Category Archives: markets

A Few More Musings on Taxes and an Economy

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James Pethokoukis, writing for AEIdeas, has a thought.

First, some rough background:

From 2009-2012, revenue as a share of GDP has averaged 15.4% of GDP vs. 13.9% from 1948-1951 and 18.1% overall in the postwar era.

Then,

Imagine if we a) kept all the expiring 2001 and 2003 tax cuts, b) started indexing the Alternative Minimum Tax for inflation so it wouldn’t hit more and more taxpayers.

How would that affect tax revenue? The Congressional Budget Office tells us:

Under that scenario, revenues from 2013 to 2022 would average about 18 percent of GDP, which is equal to their 40-year average.

Indeed, we would be back to the postwar average of 18.1% by 2016.

I would argue that the AMT, which began life as a special assessment against all of 155 particularly hated-by-Progressives successful Americans, should be abolished altogether, but that’s a topic for another post.

Here are a couple of other numbers.  US GDP was $15.1 trillion in 2011, while Federal income tax collections ran to $1.273 trillion, or 8.5% of GDP (my number differs from Pethokoukis’ because I’m only considering individual and business income taxes and leaving out Social Insurance, ad valorem, and other taxes).  In 2007, US GDP was $13.3 trillion, while Federal income tax collections ran to $1.534 trillion, or 11.5% of GDP (yes, that’s a 17% drop in Federal income tax collections in the third year of the failed recovery).

Plainly, if the Feds just got out of the way of our economy, stopped demanding ever more taxes, stopped spending our money on failed “investments,” stopped paying essentially well-meaning individuals for not working, our economic recovery would push income tax revenues up those missing three per centage points—and having returned to 11.5% of GDP, Federal income tax revenues would approximate $1.7 trillion—a rise of nearly $500 billion in the first year.  And that’s just a static analysis.  At that rate of increase every year, the Feds would be getting a whole lot more in income tax revenue by 2016—again a static analysis.  Imagine the increase from a dynamic analysis, which would include all the feedback loops from economic growth—like individual spending, business growth, jobs increases for those currently on the Feds’ dole, etc.

Another thought: from the Tax Foundation, via the TaxProf, comes this:

[W]hat does the academic literature say about the empirical relationship between taxes and economic growth?  …the results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions, and monetary policy.  In this review of the literature, I find twenty-six such studies going back to 1983, and all but three of those studies, and every study in the last fifteen years, find a negative effect of taxes on growth.  Of those studies that distinguish between types of taxes, corporate income taxes are found to be most harmful, followed by personal income taxes, consumption taxes and property taxes.  …

[T]he lesson from the studies conducted is that long-term economic growth is to a significant degree a function of tax policy.  Our current economic doldrums are the result of many factors, but having the highest corporate rate in the industrialized world does not help.  Nor does the prospect of higher taxes on shareholders and workers.  If we intend to spur investment, we should lower taxes on the earnings of capital.  If we intend to increase employment, we should lower taxes on workers and the businesses that hire them.

Why, with all that revenue enriching the Feds coffers, we could look forward to actually paying down/off our national debt, and then across the board reductions in income tax rates.

Except that tax revenues (partly) fund incumbents’ vote pandering “welfare” programs.

Negotiating?

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The Progressives in our Federal government insist, with a straight face, that the Republicans have put forward no concrete proposals in the present budget…negotiations.  They carefully ignore the fact that the Republicans already have put forward three concrete proposals: two House-passed budgets (for 2011 and 2012, which contained explicit spending, taxing, and entitlement reform steps), and the proposal on which they campaigned last fall.

Oh, wait—the Progressives studiously ignored those, too—in the Senate, where they refused even to permit debate on the budgets and ever since, with their pretense that the spending, tax, and entitlement reforms of the campaign don’t exist.

The Progressives’ current position?  As The Wall Street Journal reports,

[M]any Democrats have ruled out any changes to Social Security during the current fiscal talks.

And

A senior administration official said the White House would make no new offers until Republicans changed their opposition to raising top tax rates.

Throughout this entire shabby charade, President Barack Obama has been accusing the Republicans of holding middle-class America hostage against their refusal to agree to tax rate hikes on his hated Americans.  Yet the Republicans and Progressives already agree on making permanent current tax rates on 98% of Americans.  It’s Obama who is threatening to blow up our economy on his ego trip of demanding 100% of a tax deal for which he already has 98%.

It’s Obama who’s threatening to blow up our economy by refusing to discuss spending cuts and entitlement reform at all—after agreeing that they should be on the table shortly after the election.

It’s Obama who’s threatening to blow up our economy with his insult of demanding sole debt ceiling authority in utter disregard of the Constitutional role of Congress—and not the President—in setting spending.

Update: Speaker John Boehner (R, OH) and a number fellow members of the Republican leadership made a counterproposal Tuesday that included much of Obama’s precious tax revenue increases–not as rate increases–to the tune of $800 billion, and $1.2 trillion in spending cuts.  Obama blew this off within the hour.  So much for negotiating.

Ex-Senator Rick Santorum, last night on Greta van Susteren’s On the Record,  said that Obama’s fallback–his Plan A–of Sequestration and tax rate increases across the board makes him entirely willing to take our economy over the cliff: Obama gets his tax rate increases, and he gets the Progressives’ decades-long fought-for cut in defense spending, a $500 billion reduction.  Obama sees this as a heads, I win; tails, you lose situation.

I think Santorum is right.

Republicans and Talking to Folks

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Neil King and Victoria McGrane have some thoughts.  They cite various conservatives, for instance:

[A]ctivists—including tea-party activists but also some mainline Republicans—say the party should adopt a more populist tone, one that places more emphasis on ways Republican policies would help the middle class.

And

The critique from these Republicans suggests that the party should change some policies—such as adopting a more skeptical posture toward big banks—as well as the way it talks about economic issues.

And

Mr. Romney’s lopsided loss among the country’s expanding universe of minority voters has fanned fears within the party that its main challenge is demographic, though others dismiss that worry as secondary.

But these are short-sighted and outright wrong.  The “others” are right; the problem is Republicans’ and conservatives’ general failure to talk to all Americans, regardless of ethnicity.  Republicans and conservative need to get out and talk to people in the neighborhoods in which they live—all of those neighborhoods—as I pointed out here and here.

Ex-Mississippi Governor and erstwhile GOP Chairman Haley Barbour has the right of it.  He understands that conservative policies aren’t the problem.

We do very well when our policies for economic growth and job creation are put in place.  But we often don’t talk about those policies in ways that the middle class and working class see as in their interest.

And they don’t talk at all about those policies where Americans physically live.

The other critiquers, though (the ones who are concerned with the content of the message as well as where it’s delivered), also have a point—apart from attempts to change those policies.

The Republicans’ approach to dealing with the nation’s largest financial firms illustrates the tension.  GOP leaders oppose the Dodd-Frank financial-overhaul law as regulatory overreach and want it scrapped, partly because they say it codifies certain institutions as being too big to fail.  But so far, they haven’t rallied around an alternative means to reining in the big banks.

Or establishing the need for government to “rein in” the big banks.  Which points up another aspect of message content.  In addition to their failure clearly to articulate what they would do differently vis-à-vis Dodd-Frank, their mantra concerning Obamacare is woefully inadequate:  “Repeal and replace.”  Replace with what?

An Empirical Demonstration

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Investor’s Business Daily provides one.

Renting a 20-foot truck one-way from San Francisco to San Antonio, for example, will cost $1,693. But the U-Haul tab to go in the opposite direction is just $983.

Hmm….

This figure compares, across just a few parameters, the outcome of big government, high taxes, and profligate spending—California—with the outcome of limited government, low taxes, and (more) disciplined spending—Texas.  Texas has many faults, but the routine of government interference with its citizens’ wallets and businesses isn’t among them.

California has become a state that people are increasingly trying to escape, and Texas a state people are increasingly migrating to.

…

A study by the Manhattan Institute found that Californians have been leaving for states with better job prospects, lower taxes and better business climates.

In other words, states that are pursuing the kind of low-tax, limited government, free market policies [President Barack] Obama typically rejects.

The public may have voted to give Obama a second term.  But many people in California are voting with their feet, leaving the state that’s already put in place policies Obama has promised to keep pushing for four more years.

Obamanomics, as California demonstrates—its economy actually shrank sharply in the last four years—are an utter failure.  RTWT.

Pick One

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David Wessel, writing in a recent Wall Street Journal, reports that

Chief executives of more than 80 big-name US corporations…in a statement to be released on Thursday, say any fiscal plan “that can succeed both financially and politically” has to limit the growth of health-care spending, make Social Security solvent and “include comprehensive and pro-growth tax reform, which broadens the base, lowers rates, raises revenues and reduces the deficit.”

Then Wessel himself makes this remark [emphasis added]:

The declaration differs sharply from those of several other business groups, which urge Washington to deal with the deficit and avoid across-the-board spending cuts and tax increases set for year-end—but avoid any stance on the politically charged issue of raising taxes.

This is an all too common conflation of two separate questions, but it’s amazing to see it coming from a Pulitzer Prize-winning economics journalist.

Of course raising tax revenue is different from raising taxes: the latter is merely one way to achieve the former.  But Wessel compounds his confusion by repeating it:

The CEOs who signed the manifesto deem tax increases inevitable no matter which party succeeds at the polls in November. “There is no possible way; you can do the arithmetic a million different ways” to avoid raising taxes, said Mark Bertolini, CEO of Aetna.

Notice that: Wessel directly contradicts the CEOs in their statement, which he quoted above.  And then he carefully provides his confused “paraphrase” of raising taxes outside another direct quote.  Yet Wessel then notes the following:

The executives didn’t endorse Mr. Obama’s proposal to raise the marginal income-tax rates for the top 2% of taxpayers or any other proposal.  Rather, they called for an overhaul of the tax code that, among things, would eliminate or reduce deductions, credits and loopholes (known as “broadening the base”), and one that also would bring the Treasury more revenue than the existing code does.

It’s no wonder Americans are having trouble sorting through the question of tax reform when the so-called experts can’t even trouble themselves to keep matters straight in their own writings.