Posts Tagged ‘Tax Cuts’

There are several challenges when trying to analyze the impact of policy on economic performance.

One problem is isolating the impact of a specific policy. I like Switzerland’s spending cap, for instance, but to what extent is that policy responsible for the country’s admirable economic performance? Yes, I think the spending cap helps, but Switzerland also many other good policies such as a modest tax burden, private retirement accounts, open trade, and federalism.

Another problem is the honest and accurate use of data. You can make any nation look good or bad simply by choosing either growth years or recession years for analysis. This is known as “cherry-picking” data and I try to avoid this methodological sin by looking at multi-year periods (or, even better, multi-decade periods) when analyzing various policies.

But not everyone is careful.

Jason Furman, who was Chairman of the Council of Economic Advisers during Obama’s second term, has a column in today’s Wall Street Journal. What immediately struck me is how he cherry-picked data to bolster his claim that the government shouldn’t reduce its claim on taxpayers. Here’s his core argument.

…the 1981 and 2001 model of tax cuts makes no sense in today’s fiscal environment. Tax revenue as a percentage of gross domestic product is lower today than it was when Presidents Reagan and George W. Bush cut taxes.

And here the chart he shared, which apparently is supposed to be persuasive.

But here’s the problem. If you look at OMB data for the entire post-World War II era, tax revenues have averaged 17.2 percent of GDP. If you look at CBO data, which starts in 1967, tax revenues, on average, have consumed 17.4 percent of GDP.

So Furman’s implication that tax receipts today are abnormally low is completely wrong.

Moreover, he shows the projection for 2017 tax receipts, which is appropriate, but he neglects to mention that the Congressional Budget Office’s forecast for the next 10 years shows revenues averaging 18.1 percent of GDP (or the 30-year forecast that shows revenues becoming an even bigger burden).

In other words, a substantial tax cut is needed to keep the tax burden from climbing well above the long-run average.

Furman’s slippery use of data is disappointing, but it’s also inexplicable. He could have offered some effective and honest arguments against tax cuts, most notably that reducing revenues is problematical since Trump and Republicans seem unwilling to restrain the growth of government spending.

Let’s close by looking at a few other interesting passages from his column.

I found this sentence to be rather amusing since he’s basically admitting that Obamanomics was a failure.

Growth has been too low for too long and raising it should be a top priority.

He then asserts that tax cuts never pay for themselves. I would have agreed if he wrote “almost never,” or if he wrote that the new GOP package won’t pay for itself. But his doctrinaire statement is belied by data from the United States, Canada, and United Kingdom.

…no serious analyst has ever claimed that tax cuts generate enough growth to pay for themselves.

By the way, Furman openly admits the Laffer Curve is real. And if the Joint Committee on Taxation shows revenue feedback of 20 percent-30 percent when scoring the Republican plan, that will represent huge progress.

Estimates by a wide range of economists and the nonpartisan scorekeepers at the Joint Committee on Taxation have found that the additional growth associated with well-designed tax reform may offset 20% to 30% of the gross cost of tax cuts—not counting dynamic feedback.

Last but not least, he comes out of the tax-increase closet by embracing the truly awful Simpson-Bowles budget plan.

The economy needs a fiscal plan that combines an increase in revenues with entitlement reforms that protect the poor a la Simpson-Bowles.

As I’ve explained before, Simpson-Bowles is best characterized as lots of new revenue on the tax side and plenty of gimmicky provisions on the spending side (rather than genuine reform).

P.S. Even though Republicans are not serious about controlling spending and even though I don’t think the GOP tax cut will come anywhere close to “paying for itself,” the tax cuts are still a good idea. Both to generate growth and also because reduced tax receipts hopefully will translate into pressure to control spending at some point.

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Larry Summers served as Chairman of the National Economic Council for Barack Obama, so it is rather remarkable that he is admitting that the economy is in deep trouble and that America may be on the verge of long-term, Japanese-style stagnation. Here’s part of what he wrote.

From the first quarter of 2006 to the first quarter of 2011, the U.S. economy’s growth rate averaged less than 1 percent a year, similar to Japan in the period its bubble burst. During that time, the share of the population working has fallen from 63.1 to 58.4 percent, reducing the number of those with jobs by more than 10 million. …Traditionally, the American economy has recovered robustly from recession as demand has been quickly renewed. Within a couple of years after the only two deep recessions of the post-World War II period — those of 1974-75 and 1980-82 — the economy was growing in the range of 6 percent or more, rates that seem inconceivable today. Why?

So what does Summers propose as a solution? Well, there’s good news and bad news.

The good news is that he wants a tax cut. Indeed, he wants a fairly large tax cut. And while his column does contain a few throwaway lines in favor of government spending, he doesn’t have a laundry list of new programs that he wants to fund, so he’s not calling for a repeat of the failed stimulus from 2009.

The bad news is that he wants a Keynesian tax cut. More specifically, he wants a temporary payroll tax cut. As a knee-jerk advocate of lower taxes, it seems that I should be happy, but I want the right tax cuts for the right reason. More specifically, I want proposals that permanently reduce marginal tax rates on productive behavior – i.e., supply-side tax cuts.

Summers, by contrast, wants a tax cut that will encourage people to spend more money. But that’s the Keynesian approach, and it fails to realize that economic growth is when people earn more money. In other words, we need to produce before we consume.

A temporary payroll tax cut would reduce a marginal tax rate on employment, so there is some merit to Summers’ proposal. But it’s difficult to imagine businesses making permanent decisions to boost jobs and output on the basis of temporary tax policy. My main concern is that we would get very little bang for the buck from this proposal.

Here’s more of the oped.

Without the payroll tax cuts and unemployment insurance negotiated by the president and Congress last fall, we might well be looking at the possibility of a double-dip recession. Substantial withdrawal of fiscal support for demand at the end of 2011 would be premature. Fiscal support should, in fact, be expanded by providing the payroll tax cut to employers as well as employees. Raising the share of the payroll tax cut from 2 percent to 3 percent would be desirable as well. At a near-term cost of a little more than $200 billion, these measures offer the prospect of significant improvement in economic performance over the next few years translating into significant increases in the tax base and reductions in necessary government outlays.

I suppose I should be happy that Summers is moving in the right direction. This plan is much better than the 2009 stimulus. But if it gets enacted (and it is part of the discussions between Biden and congressional Republicans), don’t expect an economic renaissance.

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The Wall Street Journal ponders the mini-tax revolt among some Democrats, ranging from Kent Conrad in the Senate to Jerrold Nadler in the House, who are suddenly making arguments that it would be a bad idea to allow higher tax rates in 2011 (because the 2001 and 2003 tax cuts automatically expire).
I’m not holding my breath waiting for good results. Almost all of the Democrat “tax cutters” are making flawed Keynesian arguments, so they don’t even understand why it’s a good idea to focus on lowering marginal tax rates. But the WSJ’s editorial makes a good point about accepting good policy even if it’s based on bad analysis. But since extending the 2001 and 2003 tax cuts would require the support of almost 20 Democrat Senators and 40 Democrat Congressmen, I’m afraid it’s a moot issue – especially since the Obama White House is dominated by the hate-n-envy class-warfare crowd.

The revelation that tax increases could hurt the economy has recently been heard from Senators Evan Bayh of Indiana, Ben Nelson of Nebraska, and, most surprising, even from Kent Conrad of North Dakota. On a scale of unlikely events, this is like the Pope coming out against celibacy. As Senate Budget Chairman, Mr. Conrad has rarely seen a tax increase he didn’t like, but this week he averred that “As a general rule, you don’t want to be cutting spending or raising taxes in the midst of a downturn.” …Even Jerrold Nadler, a liberal from central casting, is worrying publicly that the tax hike will hit his New York constituents too hard. And he’s certainly right given that the combined top state and federal income tax rate will be close to 54% in 2011 in New York City. Mr. Nadler is proposing—seriously—to adjust the income tax brackets based on regional cost of living so fewer New Yorkers pay the rates …These are hardly supply-side conversions, but they’re a start. The economic recovery is far from robust, and socking it with one of the largest tax increases in history in January is not going to make anyone more eager to invest or create new jobs. Even Lord Keynes opposed raising taxes in a recession, and good Keynesian Democrats like the late economist Walter Heller persuaded JFK to cut tax rates in the 1960s. Those cuts kicked off that decade’s economic boom. Only in the age of Obama have Democrats convinced themselves that the best “stimulus” is higher spending and higher taxes. …even if all the 2001 and 2003 tax cuts are made permanent, the share of national output that goes toward federal income taxes will in every year stay well above the post-World War II average of 8.2%. Income tax receipts will rise gradually to 10% of GDP, even with the current tax rates intact, because as the economy grows the progressive tax code takes a larger share. If tax increases weaken the economy, revenues won’t increase as fast as Democrats hope and the deficit won’t fall by as much in any case. Which brings us back to the Speaker, Treasury Secretary Tim Geithner and Mr. Obama, who remain prisoners of their spend-and-tax dogma. Even as the Democratic tax revolt broke into the open yesterday morning, the White House rolled out Mr. Geithner to declare that the tax increases will arrive as scheduled. So the same Mr. Geithner who says the economy is weak enough that we must have new spending “stimulus” says it is strong enough to endure a huge tax increase.

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