We spent some time this morning talking about the myth of the always applicable Laffer curve and the supply-sideristas who always claim that tax cuts will be off-set by revenues from greater economic productivity. But we’re not Alan Greenspan—who famously doesn’t think it’s his job to think about how his comments on economic matters are perceived. So we don’t want our lack of enthusiasm for the great Republican myth to be construed as support for the great Democratic myth.
Perhaps you haven’t heard much about the great myth that seems to be the animating economic idea behind the Democratic party at the moment. You’ve heard the myth in various forms, of course, but it is rarely presented in terms on which it can be identified, analyzed and critiqued. Instead, it’s presented as nothing other than the obvious truth.
To put it succinctly, the myth is that increases in tax rates and higher tax revenues reduce budget deficits. Like the supply side faith, this one begins with a kernel of truth—that, all things being equal, higher revenues would reduce budget deficits—and then warps it into a poisonous lie. The mischief comes from the fact that all things are never equal, and there is little evidence that higher revenues results in lower deficits.
What is particularly not equal here is government spending. The myth of deficit reducing revenues depends on something that is patently untrue: the assumption that the demand for government spending is inelastic. In other words, when the government collects more revenues it tends to spend more.
What truly limits government spending is the size of the budget deficit. Or, more precisely, the political tolerance for budget deficits. It is the size of the deficit that is fixed, not the level of government spending. When you grow revenue, you grow spending, and the budget deficit chugs along.
This is not to say that it is impossible to reduce budget deficits. We’ve reduced them in the past, and even achieved something like a surplus at times. But this has been an achievement in politics—a political demand for lower deficits that overcame the demand for more spending—and not a function of revenue collection.
So before deciding that Republican proposals for tax cuts are irresponsible and Democratic proposals for tax hikes are responsible—that is, deficit reducing—ask yourself whether or not you think the demand for government spending is likely to increase or decrease when the government receives that added revenue.
Posted by , Oct 17, 2007 3:26PM
Government spend less money?
What?
Posted by , Oct 17, 2007 3:26PM
I don't hear much coming out of the mouth of HRC or any of the other dems that future tax hikes are going to be used for deficit reduction. Gotta pay for universal health care, $5k baby bonds and government contributions to private retirement accounts somehow.
Posted by Anonymous , Oct 17, 2007 3:29PM
Want do decrease the deficit without raising taxes? Get out of Iraq, just end the occupation. Who knows, even the price of oil will come down also. The US is spending about $2 Billion a week in that forsaken land. And that's most probably a low ball estimate by the Congress back in 2006 (before the elections).
Posted by not a Bush (the dubya kind) fan , Oct 17, 2007 3:37PM
ah more liberal naivete. and poof, like magic, when the US withdraws from Iraq there will be peace overnight, al Qaeda in Mesopotamia will be its swords into plowshares, the Sunni will lie with the Shiite, the Iraqi oil supply will be more secure, and the US won't need to re-intervene in Iraq to prevent it from becoming an al Qaeda-infested failed state a la Afghanistan in the 1990s (as opposed to the semi-failed state ex-Kurdistan it is now)
Posted by , Oct 17, 2007 3:38PM
what is to stop all these crack mommas from just popping out babies every year for a nice $5,000 salary?
Posted by , Oct 17, 2007 3:49PM
Yeah Vietnam collapsed into a total disaster after the United States left.
Posted by , Oct 17, 2007 3:50PM
True, didnt affect us much though.
Then again it wasnt exactly a haven for international terrorism.
Posted by Anonymous , Oct 17, 2007 3:58PM
for the not a fan of the dubya kind of bush
None of the issues you mention were issues before the invasion. The country was under a strong dictator and kept stable that way. On the other hand the American occupation can't do anything to resolve those regional problems. Those are all political at the core. Keep bankrupting the country in Iraq, like the Soviets did in Afghanistan, and keep complaining about taxes. Nothing will come out of it.
Note: Kurdistan is an ethnographic region, and spans parts of Iran, Iraq, Syria, Turkey, Azerbaijan and Armenia. There's no Kurdistan state. Why do you think Turkey is about to invade Iraq? The US occupation boosting the status of the Kurds in Iraq has further destabilzed the region.
Here, from ABC News (Australia), just one hour ago:
More than 500 members of Turkey's Parliament approved the motion that authorises Turkish troops to target the Kurdistan Workers Party (PKK) fighters there.
The vote was taken in defiance of pressure from the US and Iraq, which have called on Turkey for restraint.
Turkey's Western allies and Baghdad have urged Turkey to refrain from military action.
As the Turkish Parliament voted in Ankara, the US President, George W. Bush, said it would not be in Turkey's interests to send troops into Iraq.
Washington fears a Turkish incursion could destabilise the most peaceful part of Iraq and possibly the wider region by encouraging others such as Iran, to intervene.
Iraq's Government says it will send a team to Ankara for further talks to find a peaceful solution to the crisis.
NATO and the European Union have also urged restraint, warning that military action by Turkey threatens to bring chaos to the only relatively stable region of Iraq.
Posted by Bulging Bracket , Oct 17, 2007 4:03PM
Thanks for one of the few sane pieces of analysis/commentary on this. Even Megan has gotten out of the responsible camp, though I can understand, given the horrendous hounding she faces daily at The Atlantic and the horrendous conditions at The Economist.
Nearly all arguments around the relationship between taxes, revenues, deficits, and spendings are based on very old data. We're in a completely different period, where changes in expectations and behavior create differential response than the models predict. Deficits seem to have little spending restraint effect in an environment with low inflation, comparatively low taxation, recent history of successful deficit elimination*, and relatively low deficits. The 80s were different on all counts (well except for the government cooking the books).
The supply side argument that CBO static scoring is overly pessimistic is 100% right. Extended to the medium to long term, the stronger form of the argument is also 100% right (a minor positive change in productivity and growth rates will create a substantial change after a bit of compounding). It is rather in the short term where the strong-form of supply side Lafferism is tenuous and highly situational.
I'd suggest that taxes with high implementation/collection costs and large externalities (lawyers, accountants, tax-motivated behavior), such as estate, corporate, interest, and capital gains taxes, are especially likely to have Laffer issues. 0% will likely be the maximal revenue rate, thanks to effects on the economy. Taxes with substantial opportunities for international competition likely also have low to 0% maximal revenue rates - see the Irish artist, FDI, and software rates, Dubai, Hong Kong, and Singapore's successes with free-trade ports, Jersey and Cayman success with tax shelters. London is demonstrating how a 0% personal income tax can be the maximal revenue point, at least on out of country income.
The final problem is that simply focusing on maximal revenue concedes far too much ground to the Leftists. The important issue is median after tax GDP per person, with the level of GDP per person at lower percentiles being important as well. Ginii means nothing, government revenues mean nothing, only the material well being of the population is important.
For this truly important metric, the lower taxes and size of government the better. All that is needed is the DoD and some parts of the DoJ, so the feds only really need 8% of GDP - 7% for DoD (including the unofficial work of the DoE and 1% for DoJ (if not less, there really are far too many federal crimes these days). This would give a roughly 100% increase to current DoD spending and help bring back at least a Reagan era sized Navy and Army. 24 carriers and 600 ships sounds about right, but 40 and 1000 may be a better number.
Posted by , Oct 17, 2007 4:18PM
@ 3:58: what Iraq was like before the invasion is irrelevant to the facts on the ground right now, unless moveon.org has a time machine it's going to give HRC on Jan 20, 2009. short of that, even she has refused to guarantee a pullout because she knows, unlike the loony left, that there's no realistic alternative to attempting to pacify Iraq.
Posted by ronnie , Oct 17, 2007 4:24PM
BB, philosophically, i agree with you, less govt and lower taxes are better than more govt and higher taxes. but the average american doesn't agree, mainly because IMO the continual removal of people from the tax rolls has severed the link for poor/working class folks of the cost (taxes) and benefits (services, welfare, etc.). maybe 20% of all americans probably pay zero or negative income taxes. thus, they happily support more spending since "the rich" will pay for it. damn democracy.
Posted by , Oct 17, 2007 4:25PM
The only "solution" the Iraq problem is a campaign of extreme brutality on a massive scale. That is how, for example, Genghis Khan solved HIS Iraq problem; with 3 story tall mountains of humans skulls, stacked outside razed villages. America (and the international community) has neither the will nor the stomach for such actions, at this point in time. So invading Iraq was a mistake of catastrophic proportions (an obvious fact) that can only end in defeat (a less obvious fact).
Posted by Josh , Oct 17, 2007 4:38PM
ask yourself whether or not you think the demand for government spending is likely to increase or decrease when the government receives that added revenue.
I think the answer to that (from the Dem side) is self evident.
In the current environment, when was the last time you heard that they were going to raise taxes and spend the money on nothing but reducing the deficit?
It is only raise taxes to pay for free healthcare, benefits, insurance bailout, hurricane bailout, disasterous economic policy bailout (eg. Michigan), under-funded infrastructure, new govt agencies, to sink more money into worthless teachers' unions in the name of education or something else.
All the talk about reducing deficits is fraudulent. As the WSJ rightly pointed out, the last intention behind the Dems passing 'Paygo' rules was reduction of deficits. Its more like 'Gotta spend more on entitlement programs. Will increase deficit. Oops! Gotta increase the taxes. Its not us, its the paygo rules."
And lest some smart-ass try to tag this as Republican propaganda, all this was enabled by 90% of the current Republican party. They too are populists of the worst order. And in the last 6 years they have completely destroyed Reagan's legacy of fiscal conservatism and handed power over the the Dems on a platter.
Of course this will not last. In a few years the true colors of the miserable failure of a policy that socialism is will become visible (it has succeeded NOWHERE in this world.) And then fiscal conservatism will make a comeback (hopefully).
In the meantime, get ready for more baby bonds, daddy gifts, mommy subsidies and more.
Posted by The Republican , Oct 17, 2007 4:41PM
There they go again! The repugnant right's neo-cons are the greatest disgrace to America since the Ku Klux Klan. I just have to laugh at neo-cons. They try so hard to be patriotic while they rip this country apart at the constitutional seams.
They say mass murderer OBL is "irrelevant" now and spend more money on Iraqis infrastructure than on our own citizens. They fight to the death for the unborn but shit on living American kids' health care programs.
Neo-conservatives are like fans of Oklahoma football: They are more "stupid funny" when they are losing than when they win.
Posted by , Oct 17, 2007 5:10PM
The Republican 4:41 said ....
..shit on living American kids' health care programs..
Thank you for your brilliant exposition of a totally trivial economic and moral issue. Why dont you run for President?
Posted by , Oct 17, 2007 5:16PM
if Democrats really wanted to insure poor kids SCHIP could be reauthorized in a heartbeat. but they're really fighting to get socialized medicine passed thru the back door.
Posted by Anonymous , Oct 17, 2007 5:41PM
Bush (the younger) vetoed because it would have doubled the number of children eligible for the State Children's Health Program. The cost of this program would have been increased to $35 Billion over 5 years, or about the equivalent of 18 weeks of expenses for the Iraq occupation.
Bush, on the other hand, believes in private medicine, not the federal government running the health care system. He forgot to add that this private medicine panacea is something that only the very wealthy can afford without adequate insurance. But he's just expressing where the Republican priorities are, that is, if it doesn't bring more money into their own fat pockets, they don't vote for it.
Posted by gab , Oct 17, 2007 6:02PM
"And in the last 6 years they have completely destroyed Reagan's legacy of fiscal conservatism and handed power over the the Dems on a platter.
Would that be the same Reagan who led the US to the largest peacetime deficits in its 200 year history?
Posted by The Doctor , Oct 17, 2007 6:42PM
5:41,
Without the for profit medical system you wouldn't be able to bitch about how much all these medical treatments cost, because they wouldn't exist. Educate yourself about the percentage of medical patents worldwide that come from the U.S. Also, nobody is turned away from emergency treatment. There are plenty of socialist countries in which you can live. Why don't you move to one, and stop trying to screw up the US?
Posted by Anonymous , Oct 17, 2007 7:22PM
To "The Doctor"
The US is already screwed up in health care, it doesn't need my help.
As a "Doctor" do you ever worry about a patient of yours who will have to forgo necessary medications because of cost? Or do you worry more about when is the next time the drug company is going to give you a free lunch?
Just checking, Doctor.