Bruce Bartlett explains his new new book, The New American Economy, and why he thinks supply-side economics should declare victory and go away before it causes any more problems.
The supply-siders are to a large extent responsible for this mess, myself included. We opened Pandora’s Box when we got the Republican Party to abandon the balanced budget as its signature economic policy and adopt tax cuts as its raison d’être. In particular, the idea that tax cuts will “starve the beast” and automatically shrink the size of government is extremely pernicious.
Indeed, by destroying the balanced budget constraint, starve-the-beast theory actually opened the flood gates of spending. As I explained in a recent column, a key reason why deficits restrained spending in the past is because they led to politically unpopular tax increases. But if, as Republicans now maintain, taxes must never be increased at any time for any reason then there is never any political cost to raising spending and cutting taxes at the same time, as the Bush 43 administration and a Republican Congress did year after year.
My book is an effort to close Pandora’s Box and explain to people why I believe that SSE should go out of business–or declare victory and go home, if that makes the idea easier to accept. To the extent that it has any valid insights left to inform policymaking they should be used to design a tax system capable of raising considerably more revenue at the least possible economic cost. Going forward, I believe that financing an aging society and a permanent welfare state is the biggest economic problem we face. (See my discussion here.) Failure to do so leads straight back to the stagflation that SSE came into existence to cope with. . . .
Many of my friends believe I have abandoned supply side economics and become a Keynesian. (Among conservatives there are few insults more damning than to be labeled a “Keynesian.”) But as I try to explain in my book, my views haven’t changed at all; it’s circumstances that have changed. I believe that my friends are still stuck in the 1970s when tax rates were considerably higher and excessive demand (i.e., inflation) was our biggest economic problem. Today, tax rates are much lower and a lack of demand (i.e., deflation) is the central problem. I really don’t understand why conservatives insist on a one-size-fits-all economic policy consisting of more and bigger tax cuts no matter what the economic circumstances are; it’s simply become dogma totally disconnected from reality.
I don’t always agree with Bartlett, he’s almost always worth reading.
Anon314 says:
What is supply-side economics, beyond the recognition of the logical and empirical reality that lowering taxes increases economic production? It does not appear to be a coherent school of economic thought.
October 14, 2009, 9:11 amLugo says:
Supply Side economics did not cause the problem, and therefore should not go away. Politicians are always going to be able to outspend revenues, regardless of how big they are and how they are generated. Getting rid of supply side economics will only make the problem worse, since revenues will decrease while spending will not.
It is the “demand side” spenders on both sides of the aisle who should go away, not the supply siders.
October 14, 2009, 9:32 ambyomtov says:
What is supply-side economics, beyond the recognition of the logical and empirical reality that lowering taxes increases economic production?
SSE was the myth of the self-financing tax cut – the conservative free lunch. It morphed into something even worse – the notion that no tax must ever be increased for any reason. It led to such nonsense as claims that “Senator Foghorn voted for 683 tax increases,” etc.
Drive a stake into it.
October 14, 2009, 9:41 amscattergood says:
Look, SSE did its job economically. Lower taxes raised economic output and increases tax collections. But the gov’t ignored the effects of THEIR behavior and raised spending well beyond the rise in taxes.
His fundamental point is that because the economic theory didn’t control the politics of the times, the theory should be abandoned? What suggestions does he have for reducing or controlling gov’t spending?
Also his suggestion that ‘there is never any political cost to raising spending and cutting taxes at the same time’ is just patently false. The Democrats controlling Congress and the Presidency is pretty good evidence of that.
October 14, 2009, 9:42 amTamerlane says:
If Bartlett believes that financing a permanent welfare state is inevitable, then it seems to me he’s given up the good fight. Besides, the idea of using deficit spending to finance programs politicians want while keeping their constituents happy by not raising taxes was Lyndon Johnson’s great contribution to US political economics not SSE’s.
We are in such desperate straits now that some politician will eventually have to declare a “war on the deficit”. This will involve temporarily (really temporarily)raising taxes to a level that is not sustainable in the long term and reducing services (hopefully some of these reductions will be permanent). But I’m not sure that kind of political courage exists any longer in this country. Otherwise we’re doomed to experiences similar to those that have played out in Argentina since the 1920s, albeit on a grander scale.
October 14, 2009, 9:54 amTGGP says:
Not even Arthur Laffer thought tax cuts must be self-financing. It’s more that an X% drop in tax rates should not be assumed to result in an X% drop in revenue.
October 14, 2009, 10:17 amSplunge says:
Yeah, I think he’s out to lunch here, and the post WWI recession, the ’82 Regan recession, and even the post-9/11 dip, all followed by rapid recoveries, is ample proof of it. He’s mistaking the fever for the illness. The essential problem of economic recession is not its very existence, but its severity.
There will always be recessions, so long as the fluctuation-dissipation theorem holds. But so what? Does anyone really care if you have a nine- or twelve-month recession every five to ten years? Not really, no. What people fear, and rightfully so, is the recession that goes on…and on…for five or ten years. Most households can put up with a year of bad luck, but ten years will scar you, as anyone who was young in the 30s understands.
So there is zero point in pursuing the perpetual-motion chimera of a recession-proof economy, or a magical government vaccine that can prevent them. Might as well wish for a cure for the common cold. But there is a point — indeed an urgent need — to prevent periodic economic “colds” from turning into extended recession “influenza.”
That’s the proper focus. He needs to be asking himself why and how government can best promote rapid healing when the economy comes down with a cold. From that point of view, the speculative nostrums of the Keynesians look as dangerously daft as 18th century physicians bleeding cholera patients or trepanning madmen, and the conservative discipline of “supply-side economics,” with its emphasis on immediately reducing the extent to which government screws with the economy, seems like Hippocratic primum non nocere wisdom. The point of tax cuts is not really to do any particular thing; the point is just to realize that taxes are inherently a weird and artificial constraint on the movements of capital, and when capital is sick and gasping for breath it simply makes sense to loosen its tie and give it a little room to breathe.
A good case has been made that one of the major reasons for the poor healing during both the Great Depression and the present downturn is the fact that both coincided with a clownishly arrogant fad for wholescale random government meddling in the movements of capital. FDR with his New Deal agency o’ the week, Team Obama with their polka-dot motley collage of bail-outs, buy-ins, retrospective regulation, czars, hurry-up 1000-page bills no one reads, promises of vast and rapid change coupled with unsurpassed vaguery about details, have, one can readily argue, put a severe damper on the enthusiasm of anyone with capital for investment.
I mean, what maniac would start a business, or hire new employees, in this climate? You’d have to foresee an insane rate of return to justify the risk to your hard-earned savings from some crazed scheme rolling out of Washington that might totally alter your competitive playing field, confiscate your property, or — and it’s horrifying that this is not even hyperbole — simply criminalize you, ex post facto if necessary.
October 14, 2009, 10:22 amSteve says:
Those who aren’t familiar with Bartlett’s previous work may not understand that he continues to believe that supply-side economics was correct about a great many things – but all of those things, because they were correct, have long since been incorporated into mainstream economics, and thus the stuff that continues to carry the label of “supply-side economics” is mostly hokum.
October 14, 2009, 10:33 amHouston Lawyer says:
Having the Republican party retake the mantle of tax collector for the welfare state is a sure way to ensure minority party status. He seems to suggest that we abandon all analysis of the effect of marginal rates on economic decision making.
The budget is scored so as to deter tax cuts and to promote spending. His time would be better spent on reducing the spending side.
Half of all voters don’t pay income taxes anymore. How do we get them to put skin back in the game?
October 14, 2009, 10:34 amSteve says:
I mean, what maniac would start a business, or hire new employees, in this climate? You’d have to foresee an insane rate of return to justify the risk to your hard-earned savings from some crazed scheme rolling out of Washington that might totally alter your competitive playing field, confiscate your property, or — and it’s horrifying that this is not even hyperbole — simply criminalize you, ex post facto if necessary.
The most fundamental reasons why people would choose not to start a business right now are (1) lack of capital and (2) lack of disposable income among the potential customer base. You have to be quite the ideologue to believe that the most pressing concern is the fact that the government might pass some new regulation that harms your business. The primary concern is that your business may not get off the ground in the first place.
As a co-owner of a business, I think if my partners and I were to sit down and make a list of the reasons not to add employees right now, the potential for new regulations from Washington would not make the top 100.
October 14, 2009, 10:36 amSteve says:
Half of all voters don’t pay income taxes anymore. How do we get them to put skin back in the game?
By charging them payroll tax, sales tax, property tax, et al.?
October 14, 2009, 10:37 amLN says:
Half of all voters don’t pay income taxes anymore. How do we get them to put skin back in the game?
We can start by pretending that payroll taxes, sales taxes, and state and local taxes actually count as taxes.
October 14, 2009, 10:41 amHouston Lawyer says:
Payroll taxes are allegedly payments into a retirement system, and the other taxes are all local. We’re talking about the federal government here. I do not advocate a national VAT, because the more we increase taxes collected, the more the polititians want to spend.
Spending is the problem. I don’t see how punishing the largest tax payers is going to stop the demand for spending from those who don’t pay.
October 14, 2009, 10:53 amBart DePalma says:
The supply-side insight is simply that if you over tax wealth creation, you create less wealth. Thus, the Laffler Curve where you get negative revenue returns when marginal tax rates go too high and harm economic growth.
Supply-side has nothing at all to do with the oxymoron of starving the beast of revenue. This is a static economic POV. Quite to the contrary, supply-side argues that reducing punitive tax rates to a golden mean (that no one has yet identified) will increase revenues. The Coolidge, Kennedy/Johnson, Reagan and Bush marginal tax rate reductions all proved this argument.
Conversely, deficits are a function of government spending more than the tax payers are willing to provide, a situation which supply-side does not directly address.
There is no reason whatsoever to abandon supply-side simply because Mr. Bush and far more so Mr. Obama are spending like drunken spendthrifts with stolen credit cards.
October 14, 2009, 10:55 amSplunge says:
The most fundamental reasons why people would choose not to start a business right now are (1) lack of capital and (2) lack of disposable income among the potential customer base.
Gee, this is a dumb argument. If you don’t have capital, then you’re not of interest here, because you are by definition not in a position to be priming any economic pumps. You won’t be contributing to any GDP growth point of inflection. And there is less of a shortage of disposable income among potential customers than you imply. Notice the national savings rate is at record levels? That people are still snapping up T-bills even though they’re being printed so fast the printer’s smoking? Why’s that, hmm? How come people have the money but aren’t spending it? Weird, huh? Nothing to do with, say, people waiting to see if there’ll be some nifty little “Cash for Clunkers Take II” out of Washington in time for Christmas? If home-building or some other random favored industry might get some weird little “stimulus” thingy in time for the 2010 elections? Yeah right.
As a co-owner of a business, I think if my partners and I were to sit down and make a list of the reasons not to add employees right now, the potential for new regulations from Washington would not make the top 100.
Good for you. Maybe you’re in one of the favored industries, huh? Like education or law, maybe government contracting? These are very good times to be in such solid Democrat constituencies. One thing the Democrats are very good at is making sure their paymasters are happy, so indeed someone in such a business would not worry at all about nastiness instead of taxpayer gold rolling out of Washington in their direction.
October 14, 2009, 11:17 amBrett says:
I think some people are confusing Supply-Side Economics (which simply says that trying to stimulate the “supply” side of the economy – as opposed to demand-side efforts, which are the foundations of Keynesianism – is good economic policy) with what was called “Reaganomics” (which is where you get that “cutting tax rates raises tax revenues collected” nonsense*).
*It has a kernel of truth, in that if you set the rates too high gross tax revenue collected will go down from decreased economic activity, tax evasion, etc. The problem is, you almost never see conservatives and most Republicans mention the part about how the Laffer Curve is a Curve, at at some point cutting tax rates further just decreases revenue collected. Instead, their policy seems to be Cutting Taxes is Always Better, for the most part.
October 14, 2009, 11:25 amSteve says:
If you don’t have capital, then you’re not of interest here, because you are by definition not in a position to be priming any economic pumps.
There’s a lack of capital for entrepreneurs because the banks are not lending. People who could otherwise obtain credit and start a business are not able to right now. No one is thinking, “Hey, the money is there, and my business plan is excellent, but you never know when the Democrats might pass a new regulation so I won’t bother trying.” Except maybe you.
How come people have the money but aren’t spending it? Weird, huh? Nothing to do with, say, people waiting to see if there’ll be some nifty little “Cash for Clunkers Take II” out of Washington in time for Christmas?
You seem to have an almost absurd lack of insight into how actual people think.
The problem with modern conservative dogma is not that it sees marginal tax rates as an incentive or disincentive, because that has always been a valid point. The problem is the view that taxes and regulation are virtually the ONLY consideration. Raise the marginal tax rate by a couple of percent, and suddenly no one will feel like making a profit any more! Yawn.
October 14, 2009, 11:40 amDangerMouse says:
The problem is, you almost never see conservatives and most Republicans mention the part about how the Laffer Curve is a Curve, at at some point cutting tax rates further just decreases revenue collected. Instead, their policy seems to be Cutting Taxes is Always Better, for the most part.
Decreased revenue to the federal government, at least in this environment, is almost always a good thing. The less money the feds have, the more money we have. It’s that simple. We know that politicians are going to spend the revenue no matter how high or low it is, so it makes sense for it to be as low as possible and then fight over how much beyond that they’re willing to go.
Given what most people know about the government (that it is inefficient, corrupt, politically driven to favor certain industries and groups, and is subject to the idiotic whims of politicians in creating new regulations and allocating spending), why should the government generally have more revenue than less? I really don’t see the benefit at all.
It is important to reiterate that politicians will spend the money no matter if the government collects it or not. So let’s not let them collect it, then.
October 14, 2009, 11:41 amBart DePalma says:
Brett says:
Given that we have never lost revenues after a marginal tax rate reduction, we have yet to implement a tax rate reduction below the top of the Laffler Curve. I suspect that point is a rate somewhere between 20-25% – what liege lords used to tax serfs.
October 14, 2009, 11:43 amAnon314 says:
It should be kept in mind that monetary inflation is not capital. Flooding the economy with US dollars and debasing the currency does not create capital, because nothing of value has been created. However, the negative affects are that the civil sector misreads this phantom capital, which can also be in the form of suppression of interest rates, as an accumulation of real savings, and expands, until the unsustainable illusion ends, and the bubble collapses. The contemporary boom and bust cycle is created by central banks, such as the Federal Reserve, sending false signs of capital accumulation to the real economy.
October 14, 2009, 11:52 amThe Unbeliever says:
Let’s make a deal: SSE will admit “failure” and stop influencing policy, if Keynesian economics will do the same. (More accurately, if Keynesian economics will do it again, as it was blown out of the water by reality in the 70′s.)
What? No deal? Politicians would rather rely on Keynesian stimulus because it’s politically popular, regardless of its intellectual bankruptcy and lack of results? How strange.
So Bartlett thinks that Republicans misusing economic theory discredits the underlying theory. I don’t know why the last ~77 years of Democrats abusing economic theory gets a clean pass. Do we get to re-bury Keynesianism if it fails to stimulate the economy this time around?
If we broadly classify the GOP as the party of tax cuts (which are always popular), and the Democrats as the party of government spending (which is always popular with its beneficiaries), then do we need to come up with a brand new economic theory that says both are OK at the same time, since each party will inevitably support the others’ policies when it is politically popular to do so? We can call it “Bartlettism”, the theory that anything politicians do is necessary economic intervention at the time they do it (your results may vary, results atypical, future benefits not guaranteed).
And this line is just ridiculous:
Spoken like a true bureaucrat.
So apparently economics is only useful in service of the State; the national economy only exists to fund the State; the destiny of the country is to grow old, and hand off more responsibility to the State; and the role of politicians is ease the process along, growing the State as fast as is politically feasible.
By putting that premise forward, he’s basically rejected any possibility of intellectual reconciliation with conservatives, libertarians, or even most centrists. Hell, let’s be really dogmatic, and ask for a cite in the Constitution, Declaration of Independance, or any foundingdocument that agrees with this view of government.
QFT. But there is reason to write a book and blame unpopular scapegoats.
October 14, 2009, 11:52 amGuest12345 says:
How about the 24% don’t pay income taxes or payroll “taxes”?
October 14, 2009, 11:55 amMikee says:
So if I read the blog post and the comments above correctly there is no arguing that the Laffer Curve is real, that the Reagan tax cuts increased revenue to the government,that at some lowered tax rate revenues will drop, and that federal spending has increased to an outrageous extent and is completely beyond any reasonable level.
The idea that more than half the country receives more federal funds than they contribute in federal taxes is outrageous on its face. This is simple redistribution of wealth by government fiat, and must be stopped for our society to continue without utter economic failure. Why is this not the primary issue, rather than the tinkering with tax rates discussed above?
How about we all take notice of the elephant
October 14, 2009, 11:56 amSteve says:
Given that we have never lost revenues after a marginal tax rate reduction, we have yet to implement a tax rate reduction below the top of the Laffler Curve.
This is the kind of sad statement that makes Bruce Bartlett suggest that supply-side should be given a decent burial. As he wrote in 2007:
Yet amazingly, you have not only Internet clowns like Bart, but actual presidential candidates like John McCain, going around asserting that tax cuts always make revenues go UP. As Bartlett documents, this is just sad.
October 14, 2009, 12:11 pmLN says:
How about the 24% don’t pay income taxes or payroll “taxes”?
You mean poor people who barely vote? Show me how they have disproportionate political influence.
October 14, 2009, 12:15 pmRandy says:
splunge: “Good for you. Maybe you’re in one of the favored industries, huh? Like education or law, maybe government contracting? These are very good times to be in such solid Democrat constituencies. ”
My field is technology, and I know that there are many, many bright young people out there chomping at the bit to get their companies off the ground. The reason they can’t or don’t is either their business model doesn’t work (they don’t have a real product that will make money), or if they do, they can’t get start up money, either from a bank, an angel investor or a venture capitalist.
I have never, even within the biotech sector, heard anyone claim that they won’t try to market their great idea because of the potential of gov’t regulation. Even taxes are of no interest to them.
Now, perhaps if you are going to open a child day care center, you would be concerned about regulations. Those things have tons of them! Or if you want to open some sort of food prep thing, because you have to keep your kitchen clean (as regular viewers of Kitchen NIghtmares know). But I don’t see too many people complaining about freeing up restaurants to skirt these types of laws. and in fact, we have no problem with restaurants and day care centers opening up around town.
October 14, 2009, 12:21 pmpc says:
I can name three off the top of my head including the start up I’m working for. I’ll add four when I release the first version of the software project I’m working on on the side.
SSE supporters have no problem spending, they just don’t want spending on social welfare issues. Two wars? No problem (let’s start some more!). War on Drugs? It’s for the children. Having the highest incarceration rate in the world? We have a lot of criminals!
October 14, 2009, 12:21 pmLN says:
It’s time to clean up the government and put an end to Big Poor’s lobbying. No more wars, no more bank bailouts, no more agricultural subsidies. I’m tired of people making under $50K/year running our government.
October 14, 2009, 12:24 pmBart DePalma says:
Steve:
Markets look to the future and adjust their behavior accordingly. Tax debates take months. The markets can see the tax cuts coming and plan accordingly. Tax revenues soared almost immediately after the Bush marginal tax rate cuts went into effect in the Summer of 2003.
The Reagan tax rate cuts were partially countered by the worst recession since the Great Depression and double digit interest rates. The tax rate reductions were phased in between 1982 and 1984. Revenues fell somewhat in the fiscal year following the first tax rate cut, but far less than we have experienced in our current comparable recession. This suggests that the Reagan tax cuts took effect immediately as they did after Bush 2003, but could only partially offset the downward recessionary pressure. Starting in 1983 though, tax revenues soared, often by double digits.
As a point of comparison, we did not have the same magnitude of tax revenue increases after the 1991 recession when Clinton raised tax rates. Indeed, the Clinton tax increase only brought in about half of CBO’s estimated revenues.
Federal revenue increases did not return to double digit gains until after the Bush 2003 tax rate reductions.
October 14, 2009, 12:38 pmpc says:
Hmmm.
October 14, 2009, 12:45 pmSteve says:
Bart, you failed to explain why Bruce Bartlett is a liar when he says “Studies of the 1964 tax cut showed that about a third of it was recouped.”
Of course, I see you’re playing the silly game of pretending that there’s an increase in tax revenues whenever the absolute dollar figure goes up. Of course, you could do nothing at all and tax revenues will go up virtually every year, because the economy grows.
October 14, 2009, 12:48 pmBart DePalma says:
Steve:
I have no doubt that Bruce is accurately relating the findings of the studies he used. However, this does not mean the studies were correct.
The usual error of such studies is to overestimate post tax cut revenues absent the tax cut. This is the method used by critics of supply side to try to explain away the surge in revenues after the Reagan and Bush tax cuts.
Usually, these guestimates of alternative revenues are hard to objectively deal with because there are often other currents in the economy besides tax policy. For example, Reagan was entering a recession when he cut taxes. However, the Bush 2003 tax cuts offer an nearly clean slate to measure the effect of the tax rate reductions. We had pulled out of the mild 2001 recession and there were no other major economic events going on. Thus, it was easy to cleanly compare the middling growth in tax revenues before the Summer of 2003 and the surge that followed.
October 14, 2009, 1:00 pmAndrew Berman says:
If you give someone a credit card, they wind up spending more because everything feels cheaper.
October 14, 2009, 1:03 pmWe lowered the immediate cost of government and wound up buying more government.
What’s amazing is that I remember Ed Koch’s assistants testifying that to fix NYC they first lowered spending and *then* lowered taxes. They didn’t listen.
Duracomm says:
Steve and PC,
You are making the mistake of assuming all businesses are like yours.
Why My Business Has Ceased Investing
October 14, 2009, 1:11 pmThe Unbeliever says:
It depends on which tax is cut. Capital gains tax cuts result in an immediate 1-year surge of realizing gains with a short “tail” of above average gains, to the point that (barring subsequent tax hikes) they tend to pay for themselves in 3-5 years. (As per the data for both Reagan’s and Bush’s tax cuts.)
Individual’s marginal tax rates, on the other hand, require longer periods to show increased economic activity, and it’s more sensitive to other factors outside the tax rate. Supply-siders are split on whether income tax cuts result in higher revenues over time, in part because of the measurability problem, and in part because the curve is less elastic than that of cap gains; in any case, they all agree the $1-for-$1 potential is not there. The Kemp-Roth cuts Bartlett worked on were largely individual rate cuts, so it makes sense to project only a 1/3 recoup.
If you must have a one-size-fits-all dogma to attribute to supply side economics, pretty much all adherants agree that $1 in private hands is better than giving that $1 to the government. But that is a different argument from the functional aspects of taxation rates.
October 14, 2009, 1:11 pmReason60 says:
The notion that lower marginal taz rates can stimulate revenue, is akin to the idea that reducing prices leads to higher sales;
Within limits, the argument holds; but just as there is a floor below which cutting prices doesn’t return higher sales, there is a point below which lower taxes don’t have any more stimulative effect.
Bartlett’s point is valild, that when tax rates are in the 70% they are punitive and produce less revenue, and lowering them can be effective.
And yes, it IS a form of “Free Lunch Conservatism”- it promotes the idea that we can enjoy low taxes, high revenues, and a balanced budget, without any pain or sacrifice on anyone’s part.
But when they are in the 35% range, further cutting is just pointless.
October 14, 2009, 1:11 pmTaking it further, accepting deficits out of fear of any tax increases anywhere is a form of cultish madness; the damage from deficits far outweighs any harm from taxes.
DangerMouse says:
If tax cuts end up increasing revenue, I don’t consider that a positive thing. Again, the politicians will spend the money no matter what.
Why do democrats raise taxes? Because they want coverage for their spending antics in order to say that they’re not spending as much as they really are. “Look, the deficit is only 800 billion over tax revenues this year! I’m not a drunken spender like you claim!” They also raise taxes out of spite for the rich, and to penalize behavior that they don’t like.
Why do republicans cut taxes? Because they want to say to constituents that they’re giving the people their money back. Some Republicans also believe in the idea that cutting taxes increases revenue, etc, although I’m not sure most believe it. Some Republicans also try to find a balance between revenues and spending, ignoring the plain fact that their collegues will continue to spend like drunken sailors.
If you accept it as a given that politicians are addicted to spending no matter what (which history has certainly validated), then tax cuts almost become the default position. Cut taxes, all the time, everywhere, as much as possible. They won’t go to zero because there’s always resistence from the drunken sailors who want to spend, spend, spend and need coverage.
In other words, there is no hope of trying to find the right balance between tax revenues and spending, because politicians will always destroy that balance by spending more.
October 14, 2009, 1:11 pmmarkm says:
Libertarians and most conservatives and Republicans don’t believe that our purpose in life is to provide the maximum possible revenue for Congress to use in buying votes.
October 14, 2009, 1:29 pmpc says:
Duracomm, I was responding to the question: “I mean, what maniac would start a business, or hire new employees, in this climate?”
I guess I know some maniacs. I never claimed to represent all businesses, just pointing out that there are companies that are expanding. The start up I work for is fighting off VCs. One other company that wanted to hire me has taken on 10 new employees in the last few months. Another has taken on 5 new hires.
While the guy at CoyoteBlog may be going Galt thanks to all of the big government intervention, other companies are taking advantage of the current economic climate. Heck, a good friend quit his job a few months ago to strike out on his own and he turns down at least one job a week. Last I talked to him he was booked out for four months.
Some people will sulk, others will innovate.
October 14, 2009, 1:35 pmDuracomm says:
Apparently Bartlett does not understand that the problem is spending not revenue.
Give the politicians more revenue and they will just spend it on boondoggles for their rent seeking supporters. California provides a perfect example of this problem.
Paul Krugman: If Only California Could Just Raise Taxes
October 14, 2009, 1:36 pmDoc Merlin says:
True that supply side has problems.
Anyway, spending matters more than taxes in most instances. Its something that supply siders miss, but government spending crowds out private investment and causes huge problems.
Keynsians have similar problems, but on a regulatory front.
October 14, 2009, 1:40 pmSteve says:
You are making the mistake of assuming all businesses are like yours.
There are certainly businesses in specific industries that make plans based upon the anticipated effect of specific legislation pending before Congress, like the example you cite. I see that as completely different from the suggestion that millions of people are refraining from starting a business or hiring new employees right now simply because of the vague possibility that the Democrats may pass some new rule that impacts them in some way.
I have no doubt that Bruce is accurately relating the findings of the studies he used. However, this does not mean the studies were correct.
Now this is comical. It’s like “oh, I doubt any of those studies used the correct methodology, my personal methodology of comparing one year’s tax receipts to the next is much more insightful!” Pure hokum.
What baffles me is that lots of people lie to the public in an effort to get their favorite programs passed, but tax cuts seem like a relatively popular concept in their own right. You wouldn’t think there’d be the need for so much mythmaking in support of a popular idea.
October 14, 2009, 1:57 pmOrin Kerr says:
Dangermouse says:
It’s not that simple if the government is simply financing its extra debt. In that case, it’s “more money we have” in the same sense that taking out a loan at the bank is like having more money. You see that money now, but you will end up paying for it twice over down the road.
October 14, 2009, 2:05 pmDilan Esper says:
In that case, it’s “more money we have” in the same sense that taking out a loan at the bank is like having more money. You see that money now, but you will end up paying for it twice over down the road.
But that’s where the free lunch comes in, Professor Kerr. Because then we cut taxes and that magically brings in all that extra revenue to pay off the loan! Isn’t supply side economics wonderful?
October 14, 2009, 2:26 pmbyomtov says:
I don’t know why the last ~77 years of Democrats abusing economic theory gets a clean pass.
That’s right. Everyone knows the US economy peaked 77 years ago in 1932, under Hoover, and has been a disaster ever since.
October 14, 2009, 2:41 pmShelbyC says:
It’s kinda like trying to get your kid to spend less by reducing his allowance, but co-signing a credit card for him.
October 14, 2009, 3:12 pmDilan Esper says:
Great analogy, Shelby.
October 14, 2009, 3:18 pmCJColucci says:
At a tax rate of 0%, tax revenue will be $0. At a tax rate of 100%, tax revenue will be not be zero, because you will have, in effect, a command-and-control economy where people will have to hand over money to fund government-distributed goods and services, but it will be a lot lower than it would be at some intermediate rate. At what intermediate rate does the law of diminishing returns take effect? Nobody knows, but it does not appear that the kinds of tax rates anyone who counts is talking about get us there. If you object in principle to the government having money, or you hope to starve the beast, that’s fine, and it’s a discussion one can have, but it has nothing to do with any concrete results of SSE.
October 14, 2009, 3:24 pmDangerMouse says:
Orin,
My point is that government will always be financing that extra debt REGARDLESS of the tax rate. So you might as well have the tax rate lower. They’ll be spending if the tax rate was 20% or 70%, and all indications are that the more revenue the government has (either from economic growth via low taxes, or more revenue because of higher taxes), the more they’ll spend.
October 14, 2009, 3:29 pmBart DePalma says:
I think there is a fundamental misunderstanding of the economics at work here. There is no magic money tree that increases tax revenue after the tax burden on wealth creation is lowered. Rather, the economy grows faster and creates more wealth when wealth creation is not punished with progressively more punitive tax rates. Increased tax revenues are simply a byproduct of this increased economic growth.
Liberals generally have no trouble understanding the destructive force of taxes in discouraging a disfavored activity. See taxes on tobacco, trans-fats and now sugared drinks. Unless you are being willfully obtuse, what is so hard about applying this same effect to wealth creation?
If the economy is growing like gang busters, I do not mind paying the same percentage of my increased wealth to the government.
If the left could remove the blinkers of class envy for a moment, they would realize that supply side is the goose laying the golden eggs to finance their desired government services.
October 14, 2009, 4:18 pmShelbyC says:
Well, I get stuff right occaisonally :-). Although DM has a valid counterpoint; The size of his allowance might not affect how much he charges to the credit card.
October 14, 2009, 4:32 pmDilan Esper says:
I think there is a fundamental misunderstanding of the economics at work here.
This from a man who thinks that the foundation of supply side economics is the “Laffler Curve”. (And it wasn’t a typo– you said it twice.)
October 14, 2009, 5:24 pmDangerMouse says:
If the left could remove the blinkers of class envy for a moment, they would realize that supply side is the goose laying the golden eggs to finance their desired government services.
I’m not so sure about that. Oh, I agree that lower taxes would encourage stronger economic activity that would lead to more revenues to the government. What I’m not so sure about is that the left give a crap about that at all. They spend, spend, spend regardless of the size of the revenues, the state of the economy, or whether taxes are low or high. They just SPEND. So do a lot of Republicans. It’s the nature of Congress: every nail requires a hammer, every problem requires more spending, because it’s really the only tool they have.
Taxes have nothing to do with financing government programs. Those programs will be paid for with borrowed dollars if the revenues aren’t there. That pork program is going to happen, no matter what the tax rate is. The only relationship that taxes have to revenues is to provide some coverage so the porkers can claim they’re not spending too far beyond revenues. They’re also imposed as part of a redistrubitive effort and class envy tactic. Finally, they’re imposed in order to discourage certain activities.
So since the money is going to be spent anyway, why not keep taxes low?
October 14, 2009, 5:33 pmAndrew J. Lazarus says:
Rubbish, when you look at the numbers. This was, in fact, my very first Usenet (he dates himself) flame war. I quote myself, 1993 edition.
October 14, 2009, 5:38 pmDuracomm says:
PC,
Care to share what your business and that of your friends is?
Some companies are doing well now and have the attention of the VCs because they are in areas like alternative energy that are going to have vast amounts of federal money given to them. On top of that they are going to get mandates requiring consumers to purchase their product.
Subsidized companies protected by laws requiring consumers to buy there product are going to be confident about the future and will be very attractive to VCs.
Non subsidized and mandated businesses not so much.
October 14, 2009, 6:02 pmBart DePalma says:
Andrew J. Lazarus says:
Bart DePalma: Given that we have never lost revenues after a marginal tax rate reduction, we have yet to implement a tax rate reduction below the top of the Laffler Curve.
Rubbish, when you look at the numbers…. Federal Funds
Where did you get those numbers from? Here are the historical federal tax revenue receipts figures in both absolute figures and in constant FY 2000 dollars. The correct figures to use are the absolute figures. Tax policy does not determine inflation.
Here are the key figures in absolute numbers:
1982: $617.8 B – First phase of tax rate cuts.
1983: $600.6 B – Second phase of tax rate cuts and depth of recession.
1984: $666.5 B – Third phase of tax rate cuts and away we go after 1 year.
1989: $991.2 B – Last Reagan budget receipts after 1987 tax rate cuts.
Up, up and away!
October 14, 2009, 6:17 pmSteve says:
Wow, seriously, not even constant dollars??? This snake oil isn’t even flavored!
October 14, 2009, 7:07 pmloki13 says:
I….. am….. speechless. Perhaps I should chart it on the Laffler curve?
October 14, 2009, 7:17 pmPerseus says:
The irony is that Keynesian theory would suggest that tax cuts (and spending increases) are the best policy response.
But we’re all dead in the long-run, so who cares about down the road?
October 14, 2009, 7:49 pmAndrew J. Lazarus says:
You might want to re-think this. By your criterion, Robert Mugabe has the best tax policy on the planet, as with hyperinflation I’m sure tax revenue increases 1000-fold in current Zimbabwean-dollars every year. In the long history of silly claims by members of the supply-side cult (as opposed to conservative economists), this is high up there.
Now, as to your numbers. They are bogus because they include revenue from Social Security taxes (which were raised under Reagan) as well as income taxes (which were lowered). Just go one table further in the original source [PDF], that is, Table 1.4, where Federal Funds and Trust Funds receipts are separated, and you will see the same numbers I posted (up to different rounding). It’s cheating to cover the loss of revenue from tax cuts with the increase in revenue from other taxes that were raised, wouldn’t you agree? You can get a similar result from Table 1.1 by adding together the various columns of taxes in the correct category, but there is a small discrepancy based on, I am guessing, treatment of the Post Office subsidy. The effect of the tax cuts is the same: loss of revenue.
I am sorry to be rude, but I have had to deal with this pernicious myth so often I’ve bookmarked some of the relevant files.
October 14, 2009, 7:55 pmDilan Esper says:
That’s OK, Andrew, nobody speaks the language of pernicious myth more fluently than Bart DePalma. And that’s in addition to his expertise with respect to the “Laffler” Curve.
October 14, 2009, 8:55 pmnow now says:
Fixating on misspellings is churlish.
October 14, 2009, 9:33 pmmattski says:
Compulsively spouting ideologically motivated falsehoods and misinformation, as is Bart DePalma’s want, is reprehensible. It serves no purpose beyond the propagation of ignorance.
October 14, 2009, 9:49 pmLeo Marvin says:
Bravo.
Because, as Orin explained, assuming “the money is going to be spent anyway,” if we don’t fork it over today, someday we’ll just have to pay it to our creditors, plus the vig.
October 14, 2009, 10:21 pmDuracomm says:
The feds don’t have a revenue problem they have a spending problem
Bush Turns More Into Less The president’s tax-driven deficit reduction is worse than nothing
Lets repeat the important quote one more time
If washington wasn’t spending like a bunch of drunken sailors there would be no deficit problem.
Giving washington more money to fix the deficit problem is like giving a crack addict cocaine so he can fix his insomnia problem.
October 14, 2009, 10:50 pmPerseus says:
Those who live in glass houses…
Ditto.
October 14, 2009, 10:57 pmRicardo says:
Well, except for the inconvenient detail that that is around when the housing bubble started growing in force. Are you arguing that the 2003 Bush tax cuts caused the bubble? I criticize much of Bush’s economic policy but that’s a bit harsh.
October 14, 2009, 11:26 pmSteve says:
There are so many things wrong with Bart’s arguments that the fact that he assumes away everything else that impacted the economy under Bush and Reagan, while attributing the Clinton economy solely to extraneous factors, comes way towards the bottom of the list.
At least when someone like Bush or McCain tries to claim that tax cuts make revenues go up, they have the common decency to simply parrot the slogan and then move on to the next point.
October 14, 2009, 11:39 pmBart DePalma says:
Andrew J. Lazarus says:
The effective marginal income tax rate is a combination of all income taxes – Personal, FICA, Medicare and Capital Gains. You cannot separate them. Reagan slashed the net effective marginal income tax rate for most folks even though the FICA tax rate went up slightly from 6.7% in 1983 to 7.5% in 1989. The effective marginal income tax rate plunged a second time in 1987.
The supply side theory is that lower marginal income tax rates cause increased economic growth and in turn a net increase in ALL tax revenues. Thus, your decision to limit the measurement of tax revenues to the personal income taxes whose rates were cut is an error because all federal tax revenues would increase along with the economic growth caused by the reduction of effective marginal income tax rates.
October 15, 2009, 12:00 amBart DePalma says:
Ricardo says:
To start, what federal taxes are collected on the rising cost of homes? The capital gains from home sales are generally rolled into the next home purchase.
In any case, your timing is off. The housing bubble started in 1997 and continued unabated until the Summer of 2006. Given that tax revenue growth was middling prior to the 2003 tax rate reductions and soared afterward, there does not appear to be any relation between the rising cost of homes and federal tax revenues.
October 15, 2009, 12:06 amBart DePalma says:
Steve says:
The Reagan Boom lasted from 1983 to 2008 with two minor slowdowns in GDP growth in 1991 and 2001. Clinton’s tax rate increases were actually relatively minor compared to the massive Reagan marginal tax rate cuts. As such, they only slowed economic growth to a small extent. Clinton completed the Reagan free trade agenda and signed off on the Gingrich slowdown of federal spending, making up for the tax rate increases. Clinton was arguably the second most economically conservative President of the post WWII era. He was far better than both Bushes apart from the Bush 2003 tax rate reductions.
October 15, 2009, 12:15 amTim says:
Even Keynes recognized that. Cutting taxes without cutting government spending increases GDP by definition (it’s nothing more than an accounting identity).
October 15, 2009, 12:19 amAndrew J. Lazarus says:
This really is cult-like thinking. The increase in Social Security revenues (and, therefore, the total) is an effect of the rate increase, not some mystical miraculous economic epiphenomenon. You have grossly underestimated the impact of the change in Social Security taxes by forgetting that rates on the self-employed went up much more and that the maximum base went from $29,700 to $48,000 from 1981 to 1989. Ooops. And I haven’t even mentioned the need to correct per capita.
October 15, 2009, 12:32 amRicardo says:
Please have a look at the Case-Shiller index. The growth of the index accelerated rapidly in 2003 then reached an inflection point around mid-2004 before maxing out in 2006.
As for what this has to do with taxes, nearly everyone acknowledges now that a big part of the recovery of 2004-6 was driven by the real estate boom, both in terms of consumers using more leverage (via home equity loans) to increase consumer spending as well as the housing construction binge. Both activities lead to higher employment which increases tax revenues.
There were other contributors too, such as declining long-term interest rates (which of course helped drive housing prices) and higher non-housing asset prices. Oddly, neither has much to do with the Bush tax cuts and both were in force at around 2003.
October 15, 2009, 12:38 amRicardo says:
As Steve has already pointed out, looking at tax revenue changes year-over-year can be very misleading because economic growth changes from year to year but on average pushes revenues up. Much better to look at things in terms of percentage of GDP. What happens we look at things this way? Graph here.
Revenues as a percentage of GDP increased substantially from 12% in 1992 to a peak of 15% in 2000. Oddly, this increase happened right after Clinton raised taxes. By contrast, during the Reagan years revenues declined pretty steadily. Let’s apply Occam’s Razor to this one, without getting into the academic literature that supports the role of the Clinton tax increases in balancing the budget.
October 15, 2009, 1:24 amDilan Esper says:
i would not normally harp on spelling errors. but this one is trelling. bart is a DUI lawyer who also has done some serious study of military commissions law. as far as i know, he has no formal economics training. yet here he is declaiming on the eternal truth of a very bowlderized version of supply side theory.
the thing is, arthur laffer is a pretty famous person in addition to being a major figure in the supply side movement. not knowing his last name (and bart clearly did not know it, as he blew it in 2 separate comments) is like someone advocating catholicism and not knowing who the pope is.
October 15, 2009, 1:42 amDilan Esper says:
trelling = telling oops
October 15, 2009, 1:45 ammattski says:
Ricardo, Thank you.
October 15, 2009, 7:15 amjrose says:
Some revenue figures (all in 2000 constant dollars taken from the OMB) comparing pre-tax change baseline revenue, to post-tax change revenue.
Reagan: $1077B (1981), $1309B (1990), 2.2% cumuluative average annual growth
Clinton/Bush41: $1309B (1990), $1946B (2001), 3.7%
Bush43: $1946B (2001), $2006B (2008), 0.4%
I don’t see any evidence that we are on the side of the Laffer curve where cuts increase revenues.
October 15, 2009, 8:48 amDotar Sojat says:
We get it: Reagan bad, taxes good. OK. Fine.
October 15, 2009, 10:22 amBart DePalma says:
Andrew J. Lazarus says:
I accounted for both of these phenomenon.
To start, for the purposes of revenue, there is no difference between employees and the self employed because the tax rates are the same. FICA went up from 6.7% in 1983 to 7.5% in 1989 for an effective increase in the marginal income tax rate of 0.8%. Because your employer or yourself if self employed pays a matching amount, the effective total increase was 1.6% for both groups. The upper middle class did get socked with 15% increase on the taxes of a part of their income.
Even if considered alone, are you seriously contending the massive increase in total federal tax revenues from $600.6 B in 1983 to $991.2 B in 1989 was accounted for by the 1.6% increase in FICA income taxes and thumping part of upper middle class income?
However, as I pointed out above, FICA cannot be considered alone. It is merely one part of a total marginal income tax rate. The cuts in personal income tax rates offset the FICA increase of 1.6% by many multiples.
The personal income tax for the brackets covered by the $29,700 to $48,000 thumped with a new fica tax FICA ranged from 37% to 49% in 1980, but dropped to either 14% or 28% by 1987. Even here, the cut in personal income tax rates more than made up for the new FICA taxes.
October 15, 2009, 10:57 amShelbyC says:
Muphries Law strikes again :-)
October 15, 2009, 11:00 amAndrew J. Lazarus says:
Not, for example, for those people whose income was so low they paid no income tax whatsoever.
You seem to have forgotten the baseline numbers (again). We already know that personal income tax receipts fell substantially. The question is whether the compensating increase in Social Security receipts should be credited to an alleged increase in overall economic activity, or to increases in the Soc Sec tax rate. Your failure to consider the effects of the change in maximum base leads you to underestimate the effect of the change in rates and overestimate the effect of economic activity. As long as you don’t account for the change in rates/base, you are, as I said before, cheating: using a rate increase to offset the effect of a rate cut, and then crediting the increase in total receipts to the latter instead of the former.
October 15, 2009, 11:11 amShelbyC says:
Am I misunderstanding, or are you advocating using revenue as a % of GDP to test the hypothesis that tax cuts increase total revenue by increasing GDP?
How ’bout ShelbyConomics: there is a tax rate that optimizes revenue, and that changes constantly and is very dificult to determine. But for reasons that should be obvious, it is way better to be to the left of that rate than to the right. So stay to the left.
October 15, 2009, 11:12 amBart DePalma says:
Andrew :
One final time.
To the tax payer, there are no separate income taxes for social security, medicare and the general fund, there is one bottom line cumulative marginal income tax rate that must be paid. There can only be a stimulus to wealth creation if the cumulative marginal income tax rate was reduced. Reagan did so.
The proper way to measure the effect of this wealth creation stimulus is to measure economic growth and then the increased tax revenues derived from that growth.
Economic growth soared from 1983 through 2007 with almost no interruption – the single most prosperous period in US history. Check.
All federal tax revenues increased along with the economy. Thus, you cannot limit your measurement only to personal income taxes when the growth created by the reduction in marginal income tax rates increased revenues across the board whether the other taxes were cut or not. Check.
October 15, 2009, 11:58 amBart DePalma says:
Ricardo says:
:::rubbing eyes:::
Take another look at your linked graph. There is no substantive change in the growth in house prices before and after the Summer of 2003 tax rate reductions that could possibly account for the spike in GDP growth and tax revenues.
October 15, 2009, 12:05 pmAndrew J. Lazarus says:
Bart, I’ll try to make it very simple. Total revenues did not go up because of economic activity. Total revenues went up because for many people the tax rate went up. (A more nuanced view would be to allocate the increase between the two factors, but given your religious refusal to connect tax increases with revenue increases, it isn’t worth the effort.) For those tax rates that went up, revenue went up. For those tax rates that went down, revenue went down. See? Simple.
Incidentally, I don’t see why the marginal rate matters and not the total rate: if we reduced the marginal rate to zero on annual income of $1 billion or more, it would scarcely matter to the overall economy, while an across-the-board cut for everyone making less than $1 billion would matter a great deal. I feel as if you are approaching this the way Creationists approach conventional biology: with a list of so-called refutations that are barely comprehensible and in the end meaningless.
Also, you seem to have forgotten that Bill Clinton raised taxes and that was supposed to ruin the economy. Funny how that worked out.
October 15, 2009, 12:15 pmjrose says:
Economic growth soared from 1983 through 2007 with almost no interruption – the single most prosperous period in US history. Check
GDP grew at a rate of 3.3% per year during that time period. The previous 25 years (1958-1982) saw a GDP growth of 3.3% per year. I don’t see where you get “soared”.
the massive increase in total federal tax revenues from $600.6 B in 1983 to $991.2B in 1989
It wasn’t a massive increase.
October 15, 2009, 1:20 pmShelbyC says:
Well, if we set a marginal rate at 90% on income over $50,000 and 2% below, we’d have alot lower total tax rate than at a flat rate of, say, 20%, but alot lower growth as well.
October 15, 2009, 1:39 pmloki13 says:
Andrew Lazarus,
It’s pointless to try to educate some people. Do you expect someone who repeatedly insists on using absolute dollar figures to compare different years, and then changes the subject repeatedly when called on it, to be amenable to rational discourse?
A fanatic is one who, when they lose sight of their goal, redobules their effort. In a meta sort of way, I think we are witnessing the very example of what the OP was about.
October 15, 2009, 1:41 pmArthurKirkland says:
For those dismissive of Bart’s reasoning:
Bart, or a Bart analogue, will be establishing economic policy in the next Republican administration (unless Elliott Abrams declines to return to a State-Defense posting, in which circumstance Bart will be establishing diplomatic and defense policy).
Less flip: Has the religious component of the Republican Party become so extensive that true-believer dogma controls even Republicans’ policy arguments?
October 15, 2009, 4:09 pmRicardo says:
No, that’s not at all what I am doing. I am responding to the argument that Bill Clinton’s tax increases were not responsible for increasing revenue leading to the balanced budgets at the end of the decade. Bill Clinton increased taxes, revenues as a percentage of GDP increased, yet if you are a supply-sider you have to believe that revenues as a percentage of GDP increased for some other unexplained reason that can be attributed to the policies of Reagan.
October 15, 2009, 9:58 pm