Posts tagged with: tax

In the discussion of whether the problem with our national public debt is a question of receipts, outlays, or both, I linked to a helpful set of graphs from Anthony Davies, an economics professor at Duquesne University. This data shows that even though a variety of tax rates have changed a great deal over the years, the federal government has basically taken in receipts within the range of 16-20% of GDP over the post-WWII era. If you haven’t looked at this presentation before, you should do so now.

And today, Grove City economics professor and AU faculty lecturer Shawn Ritenour links to another chart, which compares these receipts against historic federal outlays (or spending). He notes (and refutes) Joe Weisenthal’s contention that “any politician who says Washington has a spending problem, rather than a revenue problem, is speaking from a position of anti-tax ideology, rather than empirical data.”

But I think if you look at the history of receipts and outlays a bit closer, you’ll see that the variance in receipts over the last decade are well within the historical norms. But the variance in outlays over that period isn’t outside the norms, either, in the sense that it continues a disturbing trend after 1970. (The data for current and future years is estimated and gleaned from sources here.)
There used to be some correlation between the red and blue lines. But not in today’s Washington.
Again, given this historic perspective, I think it’s hard to blame the blue line for the current debt levels. Keep in mind too that since these figures are a function of GDP, as the economy grows, other things being equal so too does the spending and receipts of the federal government.

In addition to the larger versions of the graphs clickable above, you can download this set of graphs in PDF form here, and visit our “Principles for Budget Reform” page to read more related commentary.

I had the pleasure of appearing on Relevant Radio last Friday to talk to Sheila Liaugminas on her show, “A Closer Look.” I discussed the idea of “intergenerational justice,” a term favored by evangelicals (Roman Catholics tend to talk about “intergenerational solidarity”), and how that concept relates to much of today’s discussion about the federal budget.

One thing you hear from many is that we need a “both/and” solution: we need to both cut spending and raise revenue in order to close the annual deficits. I’m not really convinced of this, in part because the federal government has historically shown that increased revenue always results in increased spending. The government spends what it takes in, with a little bit more to boot. There has to be something structural and meaningful to stop this from continuing to happen, especially since we can’t count on the political culture to do so itself. Whether that structural obstacle is a balanced budget amendment or some other kind of binding agreement, something like that has to be put in place.

I don’t think it’s fair on the other side, though, to say that closing some tax loopholes, making tax avoidance more difficult, and simplifying the tax code is tantamount to “raising taxes” either. So in that sense there might be a case for raising revenues in this limited sense if it gets the tax system focused on what it is supposed to do (raise revenues) rather than using it as a tool for rent-seeking, social engineering, and pandering to special interests.

What’s more important than the question of revenues vs. cuts, however, is recognizing that the size of the federal government has stayed about roughly constant when you look at it in terms of tax receipts relative to GDP. Anthony Davies does a nice job illustrating this. He points out that the government basically takes in amounts roughly equal to 18% of GDP (+/- 2%). So that’s essentially what the government needs to learn to live on. By contrast, we’re spending about 24% of GDP this year, and that number only goes higher as entitlement promises come due.

So how about this for a both/and solution: we cut spending to get within a couple of percentage points of 18% of GDP and we focus on tax policies that will grow GDP in a sustainable way in the longer term.

Two weeks ago, President Obama ventured courageously into the debt crisis debate with soak-the-rich proposals aimed at the usual suspects—“oil companies,” “hedge fund managers,” “millionaires and billionaires,”—and a new enemy, “corporate jet owners.” That phrase may have tested well with focus groups, but economists and pundits weren’t duped. The imprudence of a new punitive tax on a segment of the country’s manufacturing industry was immediately mocked up and down the Twitterverse, and longer arguments have since been made.

There’s also the “small” problem of the size of the tax break for corporate jet owners: over a decade, the government could collect three-quarters of one-tenth of one percent of the portion of our debt that the President aims to eliminate. The proposal begins to smell like demagogic nonsense.

Then we have this towering irony: the President wishes to harm a segment of the economy (manufacturing) which he claims at the same time to support. His union base insists that he sign no new free trade agreements until Congress passes protections for workers whose jobs are outsourced. There is no talk, however, of protections for Gulfstream employees who will be laid off when the higher price of jets brings down demand. Focus groups can’t provide much in the way of economic analysis. Perhaps the President’s team should have talked to Steve Rooney, president of the International Association of Machinists and Aerospace Workers in Wichita, Kan., who told the AP:

I think it’s just insulting. He acts like it is just a luxury for somebody to own a business jet when they’re used as tools. And I don’t think he realizes how many people that this industry employs and how much revenue is brought in here from those types of aircraft.

Senate Majority Leader Harry Reid, who claims that lawmakers are fighting the President’s tax agenda “to protect the owners of yachts and corporate jets. To protect corporations that ship jobs overseas” misses this inherent contradiction.

The Heritage Foundation’s Mike Franc calls it an “off with their heads” mentality, and he’s right. That successful businessmen should be bled dry out of a “sense of shared sacrifice” is not the instinct of a free society. It is a Marxist sentiment, one based in a view of historical progress as class conflict.

The creation of wealth, from which the U.S. can pay down its national debt, is not a zero-sum enterprise.  It requires the cooperative striving of the whole business ladder. As Pope John Paul II pointed out in his 1981 encyclical Laborem Exercens, management and labor ought not to be separated at all. “Isolating … ‘capital’ in opposition to ‘labor,’” he says, “is contrary to the very nature” of wealth and its creation.

In concocting a solution to this country’s fiscal problems, our leaders would do well to remember that.

Blog author: eamyx
Thursday, July 14, 2011
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Back in February 2008, then candidate for president Barack Obama addressed a crowd at a General Motors Assembly Plant in Janesville, Wis. He said,

…I am my brother’s keeper; I am my sister’s keeper– that makes this country work. It’s what allows us to pursue out individual dreams, yet still come together as a single American family. E pluribus Unum. Out of many, one.

It is ironic that Obama preached a “we’re-in-this-together” economic philosophy yet three years later, Main Street is carrying Washington’s debt burden.

Debt negotiations are currently at a deadlock in Washington over taxes. President Obama doesn’t want to follow through with $4 trillion in spending cuts without a $1 trillion tax increase, while Senate Democrats are asking for a whopping $2 trillion in new taxes. Democrats also do not want to sacrifice entitlement programs. Top leaders worry they will not be able to reach a deal in time to avoid a government default. With the predicted default deadline of August 2 creeping around the corner and unemployment on the rise at 9.2 percent, citizens feel a sense of urgency about the debt crisis.

When Obama said “I am my brother’s keeper,” what did he really mean? If the government is to act as our brother’s keeper, this means it should be accepting responsibility for the welfare of all citizens. Raising taxes to cover up Washington’s nasty spending habits is certainly not accepting any responsibility.

If the government was really acting in the best interest of its citizens, it would stop raising taxes. According to the Tax Foundation, Americans will need to work from January 1 to April 12 before they have earned enough to pay off their taxes. Tax increases may seem like a quick way to reduce the deficit as opposed to spending cuts alone, but the bottom line is that Washington has a spending problem, not a revenue problem. A Goldman Sachs report found that tax increases usually fail to correct fiscal imbalances and are damaging to economic growth while spending cuts correct fiscal imbalances and boost growth. Milton Friedman explains in his essay titled Fallacy: Government Spending and Deficits Stimulate the Economy why government spending does not mean “stimulus”:

Getting the extra taxes, however, requires raising the rate of taxation. As a result, the taxpayer gets to keep less of each dollar earned or received as a return on investment, which reduces his or her incentive to work and to save. The resulting reduction in effort or in savings is a hidden cost of the extra spending. Far from being a stimulus to the economy, extra spending financed through higher taxes is a drag on the economy.

The $2 trillion tax increase Senate Democrats are pushing has the potential to suffocate economic growth and job creation, which would not be good news for 14 million unemployed Americans. Today, the Great Recession now has more idle workers than the Great Depression. An article in The Fiscal Times claims the employment level is nowhere near where it should be for a typical recovery:

In a typical recovery, we would have had several hundred thousand more hires per month than we are seeing now—this despite unprecedented fiscal and monetary stimulus (including the rescue of the automobile industry, whose collapse would likely have lost a million jobs).

If spending binges don’t work for a family, why would they work for a government? When a family spends more than they are making, the only sensible solution would be to cut spending. Bureaucrats should take House Minority Leader Eric Cantor’s advice and be willing to share the sacrifice:

Everyone understands that Washington has been on a spending binge of late and we’ve got to start spending money the way taxpayers are right now and that’s learning how to do more with less.

The debt crisis is not just an economic hazard but a prodigious moral issue of poor stewardship as explained in an Acton commentary by Jordan Ballor and Ray Nothstine titled The Fiscal Responsibility of Mall Rats and Bureaucrats:

Responsible stewardship of one’s material resources is a consistent and recurring biblical theme. At the conclusion of a parable on stewardship, Jesus said, “Whoever can be trusted with very little can also be trusted with much, and whoever is dishonest with very little will also be dishonest with much” (Luke 16:10 NIV). We shouldn’t be duped into granting the use of greater and greater portions of our paychecks to a federal government that has been unfaithful with what it has already claimed.

Our economy will continue to hobble along until Washington is willing to truly act as a brother’s keeper in showing that it too can share the sacrifices necessary for getting spending under control. Until then, we will pay the price for Washington’s fiscal irresponsibility and millions of Americans will continue to struggle.

Blog author: jballor
Friday, June 17, 2011
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Today at Capital Commentary I discuss the size and scope of the tax code in the US relative to its basic purposes.

In “Back Door Social Engineering,” I argue, “When governments run huge deficits in part because of the complexity of its tax system and the ability of people and institutions to engage in large-scale (and legal) tax avoidance, there is something deeply wrong with the system.”

The basic purpose of taxes is to raise money for the government, not to determine social behavior. We have laws for that.

Read the whole thing here.

In this week’s Acton Commentary, “Do Less with Less: What the History of Federal Debt and Tax Leverage Teaches,” I reflect on how the federal government has lived beyond its means for decades. This reality is especially important to recognize as we approach Tax Day this year as well as in the context of debates about how to address the public debt crisis.

There are many who think we need to raise taxes in order to close the historic levels of deficit spending. In theory I would consider raising taxes as a viable option, or at least preferable to continued deficit spending, since it would at least make the real cost of government more visible. Roughly 40% of what the government spent last year was beyond what it took in.

But without structural connections between increased taxes and balancing the budget, there’s nothing at all to give us hope that the government wouldn’t simply continue to leverage the greater revenue into greater deficit spending. In this vein I note the conclusions recently updated by Richard Vedder and Stephen Moore, that “over the entire post World War II era through 2009 each dollar of new tax revenue was associated with $1.17 of new spending. Politicians spend the money as fast as it comes in—and a little bit more.”

Calvin College philosophy professor James K. A. Smith doesn’t take this reality into account, I don’t think, when he recently argued that the current situation calls for raising taxes, both on the rich and the middle-class. Thus, he writes,

But only a lazy, unimaginative take on this would assume that “low taxes” is a given. So sure, one strategy to reduce debt would be to slash spending, which inevitably happens on the backs of the poor and vulnerable, particularly women and children.

The alternative to such an unattractive option as Smith sees it is to raise taxes, particularly on the rich. Smith thus points to the idea that America needs to adopt a “graduated tax like most other North American countries.”

The fact is, though, that the US already has a progressive tax system, and indeed places a much higher relative burden on the top decile of household incomes than other developed nations.

One of the next big fights will be over raising the debt ceiling, as Smith points out. Perhaps we can link balanced budgets with increases on the debt ceiling (something more feasible than passing a balanced budget amendment). The idea would be that we only increase the debt ceiling on the condition balancing the annual budget, and that we only think about raising taxes to balance that budget if we actually commit to balancing it.

Simply raising taxes won’t do anything but give the federal government more money to leverage into higher levels of deficit spending.

Blog author: hunter.baker
Wednesday, February 9, 2011
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Michael Kinsley has a column up at The Politico in which he claims to debunk a series of Reagan myths. The one that annoys me the most is the one that is obviously and clearly incorrect and at the same time gets the least explanation from Kinsley. Here it is:

6. The Reagan tax cuts paid for themselves because of the Laffer Curve. Please.

With every other “myth” Kinsley takes on, he at least feels the need to explain himself. Not so with the Laffer Curve. I suspect the reason Kinsley doesn’t narrate here is because the slightest bit of examination would reveal that the Laffer Curve is AXIOMATICALLY TRUE.

Too much? No. The Laffer Curve is undeniable. It looks like this:

It is very simple. If you tax at either 0% or 100% you will get nothing because either there is no tax OR the effort of making money is not worth it. You can increase taxes to some optimum point where you will continue to get more revenue up to the point where increased taxation becomes counterproductive because it causes people to reduce their effort. We observed this phenomenon actually occurring in the United States when we had ultra-high marginal tax rates. Various types of earners curtailed their effort once they hit the magic level at which they would begin to pay the highest rates. They preferred to put off additional activity until the next year. Famously, the detective novels about Nero Wolfe mentioned his tendency to take a few months off at the end of the year because of the top rates of taxation.

Because people react rationally to high rates of taxation, you will realize less revenue because of a reduction in taxable activity. What exactly is Kinsley saying “Please.” about? Does he deny that moving from a 70% tax on the highest earners to a rate in the 30′s or high 20′s could lead to increased revenue as top producers expand their efforts and investments AND stop working so hard to conceal money they have made and otherwise evade taxation? At a lower rate, it is obvious that non-compliance becomes a risk much less worth taking.

No, Reagan’s embrace of the Laffer Curve was the most rock-solid common sense. And by the way, look at federal revenues after the tax reduction. Real federal revenues increased quite nicely.

The only way the Laffer Curve would be wrong is if one misinterpreted it, as some do. For example, anyone suggesting you would gain more revenue by reducing a 20% tax rate to 10% is probably wrong. But moving out of the prohibitive zone, which is likely anything over 50%, is a shrewd policy decision.

Blog author: jcouretas
Monday, January 10, 2011
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Catching up on some recent Acton commentaries. We welcome a new writer, John Addison Teevan, who is director of the Prison Extension Program at Grace College. He also teaches economics and Bible courses at the Winona Lake, Ind., school. This column was published Dec. 29. Sign up for the free, weekly email newsletter Acton News & Commentary here.

A Tithe for Uncle Sam

By John Addision Teevan

Political leaders talk as if the money Americans keep (not paid in taxes) belongs to the government and that our keeping money they could tax is an actual cost to them. This kind of distorted thinking has led us into the fiscal irresponsibility that threatens to destroy our country.

It is, of course, fair to say that there are many exemptions that, if eliminated, could bring in more tax revenue. But Congress prefers a tax code of convoluted exemptions and tax breaks that they create and sustain to keep various interest groups coming to their offices. Taxpayers love breaks such as the homeowners’ exemption that allows taxpayers who itemize to deduct their mortgage interest. Although paying less in taxes is in general a good thing, all such exemptions confuse the process, contribute to an impossibly intricate tax code and keep lawyers, accountants and tax prep software companies prospering. The amount we spend on tax preparation in terms of actual cost and time wasted compared to a simplified tax code is worth billions.

The most extreme example of the fallacious notion that government has a right to its citizens’ money is the idea is that the cost to the government of not taxing the disposable income of all Americans at 100 percent is $11.5 trillion (as if we’d bother working if we faced a 100 percent tax rate). Economist Arthur Laffer noted that the government might collect little in taxes if the tax rates were either very low or very high, because in the latter case Americans would adjust their income according to tax incentives. Government officials unfortunately tend not to think in terms of incentives but of rules and therefore assume, contrary to Laffer’s findings, that higher tax rates always bring in more revenue.

Taken to its conclusion, this thinking leads tragically to socialism. If we think the government is the best source of compassion for the needy and the engine of economic growth, then it makes sense to set taxes at high rates so the government can do all good things for the people. One small faction that I read about in an Ohio paper wants Uncle Sam to hire all unemployed people and then print the money to pay them. This childish scheme is really a variation of the more respectable idea that tax cuts “cost” the government in the same way that spending on defense or health care does.

The foolishness of the concept can be illustrated by analogy with a church. Imagine a congregation of 100 families with a budget that reflected an estimated tithe on $65,000 average family income. Using government thinking, the church budget could be $650,000 (10 percent of 100 x $65,000), even if the actual offerings to the church were only $300,000. This is based on the fairly reasonable idea that the people owe their church 10 percent of their income.

Here’s how government budget thinking might work in that church.

Budget: $650,000. Expenses: charitable relief for church members: $350,000 (54 percent), staff: $150,000 (22 percent), building expenses: $50,000 (8 percent), ministry expenses: $50,000 (8 percent); debt retirement: $50,000 (8 percent).

What is that $350,000 for ‘charitable’ relief for church members? That is the part of the tithe that the members should have given to the church, but did not. Rather than ignore it, the church would reckon it as both income and expense even though not a single dollar changed hands. Government thinking sees any foregone revenue as an expense so that the largest item in this budget is the (fictional) $350,000 expense as if the church spent that money on its own parishioners.

As it stands, the federal government appears to be incapable of balancing income and spending. Right now it is collecting about 16 percent of GDP in taxes and spending well above 20 percent, creating an immense government borrowing gap. Many politicians’ proposed solution is to demand that the existing tax regime be repealed in favor of higher rates; we can’t “afford” the lower rates, they argue. In an economic downturn, however, raising taxes is a surefire way to suppress recovery.

Addressing the spending side of the budget equation is politically painful, no doubt, but it is unavoidable. America faces difficult challenges as we try to grow out of the recession. Having the government think soberly about its tax income and budget expenses would be a good start.

Blog author: jcouretas
Thursday, October 7, 2010
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In the “Wealth Inequality Mirage” on RealClearMarkets, Diana Furchtgott-Roth looks at the campaign waged by “levelers” who exaggerate and distort statistics about income inequality to advance their political ends. The gap, she says, is the “main battle” in the Nov. 2 election. “Republicans want to keep current tax rates to encourage businesses to expand and hire workers,” she writes. “Democrats want to raise taxes for the top two brackets, and point to rising income inequality as justification.”

This is a constant refrain from the religious left, which views the income or wealth gap as evidence of injustice and grounds for reforming political and economic structures. In the video posted here, you’ll see Margaret Thatcher, in her last speech in the House of Commons on November 22, 1990, brilliantly defending her policies against the same charge.

Furchtgott-Roth zeroes in on a recent interview with Robert Reich, Secretary of Labor for President Bill Clinton and now a professor at the University of California, Berkeley.

[Reich said:] “Unless we understand the relationship between the extraordinary concentration of income and wealth we have in this country and the failure of the economy to rebound, we are going to be destined for many, many years of high unemployment, anemic job recoveries and then periods of booms and busts that may even dwarf what we just had.”

Mr. Reich is wrong. He and other levelers exaggerate economic inequality, eagerly, because they rely on pretax income, which omits the 97% of federal income taxes paid by the top half of income earners and the many “transfer payments,” such as food stamps, housing assistance, Medicaid and Medicare. This exaggerated portrait of inequality undergirds the present effort by the Democrats to raise income tax rates for people with taxable incomes of $209,000 a year on joint returns and $171,000 a year on single returns.

A more meaningful measure of inequality comes from an examination of spending. On Wednesday the Labor Department presented 2009 data on consumer spending, based on income quintiles, or fifths. This analysis shows that economic inequality has not increased, contrary to what the levelers contend.

Much of the discussion around this issue from the left uses the data to portray America as a heartless land of haves and have-nots. Here’s a quote from a Sept. 28 AP story on new census data, including income figures:

“Income inequality is rising, and if we took into account tax data, it would be even more,” said Timothy Smeeding, a University of Wisconsin-Madison professor who specializes in poverty. “More than other countries, we have a very unequal income distribution where compensation goes to the top in a winner-takes-all economy.”

Here’s an amazing statistic: The average 2009-10 faculty salary at Wisconsin Madison was $111,100. But the median household income for all Americans in 2007 (a roughly parallel comparison) was just over $50,000. Isn’t something out of whack here? Isn’t this evidence of severe economic injustice demanding structural reform? Sounds to me like the Bucky Badger faculty has been helping itself to second and third helpings at the “winner-take-all” buffet.

The faculty at Prof. Reich’s school do even better on average income: $145,800. I suspect some celebrity professors might even be … above average.

This is from “Capitalism: The Continuing Revolution,” an article by Peter Berger in the August/September 1991 issue of First Things. Emphasis mine.

… recent events have added nothing that we did not know before or, more accurately, should have known as social scientists or otherwise as people attentive to empirical evidence. The crucial fact here, of course, is the vast superiority of capitalism in improving the material standards of living of large numbers of people, and ipso facto the capacity of a society to deal with those human problems amenable to public policy, notably those of poverty. But, if this fact had been clear for a long time, recent events have brought it quite dramatically to the forefront of public attention in much of the world, and by no means only in Europe. It is now more clear than ever that the inclusion of a national economy in the international capitalist system (pace all varieties of “dependency theory”) favors rather than hinders development, that capitalism remains the best bet if one wishes to improve the lot of the poor, and that policies fostering economic growth are more likely to equalize income differentials than are policies that deliberately foster redistribution.

[ … ]

to opt for capitalism is not to opt for inequality at the price of growth; rather, it is to opt for an accelerating transformation of society. This undoubtedly produces tensions and exacts costs, but one must ask whether these are likely to be greater than the tensions and costs engendered by socialist stagnation. Moreover, the clearer view of the European socialist societies that has now become public radically debunks the notion that, whatever else may have ailed these societies, they were more egalitarian than those in the West: they were nothing of the sort. One must also remember that, comparatively speaking, these European societies were the most advanced in the socialist camp. The claims to greater equality are even hollower in the much poorer socialist societies in the Third World (China emphatically included).

As Kishore Jayabalan noted yesterday, the fallacy of “broken windows” is, unfortunately, ubiquitous in discussions of public finance and macroeconomics. Though we are told that government spending and public works have a stimulating effect on economic activity, rarely are the costs of such projects discussed.

Such is the case with several stimulus projects in my own hometown of Atlanta, GA. The Atlanta Journal-Constitution reports on a list that Sen. John McCain and Sen. Tim Coburn drew up, criticizing wasteful stimulus projects throughout the country:

Their list includes Georgia Tech professors who received federal stimulus funds to understand how jazz, avant-garde art and Indian classical musicians improvise. The report cites an Atlanta Journal-Constitution article that describes the $762,372 study, which involves using brain imaging to learn how musicians do their work.

[….] The senators also highlighted a $677,462 research project at Georgia State University to study “why monkeys respond negatively to inequity and unfairness.” Asked about the project, the university sent the AJC a news release from last year that said the research “will hopefully answer questions about the evolution of responses to reward inequality — including those responses in humans.”

Georgia Tech has fired back:

Georgia Tech issued a statement in response, saying such research is “necessary for the long-term economic success of our state and our nation.”

But how can one verify such claims? As Kishore has pointed out, the mere fact that money is being spent is not enough to claim that the economy benefits from such expenditure. The hidden costs of stimulus money are the jobs and services that would have otherwise been funded by the private sector.

In order to actually determine whether an investment is truly beneficial to the economy, one must be able to subject it to the cost-accounting of profit and loss. A product or service that makes losses has consumed resources that could have otherwise been put to more productive uses in the economy. But since government expenditures are funded not through any kind of voluntary market exchange, but through taxation, this kind of mechanism cannot be used to evaluate them.

So we can be pretty sure that stimulus projects, in fact, are not as conducive to economic growth as we have been led to believe, since such projects would probably not withstand the profit-and-loss test of the market.

But this is not to say that funding any of this kind of scientific research is not worthwhile. Activities such as philanthropy and charitable giving do not produce any kind of profitable return, but are nevertheless recognized as noble and praiseworthy. There may be good reasons for funding these projects, but economic growth is not one of them.