Tag Archives: spending

Economic Growth: Tax Cuts or Taxing and Spending Increases?

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President Obama made his position clear in his State of the Union address (as if it wasn’t clear from his performance these last three years, already).  He wants more spending, and he wants to “pay” for it by increasing taxes on the hated rich.  He couldn’t find the energy to spend more than a sentence or two on spending cuts in his SOTUS; although he did find plenty of “green” energy for spending and tax hikes.

Indeed, when it comes to actually reining in government’s use of our money, Obama has been the czar of chimeras and false flags.  As the House Budget Committee Chairman, Congressman Paul Ryan (R, WI) has put it:

We have learned already that the president who’s had three years to try and propose real solutions to fix our fiscal crisis is ducking it….  He formed commissions and super committees, so he sort of outsourced the leadership only to decry their results.

Indeed.  Obama’s committees and study groups (I don’t share Ryan’s disdain for Obama’s use of them, per se; when one is ignorant of a subject, asking experts for advice is entirely appropriate) actually did generate some ideas worth serious discussion and which could have served as points of departure for real reform.  But for Obama, they were merely cynical tools of distraction; he blew off their recommendations without so much as a fare-thee-well.  And he’s been clear about how seriously he takes his own ideas.  Obama yukked it up over his “shovel ready jobs” chant:

…shovel-ready was not as shovel-ready as we expected.

Obama does have his apologists.  Third Way think tank’s Jim Kessler insists:

[W]hen you’re in the middle of a recession it’s very dangerous to stop priming the pump.  You know, you need to get escape velocity, get out of the atmospheric pull of recession, break loose and then let the economy go loose.

But what Kessler, et al., don’t understand is that that “atmospheric pull” actually is government interference in our economy.  We can’t “get escape velocity,” to mix metaphors, with the government’s enormous sea anchor dragging us back.

How has Obama’s Progressive policies of higher taxes and more spending been working out?

His first installment, nearly a trillion dollars’ worth, failed to reduce unemployment or deliver the shovel-ready jobs he promised.  Of course he’s demonstrated how seriously he took his “shovel-ready” claim, even as he was making it.  His profligate spending, while succeeding in exploding the Federal deficit and the Federal debt—which now our grandchildren will have trouble paying down—beyond anyone’s worst nightmare at the start of the Panic of 2008, have done nothing else but hold back a normal cyclic recovery that has been struggling since the official end of that recession in the spring of 2009—nearly two years ago—just as similar Keynesian foolishness did for the Depression.

For his second try, he wanted to spend even more, and now he wants to raise taxes on a narrow group of Americans of whom he disapproves.  Ryan suggests checking the numbers.  Doing so exposes the depth of Obama’s cynicism in continuing to push for higher taxes.

All these tax increases that the president is talking about, they only cover 8 percent of his proposed spending increases. The other 92 percent of the president’s spending increases are borrowed money.

Ryan is being polite.  Those 92% are actually fantasy money—that’s the level of seriousness with which Progressives take other people’s money.

Here’s an alternative: reform our tax structure, including reducing rates, closing loopholes, and ending subsidies and credits.  To paraphrase Ryan’s argument, with Progressive tax increases hitting small businesses disproportionately (and hitting all of us—individuals and businesses of any size—too hard, simply by existing), comprehensive tax reform is far better than arbitrarily and capriciously raising taxes.

And then cut government spending to below the tax revenue generated.

One step currently under consideration, with both Republican and Demoncrat support, is the continuation of the temporary payroll tax holiday.  But this is a chimera; it will produce no effect on our economy.  It will, though, continue defunding an already dysfunctional Social Security system.  With the Progressives already having agreed that a 2 percentage point cut in taxes is good (and with Obama originally calling for a 3 percentage point cut in payroll taxes for both individuals and businesses), Republicans are blowing an excellent opportunity to begin serious reform.  The better place to put these cuts is as permanent income tax cuts for individuals and businesses, and as a first step toward larger income tax cuts and tax reform, generally.

Arthur Laffer suggests a more specific tax reform in a column in The Wall Street Journal.  As Laffer points out, and as thinking Americans have understood for a long time,

Jobs and wealth are created by those who are taxed, not by those who do the taxing. Government, by its very nature, doesn’t create resources but redistributes resources.

Laffer goes on to suggest that a flat tax is the optimum reform.  Although he uses Newt Gingrich’s version (an optional 15% flat tax for individuals, with the option being to continue paying under the present system, and a 12.5% flat tax for business) as his example for discussion, Laffer’s point is generally valid.

Laffer argues

Fairness in taxation means that people and businesses in like circumstances have similar tax burdens.  A flat tax, whether on business or individuals, achieves fairness in spades.*  A person who makes 10 times as much as another person should pay 10 times more in taxes.  It is also patently obvious that it is unfair to tax some people’s income twice, three times or more after it has been earned, as is the case with the death tax.

The current administration’s notion of fairness—taxing high-income earners at high rates and not taxing other income earners at all—is totally unfair.

Progressives—led by Obama—argue that it’s the rates that have to be progressive in a fair tax system, not just the amounts actually paid.  But concern with rates paid rather than amounts paid fails to achieve equal treatment at the start—at the point of equal opportunity; “progressive” tax rates only look to create equal outcomes, after the differing levels of ability, work ethic, and so on have been applied by the people involved, folks who behaved voluntarily according to their own imperatives.  Progressive rates punish hard work and success while subsidizing lesser effort.  There’s no fairness in this.

Finally, as Laffer points out,

[A] flat tax proposal is not revenue-neutral, nor should it be.  If there’s one truism in fiscal policy, it’s this: Wasteful spending will always rise to the level of revenues.  Whether you’re in Greece, Washington, D.C., or California, overspending is a prosperity killer of the first order. [A] flat tax…would put a quick stop to overspending and return America to fiscal soundness.

 

*I fully anticipate that Laffer will be called racist for using this term, and I’ll be similarly accused for repeating it.  Understand, though: only a racist will actively look to create racism where none exists, so he can cry, “Racist!”

A View of Fairness

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Spiegel Online International reports that the Italian Pime Minister Mario Monti wants his participation prize for the austerity measures the Italian Parliament talks about enacting.  And this prize ought to be in the form of Europe lending him yet more money, this time disguised as Euro bonds—for which Monti expects Germany to put up the lion’s share.  After all, goes his argument

Germany is benefiting from the crisis—interest rates on German bonds are way down and the weak euro favors German exporters—and should therefore share its favorable interest rates with its partners[.]

This is like arguing that, because I ruined my credit rating with profligate spending and irresponsible borrowing, which makes the sound credit rating you built with discipline and care seem even better, you, neighbor, owe me access to your credit card.

Moreover, Monti’s threatening to stage a temper tantrum, if his new-found “austerity” isn’t properly funded with other people’s money.

If this strong movement towards discipline and stability is not recognized as taking place, and a certain approach to financial aspects does not gradually evolve, then there will be a powerful backlash in the countries which are being submitted to a huge effort of discipline[.]

A discipline that other nations have been applying as a matter of course.

Hmm….

Federal Subsidies

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The Department of Education, in its First Year Progress press release concerning the Federal Race to the Top subsidy program, asserts

The 12 state-specific reports provide summaries of accomplishments made and setbacks experienced by states in pursuing reforms around Race to the Top’s four assurance areas—raising academic standards, building robust data systems to improve instruction, supporting great teachers and school leaders….

That’s a lot of bureaucracy, without a lot of actual performance.  To be sure, the rest of the claim from the DoE excerpt above includes “…and turning around persistently low-performing schools.”  Let’s look at DoE’s own individual reports to see how accurate that claim is, along with their introductory claim that

[t]hese twelve states have acted with courage and commitment in taking on ambitious education reform. Their year one work has helped lay the foundation for long-term, statewide improvements centered on doing what’s best for students.

DoE’s assessments of the first year belie those rosy words.  The Wall Street Journal reports that three of those 12 states have been explicitly called out for failure to perform in accordance with the promises they made in order to get this Federal subsidy.

U.S. Secretary of Education Arne Duncan warned New York state…to deliver its promise to overhaul teacher evaluations and develop a comprehensive student data-tracking system or risk losing hundreds of millions of dollars in federal grants.

and

…Hawaii…is now required to get federal approval before spending any of the $75 million it won.

and

Florida has also been criticized.

Florida was criticized for being seriously behind its promised time and budget schedule for getting on with its promised actions.  In fact, Florida has simply issued a string of excuses so weak that even Duncan couldn’t look past them.

I don’t expect perfection out of a government program, or any other human endeavor.  But I do expect far better performance from a government program, funded as it necessarily is, with our money—in this case, with $700 million of our money.  However, as Joy Pullman notes in The Weekly Standard, “the federal government isn’t good at a great many things—particularly education.”

Or at getting efficient results through subsidies generally.

Basic Economics

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A thought on Keynesian economics.  Brad DeLong offers this thought concerning our current debate over government spending:

The government purchases $100 billion of goods, issues $100 billion of bonds, and raises taxes by $3 billion a year in order to amortize the bonds.  Government purchases go up by $100 billion this year.  Private consumption goes down by $3 billion this year.  Net fiscal impetus is not $0 but rather $97 billion.  Cochrane [and other Keynesians] doesn’t understand the Ricardian Equivalence argument he is trying to make.

Keynesians think $97 billion were created through this spending and taxing program and that government spending is a good.  But having sold $100 billion in bonds generate this “demand increment,” from where would those $100 billion have come, and to where would they have gone otherwise?  The Keynesian view can be summarized in either (or both) of two ways: supply creates its own demand, or demand creates its own supply. Talk about trickle down, or building fields of fancy and hoping fanaticizers come.

No, what goes on actually is this.  Falkenblog commenter Aaron Brown explains:

The main point is…that people react to the $100 billion future tax increase (or spending cut, or reduction in value of nominal assets from inflation, or some other loss).  You might argue that people will under-react in some cases, but it’s highly implausible that they don’t react at all, or that they systematically under-react (and there’s no data supporting either implausible contention).  I think systematic over-reaction is plausible (although also has no empirical evidence) since once currency debasement begins i[t] almost always seems to accelerate.

The question of where the $100 billion would have gone otherwise is a different one.  It could come from private consumption or private investment, in either case likely making the net effect of the stimulus spending negative, even before factoring in the future costs.  Government takes money today from privately-selected uses to government-directed ones (loss of utility there) and also must take money tomorrow from privately-selected uses to repay the debt.

And since the economy continues to be depressed from the government having withdrawn so much money from it for its own spending, government must, apart from tomorrow’s taking for current borrowing, repeat the whole borrowing and taxing cycle tomorrow, also.  This continues to hold down the economy, as we saw with the government’s “stimulus” spending in the Great Depression, and as we’re seeing today.  Brown continues:

The Keynesian hope is that today’s $100 billion comes from hoarding or asset bubbles, in which case the net effect could be neutral or even positive.  The further hope would be that the future debt repayment will go to sound private investment or elimination of future wasteful spending (sort of “stuff then starve the beast”).

However “hoarding” and “bubble” are in the eye of the beholder. So even if you make the assumption people under-react to the future implications of stimulus spending, you also have to assume that the government’s judgment using other people’s money, with officials being paid whether they are right or wrong, is better than people making choices with their own money, bearing the losses if they are wrong.

If people are correctly preparing for future bad times instead of “hoarding” or correctly anticipating a rise in nominal asset prices instead of feeding a “bubble”, then the stimulus will be doubly harmful.

But the fact is, we don’t hoard.  We (both individual and business) save/invest.  We may have a good idea of why we’re saving—a new house, future retirement, or future expansion—or we may not, saving only against an inchoate reservation about the future—but this isn’t “hoarding.”  And government judgment?  We’re seeing how that’s playing out with the government’s substituting its judgment for ours in its use of our money for its entitlement programs.  Keynesians are all about the superiority of government’s judgment.  Otherwise, they wouldn’t keep taking our money and spending it for us, even (especially) when we don’t want to spend, in order to stimulate our economy (which, just incidentally, Keynesians also view as government’s economy).

h/t to Eric Falkenstein at Falkenblog.

Gridlock Works

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Lost in the hoo-raw over the payroll tax reduction extension at the end of the year was Congressional inaction on a couple of other weighty matters—and this inaction redounds to our benefit.

Congress failed to continue a 45 cent per gallon tax credit for corn-based ethanol and a 54 cent per gallon tariff on imported ethanol (mostly from Brazil—Obama wants us to be one of their best customers).  Since these two items were among the few things Congress even constructed reasonably—they actually had sunset clauses—they expired Dec. 31.  Of course we can expect the Progressives to attempt to redress this egregious failure or to score the evil Republicans for stopping a resumption—that is, if the Republicans find their courage, lost in the debt ceiling fiasco and which loss was underscored by their screw-up on the payroll tax reduction, and block a resumption.

Another useless “green” subsidy expired through Congress’ inaction, also: the thousand dollar tax credit for installing an electric car charging station in a residential garage expired, as did the related tax credit (up to $30 thousand) for installing a commercial charging station.

Unfortunately, the gridlock didn’t achieve a sweep: fuel refiners still are required to add 36 billion gallons of ethanol to their fuel mixes by 2022, and the (maximum) $7,500 tax credit for buying an electric car remains in place.

Of course, as with all subsidies, these had just made the subsidized items more expensive.  The 45 cent credit for the ethanol-in-gasoline just followed the fuel right into your cost at the pump, for instance.  The $6 billion per year we taxpayers were being hit for this credit bought everyone else’s ethanol gasoline.  And we paid those $6 billion even when we bought an electric car, instead.  Those of us that have bought one; sales are steady, but far from outstanding.

That credit for buying the electric car is interesting in its own right.  Just to take an anecdote for an illustration, a Ford Fusion (ignoring the usual haggling, and only looking at MSRP) runs around $20 thousand.  The correspondingly ungussied-up Fusion Hybrid is a bit under $29 thousand.  With the subsidytax credit, that drops the Hybrid to a shade over $21 thousand.

In some cases, the credit doesn’t do the buyer as much good, though.  The Tesla’s Model S is a $50 thousand electric car, and their Roadster seems, from Tesla‘s Web site, to be of a price that if you have to ask, you can’t afford it.  The tax credit doesn’t have so much practical effect here.  As to the Fisker Karma, well, that electric car isn’t available at any price, at least for a while: its batteries are…defective.  The credit is useless for it.

Maybe instead of renewing the ethanol subsidies, we can get Congress to eliminate the electric car subsidy and the requirement to dump ethanol into our gasoline, too.  Keep in mind that ethanol is hard on your car‘s engine.

Or am I hoping for too much change this year?