy in the quote.

[awm]

tomlgoodwi, on 2010-November-05, 14:29, said:

Wouldn't a retrogressive tax structure -- the more you make, the lower percentage the government takes -- accomplish just as much? In such a system, if you are in a low-income/high-tax-bracket group, you will just have to work twice as hard (or twice as long) to increase your income and escape into the next (i.e., lower) tax bracket.

There is of course a fallacy here, but it isn't much different from the fallacy in the quote.

The point isn't that raising taxes will necessarily cause people to "work harder" -- in some cases it might, in some cases it might not. The point is that raising taxes from a marginal rate of 30% to 35% will not necessarily cause people to work less. Obviously the same logic does apply to raising taxes on poor people. The difference is that poor people spend most of the money they make (and so are more efficient in stimulating the economy per dollar of their meager paychecks than the wealthy) and that poor people typically have a lot less control over the number of hours that they work (when compared to wealthy people who are more often self-employed etc).

[mike777]

Havard Economics Professor: I Can Afford Higher Taxes. But They’ll Make Me Work Less
http://mainstreet-ct...e-me-work-less/

"Taxing behavior reduces that behavior. Taxing work causes people to work less."




Interesting idea that some posters think the opposite, higher taxes will make you want to work more not less.

Keep in mind another effect of higher taxes is a larger blackmarket, see Italy and Greece.


"Milton Friedman: I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible...."

[luke warm]

mike777, on 2010-November-05, 15:53, said:

Havard Economics Professor: I Can Afford Higher Taxes. But They’ll Make Me Work Less
http://mainstreet-ct...e-me-work-less/

"Taxing behavior reduces that behavior. Taxing work causes people to work less."




Interesting idea that some posters think the opposite, higher taxes will make you want to work more not less.

Keep in mind another effect of higher taxes is a larger blackmarket, see Italy and Greece.


"Milton Friedman: I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible...."

but this is harvard and the univ of chicago (throw out the nobel prize, it occurred too long ago to matter)

[hrothgar]

mike777, on 2010-November-05, 15:53, said:

Havard Economics Professor: I Can Afford Higher Taxes. But They’ll Make Me Work Less
http://mainstreet-ct...e-me-work-less/

What a load of crap (Its par for the course for a member of the crack economic team that cratered the economy, but even so)

The author starts by assuming a hypothetical rate of return and then subtracts away all the grossly unfair losses to to taxes...

I wonder whether the company that he invested in would be able to generate that nice 8% return without functioning infrastructure, without an educate workforce, with an economy collapsing down around it, without all the nice benefits of a civilized society that he just takes for granted...

[hotShot]

Lets assume for a moment, that people would work less, if the taxes go up.

This would mean, there is work left to do and you could get paid for it.
I would call that a business opportunity for someone else.

So higher taxes would get more people into well paid job and more entrepreneurs would emerge to fill the gap that others left by working less. That has to be good for the economy ....

[helene_t]

hotShot, there is always work left to do. People working less is bad for the economy. Of course it could be a good thing for a particular person to work less. But if the tax system give people an artificial incitement to work less than they otherwise would it is a bad thing. And I say this as someone who generally is cool with high taxes, although I think the reasons Adam mentions why high taxes might lead to higher growth are largely short-term effects.

[kenberg]

Is there a typo in the headline or is there a school called Havard (as opposed to Harvard)? The caption on the picture says Harvard but it is odd. Usually a caption actually gives the name of the person. Taken at face value the article quotes an unidentified professor at Havard and shows a picture of an unidentified professor at Harvard.

Then we go on to the content.

The whole think looks like a spoof article, something the Onion would probably reject. At any rate, if higher taxes would result in this gentleman not publishing anything else, I say let's hear it for higher taxes.

[mike777]

kenberg, on 2010-November-05, 18:42, said:

Is there a typo in the headline or is there a school called Havard (as opposed to Harvard)? The caption on the picture says Harvard but it is odd. Usually a caption actually gives the name of the person. Taken at face value the article quotes an unidentified professor at Havard and shows a picture of an unidentified professor at Harvard.

Then we go on to the content.

The whole think looks like a spoof article, something the Onion would probably reject. At any rate, if higher taxes would result in this gentleman not publishing anything else, I say let's hear it for higher taxes.

Again if higher taxes will make you posters work longer hours, away from your family and loved ones...so be it.
If higher taxes is the way to create more jobs...I am for it.



http://en.wikipedia...._Gregory_Mankiw



Nicholas Gregory "Greg" Mankiw (pronounced /ˈmæn.kjuː/; born February 3, 1958) is an American macroeconomist. From 2003 to 2005, Mankiw was the chairman of President Bush's Council of Economic Advisors. His publications are ranked among the most influential of the over 22,000 economists registered with RePEc.[1]

[luke warm]

mike777, on 2010-November-05, 18:49, said:

Nicholas Gregory "Greg" Mankiw (pronounced /ˈmæn.kjuː/; born February 3, 1958) is an American macroeconomist. From 2003 to 2005, Mankiw was the chairman of President Bush's Council of Economic Advisors. His publications are ranked among the most influential of the over 22,000 economists registered with RePEc.

nonetheless, he (and friedman) have written and spoken in economic terms with which most posters seem to disagree (loads of crap, havard-educated, etc, don't ya know)

[kenberg]

I am prepared to accept that he has considerable credentials. But in his little tale, he is not drawing on vast theory, he is telling a story that he thinks to be convincing. I suppose I shouldn't damn all economists by this one story but I often feel that they develop their theories based on unrealistic assumptions on human behavior.


There was a time in my life when the first, perhaps the only, question I asked about a job was how much does it pay. I am happy to report that that time is now in the past. And so I would expect it to be for the Professor. As to building up a legacy to leave the kids, my kids have jobs and make their own money. No doubt they will accept and use any money that they inherit, but neither I nor they are making job decisions in anticipation of this.

From time to time I take on jobs of various sorts since retirement. The thoughts that go into accepting the task fall along the lines of "Is it interesting/worthwhile?", "Do I have the time?", "Will I be able to do a good job of it?". I am certain that I have never consulted the tax rates to decide whether I should or should not accept the offered task. If the Prof, whose wealth no doubt considerably exceeds mine, really makes his decisions in the way he describes, I would find that amazing.

It matters. He presents his story to explain his views on taxes. If the story he presents has no resemblance to how people of his wealth actually make their decisions, then it is useless except as propaganda.

[helene_t]

kenberg, on 2010-November-06, 10:07, said:

It matters. He presents his story to explain his views on taxes. If the story he presents has no resemblance to how people of his wealth actually make their decisions, then it is useless except as propaganda.

It was thoughts like this that made me skip economics and go into biology instead. For an applied mathematician, economics sometimes feels like black magic. As applied mathematicians we are used to making strict distinction between the inference that can be made within our models (a subject in which we have authority) and the inference that can be made in the real world (on which we have much less authority).

And working in a research lab, I usually have the luxury of having an audience (the scientists that make use of the models) that understand this distinction.

Economists work with models that are (IMHO) in general further detached from the real world than the models of most other scientists are. At the same time, they have an audience who doesn't quite so well understand the distinction, and/or who need to make decision facing uncertainty. If a scientists is clueless, he just admits "sorry, I have no clue about this". This is a respectable position and free his time to go on to work on questions on which he does have a clue. If an economic decision maker is clueless he has to make some decision anyway. Defaulting to his gut feelings (or personal interests, maybe), but is always nice if the applied mathematicians can still supply him with some lip service.

All this said: I think your attitude to work decisions are somewhat atypical. Consider, as the opposite extreme, a single mother on less-than-subsistence income, who is facing the decision of taking a regular job, the alternative being some combination of benefits, begging, crime, prostitution and some home decoration services which she doesn't report to the revenue service. I bet the amount of taxes she would have to pay on the regular income factors in for her.

But ok, that may suggest that lowering taxes for low-income people is more effective than lowering it for high-income people. Which I think generally is the case but OK this belief is probably influenced by my preference for low income disparity. I could then give you another example: an entrepreneur in the online gambling industry who is considering to set up his business in Bahamas as opposed to Florida.

[luke warm]

kenberg, on 2010-November-06, 10:07, said:

I am prepared to accept that he has considerable credentials.

me too, since (from the link), "His publications are ranked among the most influential of the over 22,000 economists registered with RePEc."... ranked by whom enters into this, i guess... one would suppose the ranking is by those 22,000, some of whom, i'm sure (or i hope), understand these things