Tag Archives: taxes

Government Tax Increases and Government Spending Cuts

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Stipulate, arguendo, that government spending is stimulative.  In order to pay for the stimulative spending, government must collect taxes or borrow.  Taxes taken away from the citizens, though, is money the citizens no longer can spend.  Raising taxes to pay for increased stimulative spending is even more money that those citizens now cannot spend.  This reduced private spending offsets the public spending funded by that taxation.

Increased taxes to support increased public spending reduces private spending even more than the amount of the tax increase, though.  The increment above the simple reduction in private spending comes from individuals and businesses now being especially careful to husband their monies: they increase their savings so as to improve their ability to handle unforeseen problems, such as a medical emergency, a roof repair, a capital plant problem, another increase in their tax bill beyond the one just suffered.  Thus, private spending is reduced further by increased saving, and a tax increase results in a net reduction in the sum of private and public spending.

This offset doesn’t change when government borrowing, rather than tax increases, is used to fund stimulative (government) spending.  Americans aren’t stupid.  We all recognize that today’s government borrowing is just tomorrow’s increased taxes and/or rising inflation, and so the above husbanding still occurs.

This is a relatively symmetric relationship.  A reduction in tax rates achieves two positive things (although after a minimum threshold, the second positive becomes a wasteful negative).  The first positive thing is that more money is left in the hands of private individuals and private businesses.  This additional money is either spent, which is directly stimulative, or it is saved against one of those unforeseen events, or for a planned large expenditure, future retirement, or future investment.

Thus, saving is stimulative tomorrow, and more than that, the saved money actually serves two stimulative roles.  One role is that this is the money private individuals and our businesses are going to spend tomorrow for one of the reasons just described.  The other role is through private or commercial lending/borrowing.  Those savings are assets that banks and other financial institutions can lend to our neighboring private individuals and to our businesses, so our neighbors and businesses have increased money for their current spending.

The second positive thing is that with these reduced tax rates, economic growth is encouraged, and that increased economic activity generates more revenue for the government beyond the direct reduction from those reduced rates.  However, since government has no need of money beyond funding the few things our government was created to effect, any amount beyond that level is wasteful and so provides room for reducing tax rates even further.

Finally, in the real world, where (Keynesian) stimulus spending has been shown to be wrong empirically (vis., FDR’s “stimulus” spending during the Great Depression, which prolonged the Depression; and Obama’s “stimulus” spending in the present deep recession, which is prolonging the recession), reduced government spending also is net stimulative.  Government spending crowds out private spending through at least two mechanisms.  Government demand artificially elevates prices compared to the level at which those prices would exist in the face of solely private demand, and private spending is reduced by lack of need to purchase: the government will buy and transfer the goods to the private individuals.  Reduced government spending reduces that crowding out, and private individuals and businesses return to the market place.

He Just Doesn’t Get It, Treasury Precinct

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Eric Morath, of The Wall Street Journal, describes Secretary Treasury Timothy Geithner’s speech this week before the Economic Club of Chicago.  Geithner said,

The challenges facing the American economy today…are about the barriers to economic opportunity and economic security for many Americans and the political constraints that now stand in the way of better economic outcomes[.]

So far, so good.  But then, Geithner claims that the deficit- and debt-exploding “stimulus” spending this administration and its predecessor inflicted on our economy in 2008 and 2009 helped avoid a much deeper depression.  (As an aside, it’s interesting to note that, just as everyone else in this administration who’s made this claim has done, Geithner declined to offer any evidence whatsoever to support his claim.)  He also insists that government needs to do yet more to stimulate our economy.

Then he argued, in all seriousness, that cutting spending and taxes won’t stimulate the economy.  Here’s the Treasury Secretary insisting that leaving more of our money in our hands to spend—or save—according to our needs isn’t stimulative.

Additionally, here’s that same Treasury Secretary arguing the old, failed Keynesian thought that government spending, of its nature, is stimulative.  The thing with government spending, though, is that it crowds out private spending, it doesn’t add to it.  With the government buying, there’s less need for individuals or businesses to buy: government will, and give it to us.  Look at health care.  Look at food stamps (which I pick on due, among other things, to the impact of farm price supports and the government-mandated ethanol program on food prices).

And

There is no economic or financial case for using the fear of future deficits to cut as deeply into core functions of the government, to weaken the safety net or fundamentally alter Medicare benefits[.]

No, of course not.  He’ll just have more money printed up to cover those costs.  Never mind that all that inflowing printed currency is just inflation, either today or tomorrow, which will only erode the value of the money coming from that Federal spending—and the value of what money we still have after taxes.  The government can print money to keep up with its inflation.  We cannot.

No, Mr Geithner, the political constraints challenging our economy today consists entirely of too much Federal government interference in our economy.  The most important thing that government needs to do more of right now, to help our economy, to stimulate our economy, is to sit down and put its collective hands in its collective pockets.  Do more nothing

Taxes, Revenue, and Growth

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Do Federal revenues come from taxes or from economic growth?  (I’ll elide, for this post, a discussion of whether the Federal government needs the revenue it wants to collect.)  A couple of better men than me offer up some thoughts:

There is a point at which in peace times high rates of income and profits taxes destroy energy, remove the incentive to new enterprise, encourage extravagant expenditures and produce industrial stagnation with consequent unemployment and other attendant evils.

and more loquaciously,

Our true choice is not between tax reduction, on the one hand, and the avoidance of large Federal deficits on the other. It is increasingly clear that no matter what party is in power, so long as our national security needs keep rising, an economy hampered by restrictive tax rates will never produce enough revenue to balance our budget just as it will never produce enough jobs or enough profits.  Surely the lesson of the last decade is that budget deficits are not caused by wild-eyed spenders but by slow economic growth and periodic recessions, and any new recession would break all deficit records.

In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now…. The purpose of cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.

Who said these things?  Those old and venerated, in some circles, Democrats: Woodrow Wilson in the first case, in his 1919 message to Congress, and John Fitzgerald Kennedy in the second, in his 1962 speech to the Economic Club of New York.

Here’s a graph from our current Progressives’ favorite exemplar, Europe, courtesy of Dan Mitchell at the International Liberty blog:

EU-15 refers to the 15 nations which comprise the 15 members of the pre-May 2004 European Union: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom—e.g., western Europe, less Norway and Switzerland.

The graph shows, decade by decade, the steady reduction in economic growth of those 15 EU nations as their governments, individually, and the EU “government” generally, expanded their size and control over their nations’ economies and their citizens’ abilities to make their own decisions.

As an aside, how do we get an economy to generate revenue?  Not this way:

Shall we create more jobs by aping Europe, which since 1990 has averaged 9.16% unemployment while ours was 5.95%?

[L]ike the leaders of the bankrupt states of Europe, President Obama believes that the key to prosperity is to regulate, engineer, and direct the economy; to raise taxes; to augment the powers of government; to substitute collective largess for family cohesion; to spend money that does not exist…to paraphrase Macbeth, to borrow, to borrow, and to borrow.

Hmm….

Some “Tea Partiers” and Budgets

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The White House objects to Congressman Paul Ryan’s (R, WI) latest budget proposal as the end of the welfare state.  I certainly hope it is.

As to the rest of The Wall Street Journal‘s op-ed, what they said.

Some—by no means all, but every grouping has its extremists—who aver themselves to be tea partiers need to withdraw their heads from rectal storage and pay attention.  In DC, in politics, in any endeavor, we need to not hold out for everything all at once, or we’ll get nothing at all, and at once.  Take what we can get today, and come back tomorrow to work for more.

This working, bit by bit, toward the goal is how the Progressives have gotten us into our present strait over these last 80 years, and it’s the only way out of our present strait to fiscal sanity and its associated economic growth and prosperity.  It’s the only path away from government dependency and back to personal responsibility and individual freedom.

Take the budget and vote it up.  Make the spending, taxing, and “entitlement” corrections today that are possible today, rather than failing to get any of it by being greedy for more.  Come back tomorrow, and work then for the next increment.  And by the way, tomorrow’s effort will be informed (for those willing to listen) by the empirical data flowing from today’s reforms, and so tomorrow’s continued reforms can be more efficiently structured and thus produce its results more quickly.  Sort of a dynamic political scoring.

Two Tax Plans

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On the one hand, we have the House Republicans’ proposed tax plan, one whose construction was led by the House Budget Committee Chairman, Congressman Paul Ryan (R, WI).  The outline of this plan contains replacement of our present six income tax brackets with just two, 10% and 25%, and reduction or elimination of tax loopholes used by (the nebulously defined) “high-income” Americans.  Ryan suggested

Take away the tax shelter, subject all of their income to taxation, and get more revenue—and we can lower everybody’s tax rate in return.

Beyond that, Ryan conceded that at this early stage, it’s not possible to know whether these “wealthy” would gain or lose from the exchange, and he refused to go into detail on the loopholes to be cut or eliminated.  It’s the House Ways and Means Committee’s task to work out the tax details in any budget proposal; until the details are worked out, the impact of the changes is inherently unknowable; and Ways and Means discussions should be held by that committee in public, not by Ryan on talk television programs, including Fox News Sunday, where these remarks were recorded.

President Obama didn’t waste time objecting to the plan.  Through his senior advisor, David Plouffe, he told Fox News Sunday that Ryan’s plan “fails the test of balance, fairness and shared responsibility.”  This certainly does draw a stark contrast between the Republicans’ ideas and his own: he continues to demand his right to raise taxes, with the inherent unfairness of taking money that doesn’t belong to government in the first place, or of raising taxes to get money the government doesn’t need.  Obama went on, claiming the Ryan plan would give the “average millionaire and billionaire” a tax cut of $150,000:

It showers huge tax cuts on millionaires and billionaires, paid for by seniors and veterans.

Here is demonstrated Obama’s breathtaking omnipotence: it’s not possible to know the effect since the Ways and Means Committee has not written the details, but he “knows,” anyway.

Obama then disparaged the Ryan plan’s vouchers for Medicare while continuing to refuse to offer any evidence of the downside of such vouchers—continuing, instead, his drumbeat of cynically unsubstantiated claims of rising costs to seniors.  With these aspersions, he also ignores the market competition effects on costs from seniors shopping their business around among private health insurers.  Moreover, his complaint comes with his continued refusal to offer a solution of his own.  He insists, instead, on simply defunding Medicare through his Patient Protection and Affordable Care Act and his payroll tax cut, despite the pending financial failure of the current Medicare system.

On the other hand, the Table below shows Democratic Party’s tax plan for our consideration and discussion:

Oh, wait: they don’t have one.  They’ve refused these last three years even to offer one beyond the cynical jokes contained in Obama’s “budget” proposals.  They’ve just had the courage of sitting on the sidelines sniping at plans that others have offered—and then refusing even to discuss those other plans in the Senate.