Category Archives: political economy

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.

Some Government Spending

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Progressives in Congress and the White House are loathe to reduce spending—especially actual reductions, not just the reduced rates of growth that they, along with too many Republicans, masquerade as spending reductions.  This reluctance is part of why they’ve been so indisposed toward passing a budget, which would make their spending excesses even more apparent.

Bret Baier, of Fox News, though, has dug out some numbers illustrating the present excesses.  Just last November, for instance, the Federal government collected $5 billion in total revenue, while spending $11 billion, each day of the month, for a spending excess of $6 billion per day.  The table includes Baier’s numbers and provides some of the biggest spending sources.  (The Totals sums won’t agree  between across and down due to rounding.)

Spender Daily Tab ($billion) Monthly Tab ($billion) Projected Annual Tab ($billion)
Department of Health and Human Services

3

90

1,080
Social Security

2.5

75

900
Department of Defense

1.8

54

648
interest on the national debt

0.85

25.6

307.4
Totals

8.2

244.6

2,935

Notice that the two biggest spenders are Obamacare—HHS—and Social Security: two of the entitlements which the Progressives have already said are not negotiable—no matter the damage to our economy.

Notice further that those $300+ billion in debt interest are utterly withdrawn from our economy; it’s just the vig on our debt.  Those dollars don’t circulate.  Moreover, that vig doesn’t pay down the debt a single fēn (分).  Then, too, when interest rates revert to our historical levels in the neighborhood of 5% from our current roughly 0.25%, those interest payments will explode to the region of $6,148 billion—over $6 trillion.  Per year.

No wonder the Progressives are so reluctant to discuss spending or actual deficit elimination and debt reduction.  That would be hard.

A Press Conference

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Here’s what was said at a recent press conference:

So I’m going to continue to talk to the President and the other leaders up in the Senate.  But, ultimately, they’ve got to do their job.  Right now their job is to make sure that middle-class taxes do not go up and that we have a balanced, responsible package of deficit reduction.

It is there for all to see.  It is a deal that can get done.  But it is not going to be—it cannot be done if every side wants 100 percent.  And part of what voters were looking for is some compromise up here.  That’s what folks want.  They understand that they’re not going to get 100 percent of what they want.  And for some reason, that message has not yet taken up at the White House or in the Senate.

And when you think about what we’ve gone through over the last couple of months—a devastating hurricane, and now one of the worst tragedies in our memory—the country deserves folks to be willing to compromise on behalf of the greater good, and not tangle themselves up in a whole bunch of ideological positions that don’t make much sense.

So I remain not only open to conversations, but I remain eager to get something done.  I’d like to get it done before Christmas.  There’s been a lot of posturing up at the White House and over in the Senate, instead of just going ahead and getting stuff done.  And we’ve been wasting a lot of time.  It is the right thing to do.  I’m prepared to get it done.  But they’re going to have to go ahead and make some adjustments.

Was that Speaker of the House John Boehnor (R, OH)?  Not really.  It was President Barack Obama, and he wasn’t talking about himself and his allies; he was disparaging Republican efforts to avert our fall over the cliff.

The Fed’s Move

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In the last week, the Federal Reserve Bank has said that it’s going to keep on buying mortgage debt (euphemistically called “mortgage-backed securities (MBS)”), and that it’s actually going to increase the purchase rate.  In addition to buying up MBS at $40 billion per month, they’re also going to buy $45 billion/mo of T-bonds.  Astonishingly, they’re going to pay for both by issuing new reserves to banks.  The Fed will continue to do this until certain unemployment thresholds are crossed.

James Pethokoukis, writing for Ricochet, suggests in quoting Economist David Beckworth, that this is a good thing:

It makes very clear to the public that the Fed will not stop until these targets are hit.  Markets, in turn, should respond in anticipation of these goals being hit.  That is, the elevated demand for liquid assets should start declining as households and firms start moving their funds into higher yielding assets.  This rebalancing should raise asset prices, help repair balance sheets, and ultimately spur nominal spending.  In other words, by better managing expectations, the Fed should cause the public to do the heavy lifting—and they already have started.  If all goes according to plan, the Fed may not have to actually purchase that many additional assets.  Ironically, this means that had the Fed been doing this all along its balance sheet would be much smaller now

On the other hand, King Banaian, also for Ricochet, writes

This would induce private lenders to leave the MBS market and hopefully make loans to the business sector.  Meanwhile, short-term interest rates would rise.

…

Reserves eventually become money.  Currently, most reserves are held by banks who receive interest on them from the Fed.  In short, the Fed is using its profits from operating in money markets to induce banks not to lend the reserves they are printing with one hand, while manipulating interest rates to encourage borrowing with its other.  And this process threatens to debase our currency.  The lone dissenting vote from Wednesday’s meeting, Richmond Fed president Jeremy Lacker, noted the Fed had only a few years ago agreed with Treasury that steering credit is not a job for monetary policy. Yet now that’s precisely what they’re doing.

The problem is that the power of all that additional money in the economy, when it does start to get spent (assuming the Fed’s credit manipulation works and “higher yielding assets” do turn into increased spending)—and lent, which exponentially expands the capacity to spend—is explosively inflationary.  By the time that inflation is recognized to be on the horizon, though, it’s actually already in full throat.  That inflation will then destroy the value of all that extra money poured into the economy, leaving us all where we are today—only with three times as much money, each dollar of which is capable of buying only one-third as much.

Maybe the Fed should stop.  Maybe the Fed should simply get out of the way and let our economy recover without the strait jackets of Fed debt-buying and of Progressive Do-Good welfare pushing.  The Fed can’t do anything about the one.  But it doesn’t have to do the other.

And this doesn’t even get into the smoke and mirrorsexpectation management that the Fed now admits is the sum and total of all that it’s doing.

The Future of American Youth?

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In France, we’re seeing the impact on the nation’s youth of their government-managed economy, magnified by the union-driven difficulty (near impossibility, actually) of getting rid of extraneous labor (or even bad workers).  Spiegel Online International offers some insight.

Kafui Affram doesn’t feel at home in either environment, not in the suburb where the 22-year-old still lives in his childhood room in his parents’ little house [or in Paris, his suburb’s parent city].

Still living with his parents.  Just like America’s youth, especially in the Age of Obamacare.

Some 23 percent of the country’s 18- to 24-year-olds live in poverty, according to a study by the National Institute for Youth and Community Education (INJEP).

The poverty rate for America’s youth as recently as 2009 was 20%.  It’s not going to improve any time soon; the unemployment rate for America’s youth was 17.1% in July 2012, at the height of the summer season for employing our youth, and the unemployment rate for their parents has been hovering around 10% for the last four years after factoring in the effect of our shrinking labor participation rate.  Then,

Youth unemployment in France has been high for some time, but it has now climbed to 26%.  For decades, regardless of their political affiliation, lawmakers have been promising to create a better situation for young people.  But exactly the opposite has happened.  Labor laws protect those who already enjoy steady jobs, while the economic crisis and recession have limited the number of new jobs created.

On Socialist President François Hollande and his program for creating of “future jobs,” Affram says,

We’re used to politicians constantly coming up with new ideas.

Yeah, we’ve heard that, too, and from the same sort of source.  With the same degree of confidence that Affram has:

I know I should be optimistic and have goals, but it’s mostly all just bleak.