Does the path to economic health run thru tax reductions

First, I'm not so sure that the economy is in all that bad shape. The nation has suffered repeatedly from periods of depression and inflation over it's 200, some odd year history. During my lifetime the economy has been in much worse shape than it is today. On the other hand, we all would like to have lower public debt, increased productivity, less unemployment, greater personal savings, and stronger growth in personal wealth without increased inflation.

The nation's debt is proportional to it's spending. That's a simple, but often overlooked, fact of economics. Prior to the Great Depression, public debt was almost entirely the result of war. Revolutionary war debts took generations to pay for, and then we added the costs of acquiring the Louisiana Purchase and the War of 1812 to the debt. 1846-48 ratcheted up the debt again, and the cost of the Civil War was still being paid for in the 20th century. The People demanded that the Federal government do something to alleviate the suffering caused by the Great Depression and the social dislocation caused by the Dust Bowl. Republican Presidents failed to act, and it fell to FDR and the Democrats to embark on ambitious public works and social programs to get the economy moving again. The costs to the public treasury were enormous, and the situation wasn't rectified before massive public spending/personal savings policies that resulted from WWII. The Cold War, and the Great Society type spending that began with LBJ in the mid-sixties, actually increased the public debt to astronomical proportions. Arguably, all of those public debts were justified and in the long run beneficial to the nation.

Currently, we are still paying off those old debts and will be for a long time to come. The National debt continues to grow, even as old debts are being paid off. Why, and should the Federal government adopt policies that would reduce the public debt faster? Typically, Republicans want less debt and the Democrats are more comfortable with it. Republicans tend to support public spending for the military, for foreign relations, and to encourage capitalization. Democrats tend to support public spending for expensive social programs. If the public debt is to be reduced, then spending must either be cut, or revenues increased. That's another of those simple truths. Is anyone willing to forego their spending? Can we afford to cut military and foreign relations spending given the state of the world, and there are sizable numbers of people who ardently work for our destruction? What would be the effect if Federal spending for the more expensive social programs were suddenly slashed? It would sure help if the amount of pork could be greatly reduced from the budget, though I have grave doubts about giving the Executive a line-item veto. What do you think the chances are that the Congress would impose upon itself rules to prohibit "tacking on" to major bills spending programs to impress their constituents back home?

As a practical matter, it's unlikely for us to suppose that public spending is going to be reigned in within the foreseeable future. That leaves us with a need to increase the revenue stream, and the heart of your question. If taxes were raised, we would indeed see some increases in Federal revenues. On the other hand, less currency would be available to individuals and companies. Consumers would probably buy less, because they had less money for purchases as the money supply became restricted. Companies would have fewer investors, and would face more difficult questions in regard to capitalization and expansion. These are all factors that would lead to deflation of the currency, and a tighter economy. Of course, the government might increase the amount of money that it prints to offset the deflation, but that raises the specter of inflation that is just as devastating to the People. Tax increases might have some short-range benefits, but dangers in the long-run probably outweigh the benefits.

Will decreasing the tax burden increase revenues enough to support Federal spending, and retire the public debt in a timely fashion? I doubt it, though it is a more promising strategy than raising taxes. By reducing the tax burden on the economy, we would encourage consumer and corporate spending. That ideally would in turn encourage the production of goods and services. Increased profits would drive business expansion, increased hiring and higher wages as the demand for labor increased. The currency supply, based on the increased productivity, might be increased with less danger of sliding over into inflation. Even with a reduced tax rate, the amount of Federal revenue would, at least theoretically, be increased. It seems to be a sound strategy, at least on the surface. The problem is that ultimately it is smoke and mirrors, rather like pulling one's self up by their own bootstraps. It seems to me somewhat similar to the idea that legalized gambling can solve the problem of increasing public revenues at the State, or local level.

What is needed, I think, is a major overhaul of the tax system. I would like to see individual income taxes stabilized, or lowered. The number of loopholes that permit some large corporations and the very wealthy to escape paying their fair share need to be reduced, or eliminated. The system should encourage personal savings, and the reduction of personal credit debt. Somehow we, as a society, must learn to be more personally responsible for our own well-being. The system needs to encourage the acquisition of property, and personal wealth. Small businesses and farms are important to the overall values that underpin the nation, let's not discourage them. There are no free lunches, and failure is a risk that we must all take if we are to seriously go in "pursuit of happiness". We have virtually abandoned tariffs as a means of raising Federal revenue; perhaps we should revisit and reconsider, import/export duties.

Au brings a great topic, and IMO, Asherman makes an interesting point with his first sentence.

On the mix of economy news shows I've seen-- There is a real argument with dueling indicators of a not so vibrant economy--and a pretty good economy.

Interest rates are the lowest since the Eisenhower administration. Real Estate is enjoying another boon.

I want to come back with evidence (in accepted economic indicators) and once and for all establish the sate of the current economy. Is it being slanted as bad? Or is it actually bad?

From today's NY Times
Sleight of Hand on Capitol Hill

The tax-cutting frenzy inspired by President Bush earlier this year has produced a predictable result: two misguided, poorly timed tax bills from the House and Senate that will not provide the short-term stimulus the country needs but will almost surely cause economic problems in the future. The two bills now head for a conference committee. There is little to root for in these deliberations, although one very useful provision in the Senate bill must survive. It would give $20 billion in emergency fiscal aid to deficit-ridden states whose budget problems will inevitably be compounded by the federal tax cuts. The conferees should also resist White House pressures to deepen the tax relief for dividends, which would make a bad bill worse.
Any list of the flaws in these bills should begin with one that has received less notice than it deserves, namely their fundamental dishonesty. You'll recall that President Bush originally asked for $726 billion in cuts over 10 years to go with his $1.3 trillion cut of two years ago. Everyone said that was too much, so the House passed a $550 billion bill, the Senate a $350 billion bill. Both numbers, as it turns out, are fictitious.
The Senate bill, for example, calls for substantial dividend tax relief that will "sunset" in five years so that the overall cost of the bill will not exceed the $350 billion limit. However, if one assumes (as one must) that the promised sunset will never occur, and that the dividend relief will instead become a permanent part of the tax code, then the true cost of the bill becomes $660 billion. Similar sleight of hand disguises the true cost of the House bill, which sunsets everything in sight — child tax credits, marriage penalty relief — and whose true cost, according to the Center on Budget and Policy Priorities, is $1.1 trillion.
The real numbers also mean that the economic impact of the eventual bill will be larger than advertised. Only two years after the original Bush tax cuts helped wipe out an expected $5 trillion surplus, the new cuts, combined with various spending increases, will add trillions more to a coming decade of red ink. This in turn will increase the need for federal borrowing, push interest rates upward and boost the cost of capital for private investment. For these reasons, a host of critics, including the Federal Reserve chairman, Alan Greenspan, believe that the measure's long-term negatives greatly outweigh its potential for short-term stimulus.
Of course, as we have noted before, the bill's greatest flaw is its one-sidedness — the fact that it will unfairly reward upper-income taxpayers while shortchanging lower-income groups and crippling the federal government's ability to meet vital needs in education, veterans' care, transportation and homeland security. Perhaps the conference committee will remedy some of these inequities, though we're not holding our breath.
Meanwhile, a little over one million people have exhausted all their state and federal unemployment benefits, a number that will grow by another 700,000 this summer. In addition, 2.1 million workers will soon exhaust their state benefits. All these people need help from Congress. Such help would not only compensate in some small measure for these unfortunate tax bills but would give the economy a quicker, more certain shot in the arm.

Good luck, Sophia. I doubt you will ever establish the state of the economy, once and for all. There are always enough contradictory factors to raise some doubt, and sometimes large doubt. Information available is by nature one to several months old, and I suspect that some of the indicators are based on obsolete assumptions. Cicerone Imposter is now anticipating at least some deflation by year end. I've been aware of his prognostications since 9/11/01. He has proven as good as any and better than some.

. I don't think so, Asherman. Tariffs and other artificial restrictions (such as price supports) on international trade do not have a good track record for improving anybody's economy. I think the economy right now is way to fragile to initiate new trade wars.

You're right, Rog.
Every indicator has a caveat or asterisk or something that can make it moot or manipulated.

Has the GNP ever shown a decrease? It has constantly increased, as evidenced by the official chart, at least since 1993.

Unemployment "rose by 341K"; employment "rose by 339K".

I have read in Slate that economists say (Greenspan and some others) the economy is going so well, Bush's tax cuts are unnecessary. Greenspan always seemed like such a lauded economic guru during Clinton's terms. Why isn't Greenspan viewed as correct about his positive views of the Bush economy? And, I don't mean this as a loaded question. Has Greenspan's reputation lost its' lustre?

Sofia
Greenspan 1, Bush 0

Warning of growing budget deficits, Fed chairman undercuts Bush, GOP arguments for tax cuts.
February 11, 2003: 5:32 PM EST


NEW YORK (CNN/Money) - Federal Reserve Chairman Alan Greenspan dealt a blow Tuesday to President Bush's hopes for massive tax cuts by stressing the need for budget discipline and saying economic stimulus efforts should be put on hold until uncertainties about Iraq dissipate.
discipline," Greenspan saidThough the central bank chairman, in his semi-annual Congressional testimony about the state of the economy, supported Bush's plan to eliminate the taxation of some dividends, he said such a measure should only be passed if other revenue could be found to replace the lost tax revenue, so as to keep swelling federal budget deficits under control.
"There should be little disagreement about the need to re-establish budget disipline
I wouldn't think that Greenspan was endorsing the Bush tax cuts. What he was doing IMO diplomatically disagreeing with Bush. Remember Greenspan is a master at double talk.
http://money.cnn.com/2003/02/11/news/economy/greenspan/

Roger,

You're probably right about import/export duties, but there aught to be some alternatives to current means of generating revenue to run the government. What other alternatives might there be?

You're probably right about import/export duties, but there aught to be some alternatives to current means of generating revenue to run the government. What other alternatives might there be?



Well, there are always alternatives to raising income.

Import/export taxes are one, but stifle international trade. The usual run of tariffs have the greatest effect on exports from the less developed nations such as steel and textiles, leaving those nations (thinking of African, now) dependent on international welfare, which in my opinion has not been effect, and will continue to be counterproductive. I support trade and oppose aid - barring exceptional cases involving natural disaster.

We could have an income tax as we do now. It is progressive and penalizes the most productive. We could change it to some flat tax scheme, but there is no income neutral that would be equally fair to myself and my fat cat boss.

We could have a national property tax, giving a free ride to everyone who owns no property. The upside would be virtually unlimited job security to all us bookkeepers, accountants, and paper pushers.

How about a national sales tax. Of course, you can only drive so many cars and wear so many clothes, so those with excess income would be encouraged to accumulate wealth.

Lets just 'pave the cow path', and tinker with what we've got. I cannot visualize a system that would not be unfair to someone. If I could, I would have answered your question.

I am not, however, entirely opposed to politically motivated tarrifs, but I'm reasonably sure they would hurt us as much as the nation against which they were levied.

The intent would not be to punish, or favor any foriegn trading partner. The purpose would be solely to raise revenue. Perhaps everything imported, or exported, would carry a 3% duty. Of course, that would never work because we always find a way to favor one over another.

I do agree that the most likely approach would be to continue relying primarily on some sort of income tax for individuals and businesses. I rather like the idea of a flat tax with few exemptions. However, this isn't really my field. You bean-counters are the specialists here.

The intent would not be to punish, or favor any foriegn trading partner. The purpose would be solely to raise revenue. Perhaps everything imported, or exported, would carry a 3% duty. Of course, that would never work because we always find a way to favor one over another.

I do agree that the most likely approach would be to continue relying primarily on some sort of income tax for individuals and businesses. I rather like the idea of a flat tax with few exemptions. However, this isn't really my field. You bean-counters are the specialists here.

Buffett slams dividend tax cut

One of world's richest calls plan 'voodoo economics,' says it puts burden on low-income families.
May 20, 2003: 10:41 AM EDT



NEW YORK (CNN/Money) - Renewing his criticism of the dividend tax cut laid out by the Senate last week, Berkshire Hathaway's Warren Buffett called the proposal "voodoo economics" that uses "Enron-style accounting."

The Senate's plan for dividends to be 50 percent tax free in 2003, 100 percent tax free in 2004 through 2006 and then face the full tax in 2007 would "further tilt the tax scales toward the rich," Buffett wrote in an opinion piece in the Washington Post.

Buffett posed a hypothetical situation in which Berkshire Hathaway, which does not currently pay a dividend, paid $1 billion in dividends next year.

Through his 31 percent ownership of the company, Buffett said he would receive an additional $310 million in income that would reduce his tax rate from about 30 percent to 3 percent, while his office secretary would still have a tax rate of about 30 percent.

"The 3 percent overall federal tax rate I would pay -- if a Berkshire dividend were to be tax free -- seems a bit light," Buffett wrote.

Instead of the Senate's tax cut plan, Buffett proposed that it provide tax reductions to those who need and will spend the money in the form of a Social Security tax "holiday" or a tax rebate to lower-income people.

"Putting $1,000 in the pockets of 310,000 families with urgent needs is going to provide far more stimulus to the economy than putting the same $310 million in my pockets," Buffett added.

He closed the piece by saying that the "government can't deliver a free lunch to the country as a whole. It can, however, determine who pays for lunch. And last week the Senate handed the bill to the wrong party."

The history of the 20th century has proven beyond doubt that socialist or command economic systems which attempt to bypass human desires to own and accumulate property as the main driving force behind economic activity, all lead only to lower production and uniform poverty. "We pretend to work and they pretend to pay us", was the cynical joke of the 1970s Soviet world.

Even in less extreme forms we can see the beneficial effect of increased incentives at the individual level. It is a fact that the very large reductions in the marginal tax rates instituted during the first Reagan administration, resulted, less than two years later, in increased income tax collections by the Federal Government. The previously very high marginal rates on large individual(and corporate) incomes had fostered the development of a host of tax dodges which increasingly distorted the normal incentives for the allocation of capital and investment. In addition they reduced the incentives for productive economic activity and bred a rather large "underground (unreported) economy and increasing use of barter in economic transactions. It was a combination of high interest rates and across the board reductions in marginal tax rates that ended the "stagflation" of the Carter years.

There can be no doubt that excessive governmental manipulation of economic activity and excess taxation can reduce the amount of wealth that is produced and distributed. The irony is that inequity in the distribution of goods that stimulates beneficial economic activity and attempts to enforce equity in distribution that suppresses it.

There is no doubt that across-the-board tax reductions are needed to restore growth to our economy and to insulate us from the possibility of deflation. The only question is how much.

The political fight is really about the future spending of the Federal Government. Republicans want less of it and use tax cuts as a means of choking off the source. Democrats want more of it and fight to defend the source. Does anyone believe their crocodile tears about the deficits?

The historical truth is that public debts are annihialated much more often by growth and inflation than by surplus repayments.

I enjoyed your expose, Asherman, but my eye hooked on one or two things in the broad historical overview. For example, where you wrote



In this historical overview, you explain the current debt back - even if not in a judgemental way - to the spending programs of FDR and LBJ (and the war). This seems perhaps a more ideology- than fact-driven representation.

Ideology has it that, as you write, "Typically, Republicans want less debt and the Democrats are more comfortable with it." But the practice has been different. If there is one single President's debts the US is still paying off, it's Reagan's - one Republican president you don't mention. Consider the stats of the Public Debt online archives, this in dollars:



It was under Nixon and Ford that the public debt first doubled within 8 years, and under Carter an equivalent amount was added again; but it was under Reagan and Bush that over half of the current public debt was accumulated. These are not FDR's and LBJ's social programs you are paying off on now; back in 1980 public debt was only a sixth of what it is now. It's the Reaganomics of 1980-1992. Now again, Bush Jr is having the budget deficit soar when under Clinton a precarious balance had just been achieved.

I think ever since Reaganomics, the "Republicans want less debt and the Democrats are more comfortable with it" mantra has become obsolete and in fact inversed.

In that context, perhaps when you mention the dilemma,



we should realise that one first step would not so much be to force any cut-down of personal spending budget on the consumer, but to at least refrain from any overwhelming increase, at the cost of revenue, of it. I.e., huge tax cuts are irresponsible. They also cost much more than any of the military and foreign relations spending, of which the necessity is obvious enough (even if the allocation could be more effective).

Can you argue this historical truth by the above-mentioned actual numbers for the US?

Nimh,

No, not with your numbers alone. However if the U.S. national debt for the years you cited was expressed as a percent of the annual GDP we would see a very different picture. it is also a fact that the debt of the Roosevelt years, to which Asherman referred, was not repaid so much by direct retirement through surplus repayments, as it was rendered insignificant by the explosive growth in the U.S.economy which occurred in the years during and after WWII, and the continued inflation of the currency.

A doubling of the national debt over an eight year period during which the GDP increases by almost 60% and the currency inflates by about 35% is not a significant change.

I agree with George that the simple set presented doesn't adequately tell the whole story. The effect of inflation has to be factored in. Secondly, the debt is always growing. Even if there were zero new spending, the debt would grow as the interest on it accumulates.

However, I believe Nimh is probably right that Reagan and Bush administrations added more quantitatively to the national debt than previous Presidents. The Reagan Starwars Program WAS expensive no matter how the costs are calculated. If Ronald Reagan hoped to protect the U.S. from Soviet missiles, he certainly was successful. With the economic collapse of the USSR, the whole world benefited with the removal of the practical possibility of a nuclear war on a scale that would threaten the survival of our civilization, if not our very existence. I think it was money well spent. The Bush spending is more complex, but a significant part of it was the Gulf War. I expect that this administration's terrorist and military activities will set new highs. Again, I think that the spending for the military security of this nation is ample justification for deficit spending.

My views are NOT driven by political partisan positions. I'm a registered Republican because that party comes closest to what I conceive as what the Federalists would favor if they existed today. You might have noticed I've clearly said that I believe deficit spending is sometimes acceptable, and I gave two examples of such justification (Military necessecity, and stimulation of the economy). I do not believe that "pork barrel" projects, even worthy ones, or social experiments justify deficit spending.

Of course, and I did err in writing to georgeob "Can you argue this [..] by the above-mentioned actual numbers" - there was no reason whatsoever to refer specifically to the above-mentioned figures, others would have been fine (perhaps even better) too.

I might actually agree that spurring growth may at some specific times be a better way to deal with public debt than executing the drastic budget cuts that would be necessary for substantial repayments. Strangely enough that's a point where Keynesian New Dealers and Reagan/Bush-like tax-slashers would end up agreeing, I'd suppose?

The reason I asked for figures is, first, because I'm by definition wary of claims of "historical truth". But also partly because I had inferred - wrongly so, perhaps - from the simple observation on how public debt is 'annihilated' in general, a political argument to indeed go for spurring growth rather than striving for repayments. And I think the historical record also showed some counterindications there.

Keyenesian spending-boosters and Reaganesque tax-slashers both argue that their strategy might cost at first, but will repay themselves back in time in increased revenue. That's quite a gamble - if it doesn't work, you're just left with an escalated debt, period. If you look at the way public debt was boosted in Reagan/Bush Sr times - way beyond the exponential increase interest rates would have effected by themselves - that "repaying itself" is not immediately apparent. It took some of the painful budget cuts and freezes under Clinton, both on social spending and on defence, to at least regain some control of the curve. With Bush Jr you seem now to risk the same gamble again.

I emphasize this risk because again and again, the increase in debt is defended in terms of the kinds of additional expenses that are easy or relatively easy to justify: the fight against terrorism, the arms race. You do this here, too, Asherman. But the multi-billion tax cut Bush Jr has gotten adopted will cost a lot more incoming revenue (pending the hoped-for repaying-itself-in-time) than any of the spending involved in the war against terrorism. And I thought - but do prove me wrong if I'm mistaken - that the same went for the proportion in Reagan's times, between money spent on tax cuts vs money spent on the military. In that sense the question over whether the latter was "money well spent" isn't actually very relevant.



I didn't mean to imply the view in question was specifically partisan, as in connected to this or that party - I wrote, "ideology-driven". Because the "Typically, Republicans want less debt and the Democrats are more comfortable with it" line is a pretty exemplary illustration of the stereotypical image of right vs left, conservative vs liberal. But it doesn't actually seem to have held up much in the last three decades or so. Clinton focused strongly on reducing debt, Bush Jr, like Reagan before him, doesnt seem to have much of a problem with it.

In Holland, throughout the eighties the Right argued the budget cuts it pushed through in terms of making up for the big-spending days of when Labour was in office, in 73-77. Whereas in fact it was the right-wing government of 77-81 that really ratcheted up the debt. So I'm a bit sensitive about the rewriting-history-through-accepted-stereotype thing.

That would be interesting, yes. I'm no economist so I don't have such figures at hand, and I couldn't find them like 1-2-3 on an impromtu browsing search, so your input would be accepted in gratitude.

I came as far as finding some web libraries of economic data, like this one and this one, but I dont have the time right now to go through them ... :-(

nimh,

I also was too lazy to lookup GDP and inflation figures for thew years in question. It would be very interesting to have a table of this data to quantify the relative changes more accurately than my estimate above.

I don't fully understand the theoretical issues separating the Keynesian and supply side economists on these issues, but am skeptical of both theories. I do note that many economists and major investors have expressed strong reservations about the Bush administration tax cuts. You are far from alone in your own skepticism.

However what influences me the most is a deep seated belief in the ability of governments of all kinds to screw up productive economic activity as a side effect of usually well-intended meddling and wealth transfers. The recent rapid growth in the economy of Ireland is a case in point. Prior to 1988 Ireland lived in a somewhat Socialist economic regime with trade protections, government controls of the labor market, and high marginal tax rates. In the years since they cast all that off, Ireland has enjoyed explosive economic growth (also some very good EU subsidies). Now the EU is pressuring Ireland to raise its corporate taxes to "harmonize" them with those of the major EU countries. One can rely on governments to resist competition in any form in which it may arise.