Left2Right

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Posted by: mikec

Your analysis assumes that everyone behaves the same way regardless of the tax rate. But this is clearly not a reasonable assumption. For example, congress doesn't act the same way. Without a tax cut, the projected deficit would be lower and they almost certainly would have spent more money. If that is true, and it is if history is any indication, then by your definition it was a tax cut, because spending is lower than it would otherwise have been. Second, and more importantly, the people being taxed don't act the same way. More studies than I can count have shown that a lower marginal tax rate leads to an increase in the labor supply. This in turn leads to greater overall wealth and very often leads to higher total tax receipts. The Reagan tax cuts and the Clinton capital-gains tax cut are good examples of this. (It's true that Reagan's tax cuts didn't balance the budget, but that's because Congress spent even more than the increase in revenue.)

Posted by: mikec | Feb 3, 2005 3:40:29 AM

Posted by: Perseus

Prof. Anderson is basically correct about her main economic point, namely, the "price" of government is equal to the Real Present Value of government expenditures (though some of her economic analysis is faulty--e.g. defaulting on the public debt would have no effect on inflation since inflation is always and everywhere a monetary phenomenon; monetizing the debt would cause inflation). Assuming that government has not gone beyond the point of maximum tax revenue on the Laffer curve, any cut in taxes today will have to be matched by higher taxes in the future (based on a neoclassical macroeconomic model--see Robert J. Barro's textbook, Macroeconomics, 5th ed., Chap. 14--the positive supply-side effects of lower taxes today are offset by equal negative supply-side effects in the future when taxes are increased). However, as MikeC points out, deficits and tax revenues have an effect on government spending (deficits tend to reduce spending while higher tax revenue tends to increase it). Thus I agree with Milton Friedman that we should cut taxes as much as possible to starve the beast and thereby prod politicians to reduce long-term government spending.

Posted by: Perseus | Feb 3, 2005 6:12:43 AM

Posted by: No Labels Please

Ms Anderson is right.

However, there are sometimes valid reasons for running deficits that shift tax burdens forward in time:

1. The expenditures are being used for investments that have rates of return that exceed the cost of borrowing the money. For example, if the government spent $500 bn developing economic alternatives to fossil fuel energy, and suceeded over 10 yrs, that would have a return far in excess of 4.5%, and provide benefits for future tapayers that are arguably a good deal for them.

2. Temporary economic stimulus. Enough has been said about this.

3. Complete necessity - disasters, defensive wars, etc.

The current deficit situation is partially justified [maybe half of it] by some combination of the above, with the "war on terror" viewed as a combination of investment and necessity. However, the economy has recovered sufficiently that the remainder of the deficit, say $300 bn, should be corrected with reduced spending or higher taxes.

My favorite idea - a $1/gallon equivalent tax on gasoline and other petroleum products [raises about $250 bn/ yr], coupled with about $100 bn of spending cuts.

Posted by: No Labels Please | Feb 3, 2005 6:55:39 AM

Posted by: David Velleman

To Liz's plea for terminological honesty about tax postponements, I will add a corollary plea for a moritorium on the ridiculous slogan "starve the beast". Here are two reasons why the slogan is ridiculous. (1) The slogan "starve the beast" suggests that, once properly starved, "the beast" will die and we will live happily ever after: "Ding dong, the beast is dead." But people who believe this are really living in Oz. For as Liz argues, death by starvation for this "beast" would consist, in reality, of massive government default on its obligations, which would be a disaster for all of us. If this beast dies, so do we. (2) You might think that the prospect conjured up by "starve the beast" is, not that it will die of starvation, but that it will learn to live on a leaner diet. Yet as Liz has shown, the Bush administration, while depriving "the beast" of tax revenues, is also increasing its appetite. So Bush is preventing the only constructive outcome -- indeed, the only non-catastrophic outcome -- that might be expected from "starving the beast".

Let's have no more fairy tales about starving beasts. Tell us in plain language how you plan to prevent economic disaster.

Posted by: David Velleman | Feb 3, 2005 6:56:28 AM

Posted by: Wild Pegasus

The starve-the-beast idea rests on the notion that massive government debt will reflect badly on individual politicians, who will in turn lower government spending. However, individual politicians take little flak for government spending (it's "Washington"), and they're either dead or drooling by the time the bills come due. Case in point, those "small government" Republicans control the House, Senate, Presidency, and, to some extent, the Supreme Court. Marginal rates were cut. Where's the reduction in spending?

If you want to lower government spending, you have to build political momentum to abolish or reduce the scope of government programmes. Currently, there are only two parties who are interested in doing this, and they got about 500k votes last election combined.

- Josh

Posted by: Wild Pegasus | Feb 3, 2005 7:14:05 AM

Posted by: noah

You advocate clarity and transparency but are silent when your allies lie about SS and just about everything else?

Posted by: noah | Feb 3, 2005 7:42:25 AM

Posted by: Paul Deignan

Suppose you're a married graduate student with 3 kids. I paid 2k less net then under Clinton. Thanks W! I needed it. Now if we could only do something about SS. And don’t worry; I am already putting the money to very good use.

Yes, the government does waste money and resources. It made a great impression on me to see first hand the gross incompetence of vast numbers of bureaucrats who were paid extremely well in DC. And yes, many of them need to be fired as their "work" was entirely counterproductive. So my suggestion would be to reform government work rules. A person will not appreciate the value of money when it is handed out for nothing. An environment where that is common increases the tendency for creating "work" rather than results.

We need government "lay offs" to go along with budget priorities. There should also be incentive programs for measurable competitive group and individual performance. Of course, to obtain reform, the system must be constrained from compensating for internal inefficiencies through more taxation. There must be external pressure to reform and to continue to run efficiently thereafter.

Tenured LA university professors are probably the last ones we should be seeking advice from in regards to this problem. (No offense, but the tenure paradigm is not what we need to reference implicitly or otherwise for governmental reform). Frankly, we need to reform that system as well.

Posted by: Paul Deignan | Feb 3, 2005 8:23:26 AM

Posted by: D.A. Ridgely

So liberals have just been lying about those “massive” tax cuts, too? Fair enough.

Of course, government financing isn’t nearly as troubling an issue as government spending, and especially what that spending is for. Insofar as financing is a problem, the issue isn’t debt financing so much as the fact that we are relying too heavily on foreign debt financing. Yes, telling the American public that any act of Congress is permanent is lying. That’s what politicians do. Ms Anderson will find she is preaching to the choir as far as the libertarians here are concerned and to a large number of social conservatives as well.

But when it comes to mendacity, what was the liberal Democratic response to Bush’s Medicare expansion? What is the inevitable liberal Democratic response to cutting or eliminating even the most egregiously wasteful and unnecessary programs? And which party or ideology has the longer record of indifference or even enthusiastic support of deficit spending?

“Starve the beast” is a silly metaphor, but it’s only a catch phrase, and politicians being largely dull-witted need their catch phrases. How many times do I have to repeat it: they’re all weasels. The only solution is less government, period.

As for Social Security, notwithstanding the public rhetoric, the point of privitization is to wean Americans from the belief that the government is the necessary and proper mechanism for the vast panoply of social “insurance” (read “welfare”) type programs that Ms Anderson supports. Perhaps when people discover they do not need to depend on Uncle Sam for their retirement income, they’ll begin to realize they can keep even more of their own money in their pockets by eliminating the NEA, NEH, HUD, DoED, etc. Then we really could put the beast on a sustainable diet.

Posted by: D.A. Ridgely | Feb 3, 2005 8:27:28 AM

Posted by: Paul Deignan

BTW, there is a constraint in governmental spending on the borrowing side. There is also a constraint to government spending against simply printing more money. These constraints are actually on the economy as a whole with the government as the regulating/compensating entity.

What we are talking about here is imposing a constraint so that the regulator cannot borrow from the plant in order to increase its control authority over the entire system. The plant (productive sector of the domestic economy) is that which actually produces the wealth of the entire system. The job of the regulator (government) is to guide that growth efficiently and to a useful purpose in relation to external (foreign) economies.

Posted by: Paul Deignan | Feb 3, 2005 8:41:40 AM

Posted by: mw

Semantic sleights-of-hand a la Lakoff are just not a good strategy. For liberals to insist that tax cuts are really 'tax postponements' is simply to fall into a semantic trap of their own making. What that says about people making that claim is that THEY personally cannot envision making up for a tax cut in the future in any other way than a later tax increase.

And it is simply NOT true that deficits are only closed by tax increases. The budget didn't go into surplus during the Clinton administration because taxes were increased, but becuase revenues unexpectedly jumped while spending was held down by a divided government.

Liberals will do far better complaining about the deficits in the conventional way rather than trying to redefine tax cuts as 'postponments'.

Posted by: mw | Feb 3, 2005 8:51:20 AM

Posted by: Terrier

So let me get this straight - the Radical Republics are pursuing policies that will lead to financial ruin for all of us (because the secret of the beast is that we ride it and it rides us) but despite controlling all the branches of the government this irresponsibility must be the fault of Liberals for not casting their insufficient votes against these policies. Was Harry Truman the last responsible human in America? Instead of lecturing me on Hayek or some other dead and buried Thales why don't some of these Libertarians that actually voted for this mess prove they have hind legs and rear up and try and get some of the Radicals to listen? Is it because they know that they only sit at the children's table? Clinton reduced the size of the government! And balanced the budget! Were all these guys loyal Clinton supporters or did they gush over his anatomical features and sharpen their knives for Gore? They all sound like a bunch of damn politicians to me.

Posted by: Terrier | Feb 3, 2005 9:04:36 AM

Posted by: David Velleman

D.A Ridgely writes:

Perhaps when people discover they do not need to depend on Uncle Sam for their retirement income they’ll begin to realize they can keep even more of their own money in their pockets by eliminating the NEA, NEH, HUD, DoED, etc. Then we really could put the beast on a sustainable diet.

What's strange about saying that people "depend on Uncle Same for their retirement income" is that it misdescribes not only the reality but also the perception. One of the reasons for Social Security's success is that people largely understand that it's a social insurance scheme, not a government handout. They may be a bit confused about the economics of the scheme (thinking that each generation pays for itself). But they realize that Social Security is something that we jointly do for our own collective benefit.

If you want to abolish the NEA, NEH, HUD, DoED, borrowing money on your grandchildren's tab is a strange way to go about it. As far as I'm concerned, you can have the NEA and NEH: abolish them tomorrow. But stop running up bills that our children and grandchildren will have to pay.

The rest of Mr. Ridgely's post is what's called whataboutery. When you can't defend the incompetence of the Republicans, ask "what about" mistakes of the Democrats.

Posted by: David Velleman | Feb 3, 2005 9:11:07 AM

Posted by: /Will

"(For the reasons stated here, Social Security presents no more than a minor problem, and Bush's plan would make it worse. Why are we wasting time on a hangnail, when heart failure looms?)"

I sincerely hope Ms Anderson doesn't really believe this. SS is a huge part of our current national debt problem and (by ALL accounts) will continue to be a MAJOR financial challenge. Fixing it can only improve our nation's finances.

She correctly notes that the real problem is government spending -- but shich party should I elect to curb spending? (Maybe its just me, but I haven't seen many small-government democrats run in my state.) Also, wasn't it Kerry who wanted to create a whole new chunk of Government obligations in his socialized Health Care plan? Wake up and smell the napalm, the Democrats aren't interested in substantially cutting Government spending!

Posted by: /Will | Feb 3, 2005 9:19:43 AM

Posted by: David Velleman

/Will says:

SS is a huge part of our current national debt problem

Posted by: David Velleman | Feb 3, 2005 9:34:56 AM

Posted by: Terrier

Wake up and smell the napalm, the Republicans aren't interested in substantially cutting Government spending!

Posted by: Terrier | Feb 3, 2005 10:21:35 AM

Posted by: No Labels Please

A few points:

1. All G7 countries are facing the same demographic shift problem that will lead to unsustainable levels of retiree benefits in the medium term - 25-30 years out say. This is just not deniable. Projections are that somewhere between 20%-30% of GDP will be required to pay for current levels of benefits given demographic shifts with unfunded pay as you go schemes like social security and medicare in various countries. In the US reasonable projections are total SS and Medicare costs going from 10% of GDP to 20%. This would mean something like a 50% increase in the overall federal budget as a share of GDP. This would also lead inevitably to much slower economic growth. By the way, the problems in Europe are much worse due to negative population growth.

2. An alternative to pay-as-you-go [ie taxes-in/benefits-out] schemes is to try to raise the savings rate dramatically and make most people at least partially responsible for their own retirement and medical costs. This has the advantage of being insensitive to relative inter-generational demographics. It also makes a huge pool of capital available for productive enterprise. This is the direction the current administration is trying to push things. It is certainly not a crazy idea, and for example is how many Asian countries operate with savings rates of 20%-30%. CF US savings rate of zero.

3. It's true that SS is not as big a problem as health care, but it is emphatically a problem. More than that it is essentially the same category of unfunded benefit problem as health care. Hence, increased savings strategies that tend to ameliorate the SS problem can be used to help Medicare as well.

4. None of this means that floors on benefits for people who have not managed to save can't be placed in the system. But operating a society with huge demographic shifts on a zero savings rate system [pay-as-you-go] is really irresponsible.

Posted by: No Labels Please | Feb 3, 2005 10:26:46 AM

Posted by: rtr

A "tax postponement"?

What can be done to start is to dig up the graves of Presidents Franklin Roosevelt and Lyndon Johnson and tar and feather them as lying, thieving, criminals. Topple all statues of them like they were statues of Saddam Hussein. Since we've suddenly decided to be terminologically honest, we will never hear another leftist call Roosevelt or Johnson "great" presidents.

Terrier outright lies with the statement "Clinton reduced the size of the government! And balanced the budget!"

Let's see the number of dollars collected or redistriubted by the government at the start of his term and the number of dollars collected or redistributed by the government at the end of his term. Care to revise your statement?

The fact is labeling a tax cut, which is precisely defined as less money stolen by the government from individuals, as a "tax postponement" is a weak (as laughably weak as the Democratic Party official post State of the Union speech yesterday) attempt to make spending permanent.

No houses are bought by government. Promising your neighbor's house to another is not "buying a house".

Saying “Bush hasn’t cut taxes” is a non-starter lie that does nothing to help the credibility of the left. If the left thinks Kerry could have been elected by claiming he would have “cut taxes by raising taxes” the loony bin awaits.

Let’s try starting from the beginning:

A.) When the government forcibly takes “X” amount that is called tax receipts.

B.) When the government “spends” X’ > X that is called a deficit.

C.) When the government “spends” X’ < X that is called a surplus.

D.) When the government taxes X’ < X that is a tax cut.

E.) When the government taxes X’ > X that is a tax increase.

F.) When the government forcibly takes a percentage of an individual’s income at “Y” rate that is called the marginal tax rate.

G.) When the government taxes an individual at Y’ > Y that is a tax rate increase.

H.) When the government taxes an individual at Y’ < Y that is a tax rate decrease.

Notice it is necessary to type A.) – H.) to even leftist “professors” because they are intellectually *corrupted* by ideology, and hence *liars*. Thus, the ridiculous claim that Bush hasn’t cut taxes, he’s merely postponed them is as ridiculous as the claim as Kerry didn’t increase spending, he’s merely postponed it.

Posted by: rtr | Feb 3, 2005 10:29:13 AM

Posted by: john t

David V Could you live with "put the beast on a diet". In 1991 we had a tax increase,for the children". In 1993,as you may surmise two years later,another tax increase,again for the children. My,we were doing a lot for the chidren weren't we. And in each case it was stated that the rich should pay their fair share. And in each case fed spending increased. AH but it gets better. The cannibals in the white house,not being content with two tax increases in three years,then started mucking around withe the idea of a value added tax, a form of national sales tax. How do I know that,by reading the front pages of the NY Times. And this only three months after the income tax hike. No doubt academics were gleeful,after all gov't never has enough money. The reason the idea died[ stay calm David,not the gov't,only the idea] is that the admin. virtually collapsed after the health care fiasco. This is the reality of the liberal approach to fiscal policy,and I thought I'd interject it to the lofty talk about children,the future and so on. By the way if you can use a neologism like "whataboutism' can we still use Uncle Sam? A lot more to come on this.

Posted by: john t | Feb 3, 2005 10:31:16 AM

Posted by: David Velleman

johnt: You're changing the subject. We'll have other conversations about cutting government spending, but the topic here is cutting taxes.

Spending and taxes are of course related, but they're related like this: cutting spending is an alternative to raising taxes. Both spending cuts and tax increases have the effect of bringing the budget into balance. No doubt, you think that when taxes were raised in 1991 and 1993, spending should have been cut instead. That's a perfectly reasonable view. But that's not the view under dispute in this post. What's under dispute here is the nonsensical view that the way to correct the error of having raised taxes instead of cutting spending is ... to cut taxes and raise spending.

Posted by: David Velleman | Feb 3, 2005 10:43:30 AM

Posted by: Dallas

President Bush boasts, as one of his major policy achievements, that he has "cut" taxes. Virtually all media outlets and partisan sources, including Bush's critics, follow Bush in calling his tax policies tax "cuts." But Bush has not cut taxes. He has merely postponed them.

Bush boasts of his achievements, and Anderson accepts this characterization, criticizing his tax policies. The policies of our government are regularly foisted on the public in this fashion as if the president were an elected monarch, ruling our lives and determining our fate by personal edict, and we, the public, take the bait. On foreign policy and defense issues, this has some basis, as the president has considerable discretion, but when we are concerned with taxation, borrowing, and expenditures, this is nonsense.

The Constitution vests Congress with the power to impose and collect taxes and the power to "borrow money on the credit of the United States." The discretion of the president in this arena is severely circumscribed. He can't run around, hully gully, levying taxes, borrowing money, and writing checks as he sees fit. Even the role of the Senate is curtailed, as as all bills for raising revenue must originate in the House of Representatives.

Why do we do deem our economic fate to be in the hands of a regal president? I'm not entirely sure, but I suspect it arises from political expediency on the part of legislators. Dems would rather blame the president than their colleagues, while Repubs would rather have a lightning rod than take the hits themselves. Dems project, while Repubs deflect (or vice versa, if the Dems hold the presidency). Meanwhile, the legislative process, where policy is actually formed, bogs down in partisan bickering, with one party marching to the tune of the pied piper and the other unifying to thwart him.

Even though I respect, admire, and support Bush, I’m fed up with treating the presidency as if it were the office of a potentate. We need a dose of constitutional realism. Those holding power should be held accountable for the exercise of it.

Posted by: Dallas | Feb 3, 2005 11:06:21 AM

Posted by: Steve Burton

Nobody who's anybody (politically speaking) is going to switch from the phrase "tax cuts" to the phrase "tax postponements." Arguing about it is a total waste of time and pixels.

So the Republicans want to finance current levels of federal spending with less tax revenues and more borrowing, the Democrats want to do it with more tax revenues and less borrowing.

Wow. What a profound ideological divide. What's worse for the country in the long run: another dollar added to the tax burden or another dollar added to the debt? An issue that only a policy wonk could love.

About half way through her piece, I thought Ms. Anderson was trying to make the important, if rather obvious, point that what really matters is the level of spending, not the method of financing it.

But no. She just wanted to bash Bush for wanting to extend his tax cuts. Sorry, "postponements." Whatever.

Must...stay...awake...

The only potentially constructive suggestion in all this is the point near the end that "strong steps will be needed to rein in spending increases on health care entitlements."

OK, Ms. Anderson: I'm alert again. Tell me more. What "strong steps?"

Posted by: Steve Burton | Feb 3, 2005 11:27:25 AM

Posted by: Paul Deignan

When thinking about this issue, beware of making the mistake of traslating the analysis of internal dynamics in time outside the level of the national economy. For example, SS is supposed to be a savings program. That does not mean that other economies are directly funding this domestic savings program. Also, there are no stored reserves of wine, whiskey, and cheese (well, maybe the cheese) that are "saved". We are off the gold standard.

This is essentially a current time internal blance of debt/credit within the US between workers and retirees. Any exterior borrowing/lending gets lumped into the trade deficit and should be thought of as such -- in other words, don't assume that France will bale out SS in 2042 because they care about the promises FDR made to US citizens back in the 30's.

All monetary issues can be distilled into an exchange of either services or products. It is easy to get lost in the details of macro and micro economics. Don't lose sight of the forest for the trees.

Posted by: Paul Deignan | Feb 3, 2005 11:35:00 AM

Posted by: No Labels Please

Taxes and debt are only similar to the extent that the debt is retired in the short/medium term [5-10 yrs say] and not "rolled over" in perpetuity to become a burden for future generations. Hence the argument that debt is only acceptable for long term investments that may benefit future generations, or short term budgetary or stimulus purposes. It should not be thought of as an alternative method of funding ongoing budgetary expenditures.

Posted by: No Labels Please | Feb 3, 2005 11:40:25 AM

Posted by: john t

David V Apoint not usually seen about deficits;If spending contributes to deficits,and it does,then Bush should be give some credit for attempting to reduce it,which attempts have alrady commenced. I do wish he had started a little earlier but that's another story. However we are asked to be terrified at the prospects of such cuts and the spectre of deficits is pushed backstage The chidren are again put up as as a notice of our lack of compassion. But if deficits are bad and reduced gov't expenditures are bad what are we,as agents whose morality is measured by what the gov't spends left with. Why of course,tax increases. A few short comments on your excited[not exciting]posts. Contrary to what your palpitating heart tell you it is not foreordained that ther will be a"massive default on it's obligations". A decrease on the issue of new debt is not beyond the scope of human action. This is dependent on a expanding economy accompanied by increase in tax revenue,which usually happens,not to much to ask for there. And the admittedly,slow retirement of outstanding debt. Long term to be sure. Interesting 9:34 post David . So a person interacting with his bank is the same as gov't fiscal policy and debt. First,when a bank makes a loan of any type an amortization schedule is established. Where's the govt's amortitization schedule? Second Bush isn't planning on bailing out SS because of SS loans to the general fund,future liabilites are the main reason. And the only response from the left has been,reduce benefits and raise taxes,[NT Times]. You should consider that a "maasive default". Which so called answer is all the more reason to start private,and voluntary,privatization. By the way a bank considers a loan a asset,how would you consider gov't debt?

Posted by: john t | Feb 3, 2005 11:47:34 AM

Posted by: Paul Deignan

Taxes are compelled from the citizenry as directed by government.

Debt is funded voluntarily by whomever thinks it a wise investment at the promised rate of return.

Monetary policy effects the risk associated with the outstanding debt as well as the ability to finance new debt. Printing money dilutes the value of the outstanding debt at a greater cost to the financing of new debt. Since debt is continually being refinanced, this is a net zero except for secondary effects in regulating the economy towards optimization (you cannot print your way out of debt).

The government seeks to adjust the internals in order to maximize its playing position with other economies. This is independent of the internal dynamics of taxation except to the degree that the overall US ecomomy may be penalized by the misoptimization of wealth production.

In other words, the debt=tax argument is bogus.

Posted by: Paul Deignan | Feb 3, 2005 12:00:40 PM

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