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Those Republicans who regularly exhibit their apparently unbounded confidence in the power of the private sector and their childlike belief that any problem can be solved by identifying the appropriate group to which the government should give a tax cut.
Those Democrats who regularly exhibit their apparently unbounded confidence in the power of the government and their childlike belief that any problem can be solved by identifying the appropriate group to which the government should give more money.
As frustrating as these two are, there is another group, which includes some of each of the above and some Independents as well, that I find more irresponsible than either of the two “principled” groups above. I am talking about those folks who can be described in either of the following two equivalent ways.
a) They are not willing to support the necessary taxes for all they want the government to do.
b) They want the government to do more things than they are willing to support taxation for.
This is the group that is driving us off the debt cliff. That group includes anyone who votes for deficit spending AND does not vote for tax increases.
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SEND IN THE CLOWNS
1 hour ago
If the tax rate is 0%, the government collects no revenue. If the tax rate is 100%, the government collects no revenue. When the tax rate is between 0 and 100%, the government collects revenue. From these axioms, we can conclude that (1) there are tax rates at which, if the government raises the rates, it reduces revenue, and (2) there is an optimal tax rate at which the government is collecting as much revenue as it can.
ReplyDeleteTherefore, it is possible (depending on where current tax rates are in relation to optimal tax rates) to support more spending and lower taxes without adding to the deficit and debt. I submit that the group of people that should concern you are those that support so much government spending that, even at optimal tax rates, the government cannot collect enough revenue to pay for it all.
The first paragraph refers to the Laffer Curve which we have discussed on three previous occasions (5-26,7-26, 12-2) and I agree with Adam’s statement about “tax rates” and “revenue”.
ReplyDeleteIn the first sentence of the second paragraph, I agree with you if by “taxes” you mean “tax rates”. The word “taxes” by itself is kind of treacherous because using it can lead you or your reader to conflate “tax rates” and “tax revenue”. Perhaps I fell into that trap in my original post. Since I was comparing debt and deficit to taxes and taxation and since I did not use the expression “tax rate” I thought that it would be clear that I was talking about amounts of taxes and not rates of taxation.
With respect to the second sentence of the second paragraph I would certainly oppose those people, if I could identify them. The problem is that there is no way to know what the optimal rate is. I would bet that the problem of determining the optimal rate would be made harder by the fact that different types of economies probably have different optimal rates. I would expect that the only way to deal with the question would be by trial and error. Consider for example of the US income tax. The rates of the last ten years have produced huge deficits. The slightly higher rates of the nineties produced balanced budgets. Wouldn’t that suggest that the side of the Laffer curve that we are now on is the one for which a rate increase would increase revenue?
By "taxes" I did mean "tax rates" because that's how I thought the word "taxes" was being used in the original post. Obviously I agree re: ambiguity of the word "taxes."
ReplyDeleteBut I'm afraid I cannot agree that "The problem is that there is no way to know what the optimal rate is." I concede that controlled experiments are impossible in politics and economics, I concede that (as you point out) the optimal tax rate may change over time depending on structural and other factors, and I concede further that we do not currently know precisely what the optimal tax rate is. That doesn't mean we don't have any idea though. As Exhibit A, I refer the interested reader to Table 1.2 here http://www.gpoaccess.gov/usbudget/fy11/hist.html. As you can see, in the history of the republic, with all of the different tax rates and tax structures we have had over time, federal tax revenues have never exceeded 21% of GDP. I submit that it will be very very difficult for Congress ever to construct a tax code that yields more than 21% of GDP in revenue.
Federal spending for FY2009 cost 24.7% of GDP and 25.4% of GDP in FY2010 (that's an estimate, since I guess they haven't confirmed the final numbers yet, even though FY2010 ended 9/30/2010). Therefore, I have no trouble identifying the people who support so much government spending that, even at optimal tax rates, the government cannot collect enough revenue to pay for it all -- it's the Members of Congress who have voted for all of these spending bills, the President who has signed them, and the voters who put them in office.
Re: your last 3 sentences, I cannot agree that "The rates of the last ten years have produced huge deficits. The slightly higher rates of the nineties produced balanced budgets." It's more nuanced than that, as the table indicates. Furthermore, it has no bearing on which side of the Laffer curve current tax rates fall because the Laffer curve is about tax rates and tax revenues -- you're talking about deficits, which is also a function of spending.
By the way, I don't know which side of the Laffer curve current tax rates are.
In the second paragraph you imply that you believe that there is a way to tell what the optimal rate is, but you did not tell me what it was. I don’t see why the fact that the republic has never exceeded a tax rate of 21% of GDP means that it cannot do so. Whether it should or not is, of course, another question but it has been done by other nations.
ReplyDeleteIn the third paragraph you assign blame to a class of people that includes Bush, Obama, and “the voters who put them in office”. That gets about all of us doesn’t it? I agree with you that we are all to blame for the mess.
I agree that the relation between deficits and the Laffer Curve is not direct because of the spending aspect of the equation. But it is relevant and, with respect to your last comment, I think we do know which side of the Laffer Curve we are on. For those not familiar with this see the post on 5/26. In summary: There is a tax rate that will produce the maximum possible revenue. If you are on lower tax rate side, then an increase (decrease) in the tax rates will produce an increase (decrease) in revenue. If you are on higher tax rate side, then an increase (decrease) in the tax rates will produce a decrease (increase) in revenue. At the site you offered, http://www.gpoaccess.gov/usbudget/fy11/hist.html , if you go to the table 1.3 and go over to column 5 there is listed tax receipts in constant 2005 dollars. The Bush rate reduction was spread over three years beginning in 2001 and completely in place by 2003. The tax receipts for, 2000, the last year before the reduction was $2.31 trillion. In the next three years the receipts declined steadily until in 2003 it was at $1.90 trillion. That seems like a pretty good indicator that we are on that side of the Curve for which an increase in tax rates would produce an increase in revenue.
It is, of course, also pertinent to all this that there is no inherent reason that we should seek to maximize government revenue. But the analysis is relevant.