Supply Side Tax Cuts [Archive] - Front Office Football Central

Ksyrup

11-06-2003, 02:57 PM

Here is my admittedly rudimentary view - and that's all I can call it, is my view - of these issues:

"Trickle Down Economics" is actually not a correct term, and this "theory" is not an scholarly economic theory, to my knowledge. In my view, it actually works just the opposite of what it is described as. When a business receives a tax cut, that tax cut does not automatically result in more profits for a business. In order to generate more profits, businesses must produce more goods or provide more services. They do that by building new establishments, hiring more people, etc., in order to generate the profits. Thus, it seems to me that the first beneficiaries of a tax cut for businesses are the "middle class" workers. But even that doesn't occur overnight. Business are necessarily wary of running out and hiring people on the first signs of a recovery, until they see that there will be a sustained increased demand. And then they act. Profit is generated over time by the increased productivity brought about by the tax cuts.

In my opinion - and to agree with others on this subject, there's really no way to de-politize this issue - what occurred in the 80's as far as the deficit goes, is that Reagan was unable to control the spending approved by Democrats. Tax revenues increased in the 80's as tax rates went down - I don't think anyone would dispute that. Spending increased, though, because Democrats controlled the legislature (except for a small period of time in the Senate immediately after Reagan was elected). That wasn't part of the plan.

But of course, good compromise ends up pleasing no one, so the Republicans got the tax cuts they wanted, and the Democrats got the spending they wanted, and taken together, we got deficits. I'm not here to deride those who believe in and support an increased role for the federal government, but the fact of the matter is, taken together with the tax cuts, we were going in two different directions at the same time, and that was a recipe for disaster. Only in that respect do I believe the tax cuts did not accomplish what they were intended to accomplish. That said, I don't think we've seen what will actually occur if spending is kept in line with the increased revenues generated by tax cuts.

I actually think Clinton did what was necessary to bring that under control, and for that, I give him credit. What I do not give him credit for is creating the prosperity of the 90's. It is quite obvious that much of that prosperity was a sham. The increased "productivity" that we saw in the 90's consisted largely of dot com's employing scads of people to sit around and twiddle their thumbs, dreaming up money-making ideas that never had a chance of succeeding. It was a fluke.

And dealing with the effects of the "burst bubble" is what Dubya has had to do. The economy's problems were not Clinton's fault, and they weren't Dubya's fault. Businesses got fat, and individuals made enormous amounts of money, on virtually nothing substantive. It's my opinion that the accounting scandals occurred due to corporations doing anything they could to appear as if they were still productive enough to justify their obviously (in hindsight - believe me, I lost a lot like most people) inflated stock prices. How do you top the prosperity of the 90's, especially when it wasn't justified to begin with? You lie about it.

Having said all of that, and given the state of economy over the past couple of years, I think the time is ripe for the tax cuts we are getting. And I think we'll see the economy come back to shape - although I freely admit that the "what goes down, must come up" idea, which benefitted Clinton on the heels of the 1990 recession, was bound to help Bush, nearly regardless of what economic policy he chose to follow. These things go in cycles, and absent a path of willful destruction, there's not much that can be done to stop a recession from occurring, or to prevent a recovery. It's just the degree to which each can be minipulated.

That's my admittedly biased take on things.

Butter

11-06-2003, 02:58 PM

The Heritage Foundation? Really, sianews?

While you're at it, go to the Right to Life foundation web site for a fair and balanced look at abortion. :rolleyes:

Joe Stallings

11-06-2003, 03:05 PM

....is that Reagan was unable to control the spending approved by Democrats...spending increased, though, because Democrats controlled the legislature...

Huh?

Ksyrup

11-06-2003, 03:07 PM

The legislature controls the budget, not the President. He got his tax cuts, they insisted on their spending programs. He was not in a position to dictate both tax cuts and spending in-line with the revenues being generated by those tax cuts, because the opposing party controlled the budget.

QuikSand

11-06-2003, 03:08 PM

Nutshell:

Taxes make it more costly to do things. Taxes applied when things are bought and sold make those sales more expensive. Taxes on our income make us have to earn more to get the pay that we desire, and make it harder for employers to hire people.

When we reduce taxes on almost anything, the likely result is that these lowered burdens will have some positive effect on the thing being taxed less. Lower taxes on, say, dividend income is likely to mean that more people will be interested in buying stocks that might pay dividends. It's not that complicated.

There is an inevitably political debate when a change in tax policy is proposed. Part of this hangs on the human nature respone to simply look at what we do now, how the proposal is difference, and focus on the "change" being considered. Therefore, political dialoge frequently hinges on "who is getting the tax cut" - meaning what economic strata are those most affected.

Supply-side economic theory, simply put, resides in the belief that wealthy and successful people with high incomes would benefit from reduced taxes, and would then more productively use the resources that they otherwise woudl have been paying in taxes. This theoretical reinvesment might take the shape of expansion of businesses (thereby hiring new people to jobs), and investment in capital markets (providing other businesses resources to do the same sort of thing). The "trickle down" theory is that if wealthy people benefit from a tax cut, they will do things that will stimulate the economy as a whole, and the rising tide will lift all boats, so to speak.

Does it work? There's no easy answer. Reducing tax rates on higher income brackets (a major plank of the Reagan tax cuts in the 1980s) certainly eliminated a long list of perverse incentives created by the American tax structure. Did wealthy people really change their behaviors as a result? It's hard to say. Did lower income people really benefit from higher income tax cuts? Again, it's hard to really say. There's no doubg that the economy of 1983 through 1987 was much stronger than that of the several years that preceded it, but that begs our net question...

Does the setting of tax rates and the spending of government budgets (usually lumped together as "fiscal policy" and considered something diffrent than "monetary policy," which is about seting interes rates and money supply) really translate to economic success or failure for the economy as a whole? Another one that's tough to answer. There are competing theories on this -- and reaffirming the inextricable link between economics and politics, many people's opinion on this question seems to pivot on whether you are talking about Messrs. Reagan or Clinton, for instance.

Maybe all this is too simple for what you wanted... but based on some previous conversations here about taxation, I thought it might be useful to have a tiny primer, without getting into argument and opinion.

Fonzie

11-06-2003, 03:10 PM

Originally posted by Ksyrup
The legislature controls the budget, not the President. He got his tax cuts, they insisted on their spending programs. He was not in a position to dictate both tax cuts and spending in-line with the revenues being generated by those tax cuts, because the opposing party controlled the budget.

I was always under the impression that a huge chunk of the spending increases (and thus deficits) in the 80's were due to the massive boosts in defense spending requested by Reagan.

dawgfan

11-06-2003, 03:51 PM

Bishop, I think it's important to realize that analyzing macro-econimics is a task at least as complex if not moreso than predicting the weather.

What we're talking about is a system that extends worldwide with factors across the spectrum having a huge impact. Factors such as worldwide economic situation, war threats, terrorism, social factors, technological breakthroughs, etc. Trying to tease out the various elements that up macro-economic behavior is a near-impossible task given the scope of what is involved.

I guess what I'm trying to say here is that attempting to determine the effect of a particular economic policy by a President and/or congressional effort is very difficult to do with a high degree of accuracy. Simply looking at U.S. economic policies and saying action A was enacted at X date and by Y date B was the result does nothing more than show possible correlation, and certainly doesn't prove by itself causation.

Ksyrup

11-06-2003, 03:53 PM

Originally posted by Fonzie
I was always under the impression that a huge chunk of the spending increases (and thus deficits) in the 80's were due to the massive boosts in defense spending requested by Reagan.

Not quite. The amount spent on defense, as an amount of money in and of itself, did dramatically increase. However, as a percentage of gross domestic product, it only rose slightly between 1980 and 1990. And compared to defense spending in 1960 and 1970, the 80's represented a significant decline. What dramatically increased was spending on social programs.

Federal Outlays as % of GDP (http://home.netcom.com/~rdavis2/outgdp04.html)

IMetLyleAlzado

11-06-2003, 04:11 PM

Regan did get his increases in the Defense budget, but he never got the increases that were proposed, the Democratic Congress always cut some, but there was an increase in the budget. Reagan's budget proposals would have resulted in even greater Defense increases.

In addition to these increases were similar growths in domestic spending by the Democratically controlled Congress. Net effect was increases all across the board.

During the Clinton administration the opposite occurred, end of the Cold War, defense budget slashed, cuts actually began during Bush administration but delayed by the Persian Gulf War. (I benefited slightly from this, retired early from the Army during the drawdown) Congress being Republican controlled during this time controlled to some extent the growth of domestic spending. Coupled with the economic boom from hyper inflated Tech/dotcom stocks resulted in a balanced budget.

Samdari

11-06-2003, 04:29 PM

Originally posted by Ksyrup
The amount spent on defense, as an amount of money in and of itself, did dramatically increase. However, as a percentage of gross domestic product, it only rose slightly between 1980 and 1990. [/URL]

This statement is kind of subjective, no?

The measure you are referring to, by your own link, is 5% in 1980, but around 6% for most of the 80's. Some of this would consider this to be a 20% increase, which is quite substantial. It dipped back down to 5% in 1990, thus 'hiding' the fact that this number was higher during the 1980's.

Although, since I am an army civilian employee, I encourage you to all vote for candidates who seem to want to spend the most on the military.

Ksyrup

11-06-2003, 04:33 PM

The statement may be subjective, but the numbers aren't subjective, they are what they are. You would see a 20% increase, I see a drop from 8% to 5.2% between 1970 and 1990. Even if you look at mid-80's, it's still about the same % as it was in 1973 or so.

Samdari

11-06-2003, 04:39 PM

I agree that military spending has overall gone down this century. I just think that the pointing to the fact that since the number was roughly equal in 1990 and 1980 as proof that military spending did not increase during Reagan's term is deceptive. During every year he had influence over the budget, military spending was higher than when he found it, by any measure.

Buccaneer

11-06-2003, 06:56 PM

QS: Good post, as usual.

Arles

11-06-2003, 07:04 PM

One main piece of Reagan's tax policies that never gets much play is the fact that these tax cuts helped "invent" venture capitalists. When Reagan took office, the top Marginal tax rate was 70%. Therefore, the "rich" had little incentive to invest their money in growing businesses, and instead tried to find tax shelters to try and hide this money from the government. In essense, many of these tax shelters amounted to hiding money under your mattress and did little to help the economy as they were often moved out of the country or hidden in low-yield (but tax-friendly) accounts.

Now, what most people know is that Reagan cut these 70% rates in half to 35%. But, what many people forget is that he also eliminated many of the tax shelters that the rich routinely relied on to avoid paying taxes altogether. This forced them to invest in the free market and actually pay taxes. It is also a major reason why the % of total tax revenue paid by the top 10% rose from 48% in 1981 to 57.2% in 1988, despite the 50% cut in rates.

So, since most of the rich were used to "socking money away" in long-term tax shelters, or losing it altogether in taxes in the early 80s, they suddenly found themselves with a great deal more "liquid" money in the mid to late 80s. Many then started investing this extra cash in small businesses like Oracle and Microsoft. Their logic was that if someone had a good idea that could work, putting a small amount of initial capital down to help them get in the market could end up paying them back 10x to 20x by the time the company got going.

And that practice (that started in the mid to late 80s) was a main reason for the tech boom in the 90s. Without Reagan's cutting of the top marginal rates and his elimination of many of these tax shelters, who knows if the capital would have been there to fund the Microsofts in their infancy.

Arlie

BishopMVP

11-06-2003, 07:17 PM

Thanks for all the responses. I think I may have undersold my own knowledge to some degree, and also expected a clear answer on a very complicated and arguable point.

Originally posted by Ksyrup
When a business receives a tax cut, that tax cut does not automatically result in more profits for a business. In order to generate more profits, businesses must produce more goods or provide more services. They do that by building new establishments, hiring more people, etc., in order to generate the profits. Thus, it seems to me that the first beneficiaries of a tax cut for businesses are the "middle class" workers. But even that doesn't occur overnight. Business are necessarily wary of running out and hiring people on the first signs of a recovery, until they see that there will be a sustained increased demand. And then they act. Profit is generated over time by the increased productivity brought about by the tax cuts.

Correct me if I'm wrong, but it seems like here you're confusing profits with revenues. If a business generates $1,000,000 a year in revenue (all numbers picked out of thin air) and pays $250,000 in taxes, a reduction in the tax code that results in the business paying $200,000 in taxes would seem to generate $50,000 in profit immediately. This would likely lead to the business expanding in the manner you described and creating more jobs down the line after productivity rises (similar to what is happening now) and increasing both revenue and profit.

Originally posted by Quiksand
Does it work? There's no easy answer. Reducing tax rates on higher income brackets (a major plank of the Reagan tax cuts in the 1980s) certainly eliminated a long list of perverse incentives created by the American tax structure. Did wealthy people really change their behaviors as a result? It's hard to say. Did lower income people really benefit from higher income tax cuts? Again, it's hard to really say. There's no doubt that the economy of 1983 through 1987 was much stronger than that of the several years that preceded it, but that begs our next question...

Does the setting of tax rates and the spending of government budgets (usually lumped together as "fiscal policy" and considered something different than "monetary policy," which is about setting interest rates and money supply) really translate to economic success or failure for the economy as a whole? Another one that's tough to answer. There are competing theories on this -- and reaffirming the inextricable link between economics and politics, many people's opinion on this question seems to pivot on whether you are talking about Messrs. Reagan or Clinton, for instance.

That's a really nice summary there, and seems to be a lot of what I was trying to get to but couldn't easily put into words. My line of reasoning for starting this thread was:

1. I'm unsure of whether Government Policy can really affect the economy at all. There is some evidence it is cyclic, and some that it is really technological advancement that spurs productivity. These things are not mutually exclusive of each other or other factors.

2. In years directly after Reagan and Bush enacted the so-called "Supply-side" tax cuts, Reagan to a much larger extent, the economy improved, so this either helped spur or at the least this has no effect on the economy.

3. Until shown otherwise, this appears to be the best fiscal policy and we should continue using it.

So in the end the question I have is whether this line of reasoning is true. It may end up that the answer is closer to dawgfan's point that there is too much uncertainty to determine anything empirically, but shoudn't we at least be able to have some idea?

QuikSand

11-06-2003, 07:30 PM

Originally posted by BishopMVP
2. In years directly after Reagan and Bush enacted the so-called "Supply-side" tax cuts, Reagan to a much larger extent, it seemed to help the economy, so this either helped spur or at the least this has no effect on the economy.

This is a non-sequitur. It is also certainly possible that the mid-80s economic recovery would have been more robust had the government pursued a different fiscal policy-- either a differently-directed tax cut, or perhaps nothing at all.

Many would argue that the Reagan tax cut was responsible for the recovery, and maybe it "seems" that way -- but we simply cannot prove it. If you want to posit a firm logical statement, then you have to do better than that.

Glengoyne

11-06-2003, 07:38 PM

I have always been a proponent of the idea that the president really can do very little to affect the economy. I believe the evidence shows that tax revenue increased after Reagan cut taxes, but whether the tax cut was directly responsible for the gains is pretty unclear. I think the economy surges and dips. I think the economy is cyclical. According to my theory Reagan and Clinton got lucky. They were simply president at the right time. Carter, and Bush Sr. were unlucky. Bush Jr. may make out ok, but that is left to be seen.

--edit to change my effect to affect

Blackadar

11-06-2003, 07:45 PM

"Voodoo economics" - George Bush.

It's all just simple supply and demand curves.

BishopMVP

11-06-2003, 07:47 PM

Originally posted by QuikSand
This is a non-sequitur. It is also certainly possible that the mid-80s economic recovery would have been more robust had the government pursued a different fiscal policy-- either a differently-directed tax cut, or perhaps nothing at all.

Many would argue that the Reagan tax cut was responsible for the recovery, and maybe it "seems" that way -- but we simply cannot prove it. If you want to posit a firm logical statement, then you have to do better than that.

Sorry, I chose my words poorly there. It has been edited from "it seemed to help the economy" to "the economy improved." Now this could be argued, but I think the consensus is that it is true.

Originally posted by Glengoyne
--edit to change my effect to affect

I was debating my uses of the two for about 10 minutes and then gave up.

BishopMVP

11-06-2003, 07:50 PM

Originally posted by Blackadar
It's all just simple supply and demand curves.

At least when it comes to my courses that's true. In my MicroEcon course, anyone who understands that and can read a graph can get a 90. Learn 1-2 definitions a week and you get a 100.

Glengoyne

11-06-2003, 07:51 PM

The rule I use on effect and affect is that affect is usually a verb. Effect is usually a noun.
Effect can be a verb though, as would have been the case if I had typed "The president can do little to effect change in the economy".

Jon

11-06-2003, 08:13 PM

Originally posted by Ksyrup
The legislature controls the budget, not the President. He got his tax cuts, they insisted on their spending programs. He was not in a position to dictate both tax cuts and spending in-line with the revenues being generated by those tax cuts, because the opposing party controlled the budget.

BUT the president writes the budget and submits it. That is the starting point in any bugetary process on the national level. Congress doesn't make the budget.

gstelmack

11-06-2003, 08:23 PM

Originally posted by Jon
BUT the president writes the budget and submits it. That is the starting point in any bugetary process on the national level. Congress doesn't make the budget.

I was in High School during the 80's, and very clearly remember all the Capitol Hill stunts with a gurney and people in scrubs rushing Reagan's budgets up the steps with the clear "Dead on Arrival" message being hammered home...

I think the economy chugs along on normal cycles, heading up then down. As was said elsewhere, Presidents just get lucky if it's on the upswing or at a peak when it comes up for election time.

Buccaneer

11-06-2003, 08:26 PM

Originally posted by gstelmack
I was in High School during the 80's, and very clearly remember all the Capitol Hill stunts with a gurney and people in scrubs rushing Reagan's budgets up the steps with the clear "Dead on Arrival" message being hammered home...

I think the economy chugs along on normal cycles, heading up then down. As was said elsewhere, Presidents just get lucky if it's on the upswing or at a peak when it comes up for election time.

Yep. Good call.

Farrah Whitworth-Rahn

11-06-2003, 09:09 PM

Alright, this is my area of expertise so I want to say a few things, and add to the conversation if I may.

First, the Regan tax cuts of the 1980's were tax nuetral. That means that while it cut one tax, it raised another so the net effect to the treasury from the change in rate was $0. All Regan did was shift the burden of taxation from individuals to corporations. Any additional revenue to the treasury was considered gravy.

Second, before the big act of 1986, corporations were paying an absurdly low tax rate compared to the individual rates. Wealthy families would form corporations and try to place as much of their wealth in the corporation as possible. With the '86 act, the rates flipped, wealthy families were trying to pull the money out of the corporations (taxed as a dividend to the individual when it is - remember double taxation?) to grow their wealth at the lower, individual tax rates. I think, in some respects Regan and his advisors new this was going to happen, and could afford to make a tax nuetral tax plan.

Third, while I define myself politically on the right side of the isle, BOTH parties use the Internal Revenue Code as a way to promote their social agenda. For example, did you know that an abortion is tax deductible as a medical expense? Or that you get a special federal tax credit for buying an electric hybrid car? Those are a few, and there are thousands of others that I can site. IMO, the tax code should fund the basic functions of the government like defense and public safety. Not a politicians pet project. Can't complain too much though, after all the tax code is the accountant's full employment act ;).

Ok, that's all I wanted to say. Thanks for letting me throw my $.02 in, I will go back to lurking now.

JPhillips

11-06-2003, 10:10 PM

A few points.

1) We have had one great quarter. This is by no means a bad thing, but we need to see economic numbers for at least a year to really see if things are improving.

2) Most of the "supply side" tax cuts have yet to take effect. Most of what has taken effect are tax cuts to middle class and small business. The top marginal cuts and the estate tax elimination and the dividends cuts are either still to come or have only been implemented in a small percentage.

3) Its frustrating to see the Reagan tax cut and post boom sighted as proof of supply side theory. Clinton raised taxes and there was a boom. FDR raised taxes and the economy picked up. Taxes were sky high during Eisenhower. There is really no direct evidence of tax policy and the effect on the national economy. Anyone who tells you differently is probably trying to score political points.

4) If you can figure out if these tax cuts or any other legislative tinkering directly effects the national economy start brushing up on your Nobel acceptance speech.

Buccaneer

11-06-2003, 10:12 PM

3) Prove it.

JPhillips

11-06-2003, 10:28 PM

Prove what? That the economy has had boom and bust cycles that don't correlate to supply side tax cuts?

QuikSand

11-07-2003, 02:42 AM

Okay, here's one to add to the mix.

If you're stuck on the argument that "tax cuts directed to higher income people will boost the economy," maybe we need another entry into that race.

How about this one: the Earned Income Tax Credit. This is, simply put, a program designed to use the tax system to provide extra incentive for lower income people (particularly those with children) to go to work, rather than to decide not to work. You only are eligible if you are in a fairly low income group, but you are actually earning the income that you make by working.

Now, this is the opposite of a "supply side" tax cut -- this is a stimulus that provides stronger incentives to the "demand side" of the economy -- it provides a much stronger incentive for lower income people to decide to work. And here, you have a case where the people in question are facing a real-life decision-- it can be awfuly difficult to give up an unemployment check or other benefit and to find day care for your kid(s) in order to go get a fairly low-paying job. The EITC might very well be the difference between it being economically worthwhile and not to a given head of a household.

This is the kind of alternative proposal that you may need in order to consider whether the initial statement is true (that supply-side tax cuts for the wealthy are a benefit to the economy). This is a tax reform that also would cost the government revenues, but it targets its effect differently. However, the logic that this also would have a potentially strong stimulative effect on the economy is pretty strong here as well.

QuikSand

11-07-2003, 02:44 AM

Originally posted by Glengoyne
The rule I use on effect and affect is that affect is usually a verb. Effect is usually a noun.
Effect can be a verb though, as would have been the case if I had typed "The president can do little to effect change in the economy".

Fine logic.

The overwhelming share of people who can't separate the two words will also have no occasion to use the verb "effect," making it even simpler to just drop the exceptions to the general rule.

If you want to fine tune your list of exceptions even further, then include the fact that there is a noun "affect," referring to one's appearance... but that's also pretty seldom used.

Abe Sargent

11-07-2003, 10:45 AM

Fun read.

-Anxiety

Glengoyne

11-07-2003, 01:20 PM

Originally posted by QuikSand
Fine logic.

The overwhelming share of people who can't separate the two words will also have no occasion to use the verb "effect," making it even simpler to just drop the exceptions to the general rule.

If you want to fine tune your list of exceptions even further, then include the fact that there is a noun "affect," referring to one's appearance... but that's also pretty seldom used.

I was actually going to bring up the usage of Affect as a noun, but for the life of me couldn't come up with an example.

Riggins44

11-07-2003, 06:17 PM

We need more free trade agreements to fix our economy. ;)

sperril

11-07-2003, 09:07 PM

Here is my take:

First I'll dispell some falsehoods.

The wealthy do not employ people. (With the exception of the staff for their mansions anyway.) Corporations employ people. Warren Buffet explained it best. He said that cutting his taxes would not create a single job. Cutting his corporation's taxes might. I say "might" because it is a little more complicated than that. For example, if GM is having trouble selling cars, they are not going to employ more autoworkers no matter how much money you give them. They simply are not going to employ people to stand around and do nothing. This is why supply side economics is generally regarded as a failure.

Another myth is that one party or the other favors lower federal spending. Neither party actually has any kind of decent track record when it comes to spending. The only thing they differ on is what to spend the money on. Reagan, for all his "small government" talk, never once asked for a budget that was smaller than what the Democratic congress offered. The big difference is that Reagan wanted defense money and the congress wanted social program money.

Yet another myth is that government funds fall into some kind of black hole when the government spends them. Every dollar that the government spends creates as many jobs as a dollar spent by anybody else. The federal government is the single largest employer in this country. Add that to the number of people who work in industries that are directly government funded, (such as defense contractors and research institutions,) and the number is truly astonishing. The only surefire way to increase employment is to increase federal spending.

Federal spending is also not a zero-sum game. The government does not have to take in money to spend it. Unlike you and me, the government can go into almost unlimited debt. It only has to pay the interest. Of every dollar collected in taxes, about 35-40 cents goes to paying off the interest on the national debt. This does not reduce the debt in any way. For a chart on how much money each President taxed, spent, and how the deficit was affected check out this link:

http://www.geocities.com/CapeCanaveral/Launchpad/5577/philo/fedbgt.htm

Deficit spending is not always a bad thing. Reagan ran up the largest deficit since WWII. You will also notice that unemployment was low. As I've said earlier, spending federal money is a great way to increase the number of jobs. Reagan also spent so much money that the Soviet economy could not keep up and eventually collapsed. A heavy deficit was a small price to pay for the defeat of Soviet Communism. Bush Sr. was the eventual loser in that he was stuck with the job of reducing the size of the military to coincide with the end of the cold war. The result of spiraling deficits and lower defense spending was an economic recession.

A good way to think about deficit spending is that the government is giving more money back to the economy than it is taking out of it. A budget surplus sounds great on paper, but in actuality it means the government is taking more money out of the economy than it is adding to it. This is why you will see an economic boost in the near future. Bush Jr. is spending money at a much higher rate than he is collecting it.

Statistics can also be great liars if used improperly. We always hear that the top 5% of taxpayers pay 40% of all taxes. This would sound grossly unfair if we didn't know another fact: The top 5% of taxpayers earn about 40% of the income. If they have a higher rate than the other 95% of taxpayers, they should be paying well more than 40% of the taxes. Truth is that the rich have access to tax shelters that the middle class doesn't. They don't actually pay a higher percentage than the average taxpayer. The state of Minnesota recently found that the less money you make in that state, the higher percentage of your income is paid in taxes.

It would be nice to get rid of the national debt. If it was paid off today, we could immediatly slash taxes by 40% across the board without affecting federal spending at all. While this is a worthy goal, we also must understand that when the economy is bad, like it is right now, deficit spending must be allowed to correct it. Bush may be doing the wrong thing when he cuts the top marginal rates, but he is doing the right thing when he spends money like hell.

Glengoyne

11-08-2003, 02:27 AM

Originally posted by sperril
Here is my take:

First I'll dispell some falsehoods.

.... This is why supply side economics is generally regarded as a failure.
....

Statistics can also be great liars if used improperly. We always hear that the top 5% of taxpayers pay 40% of all taxes. This would sound grossly unfair if we didn't know another fact: The top 5% of taxpayers earn about 40% of the income. If they have a higher rate than the other 95% of taxpayers, they should be paying well more than 40% of the taxes....They don't actually pay a higher percentage than the average taxpayer.
....

It would be nice to get rid of the national debt. If it was paid off today, we could immediatly slash taxes by 40% across the board without affecting federal spending at all.

Some good points, but a few things I'd like to comment on while I try to type myself to sleep.

First, Supply side economics isn't generally regarded as a failure. There are plenty of economists, who whole heartedly ascribe to this theory. As was mentioned earlier in the thread The evidence of the 80s can be piled up to show how well supply side economics works. It was also mentioned earlier, that while that evidence exists, it doesn't necessarily prove the theory. One thing to remember about economics is that it isn't a hard science. Just as there are economists who believe supply side economics work, there are those who dismiss it as completely without merit.

Second, I think the top 5% pay MUCH more than 40% of tax revenue. I think the top 1% pay nearly that much of the total taxes collected. The top 5% certainly pay more than half of all taxes. As you point out this is in no way unfair, they earn the money after all they should pay their fair share. By that token they should also get the same breaks. Meaning if taxes are cut 1% across the board, then the fact that someone in the infamous top 1% of tax payers can buy a lexus with his savings, while I get a car payment out of mine shouldn't piss anyone off.

Thirdly, People in higher tax brackets absolutely pay a higher percentage of their income in taxes. Income tax is a graduated tax, the more you earn(the higher the tax bracket), the higher percentage you pay(on your income in that bracket). While I agree that there are plenty of loopholes and writeoff that wealthy people have access to, they still have to arrive at an adjusted gross income. Using that adjusted gross figure, they do in fact pay a higher overall rate than those of us not in the top few percentiles. I believe the top 10% pay an aggregate rate of about 20%, while the overall aggregate percentage is under 15%.

I am certain you can type "income tax top percent" or somesuch into a google search, and find plenty of charts and such that will provide the hard numbers. I would do so myself, if I wasn't downloading the CM demo on a 56k line.

Oh and lastly, I would love to pay down the national debt, even at the expense of some higher taxes. I would actually like to pay the piper sooner rather than later. As an aside. I was gloriously embarrased here a couple of months ago when I said I thought the debt had been largely paid off with the tax revenue of the nineties boom. I remembered the national debt clock running backwards, and honestly thought the debt was down to about a measly trillion dollars. Oops 6 trillion and pushing 7. The national debt was pared down by 100 billion dollars with the surplus of the ninties.

sperril

11-08-2003, 03:03 AM

Best numbers I can come up with are here:

http://www.cbo.gov/showdoc.cfm?index=1545&from=4&sequence=0

According to CBO numbers, from 1977 to 1995 the top 1% paid between 17% (in 1981) and 29% (1995) of all federal income taxes. If we look at all federal taxes, (not just income,) than the top 1% paid between 13% (1981) and 20% (1995) of all federal taxes. During this time they made between 9% (1977) and 14% (1995) of all income.

I'll chart out some specific years.

1977

top 1%
income 9%
income taxes 20%
all fed taxes 16%

top 5%
income 22%
income taxes 38%
all fed taxes 32%

top 10%
income 32%
income taxes 50%
all fed taxes 43%

1987

top 1%
income 12%
income taxes 24%
all fed taxes 16%

top 5%
income 25%
income taxes 43%
all fed taxes 32%

top 10%
income 35%
income taxes 56%
all fed taxes 43%

1995

top 1%
income 14%
income taxes 29%
all fed taxes 20%

top 5%
income 27%
income taxes 49%
all fed taxes 36%

top 10%
income 38%
income taxes 61%
all fed taxes 48%

Chief Rum

11-08-2003, 03:50 AM

sperril, wasn't your point that the wealthy were paying taxes commensurate with their income, as a percentage of the all taxes? Your numbers there seem to contradict you. They seem to point out what Glengoyne just said, that the rich pay more than their fair share, as a percentage.

CR

sperril

11-08-2003, 04:38 AM

Second, I think the top 5% pay MUCH more than 40% of tax revenue. I think the top 1% pay nearly that much of the total taxes collected. The top 5% certainly pay more than half of all taxes

This is what the numbers are contradicting. The top 5% do not "pay more than half of all taxes." The most they paid in the three years I covered was 36%.

I may have thrown some people off with my Minnesota study remark. I should have qualified it by saying that this was in regards only to state taxes in that particular state.

If you consider a flat-tax to be fair, then our system would be unfair to you. The problem is the definition of the term "fair."

For example, I don't use our interstate highway system in the generation of my income. A corporation like General Motors would be unable to function without it. Besides lowering demand for automobiles, it would also make transportation of their manufactured goods far less efficient.

The reason that the rich pay less total tax than they do income tax (by percentages) is because of certain taxes in our system that don't take income into account. When I fill up my tank with gas, I pay a federal excise tax on it. If Bill Gates fills up next to me, he pays the exact same dollar amount of excise tax that I do. His income is irrelevent. The same goes for tobacco, alcohol, etc....

My penalty for speeding is equal to a couple of day's pay. (I am a college student who works part time.) Bill Gates will make more money in interest while waiting for the ticket than he will have to pay for it. In a fair system, why is my penalty for speeding greater than his?

For reference, these are the tax brackets for single filers:

Income income + this of income
tax % over

$0 - $6,000 - 10% $0
$6,000 - $27,950 $600.00 15% $6,000
$27,950 - $67,700 $3,892.50 27% $27,950
$67,700 - $141,250 $14,625.00 30% $67,700
$141,250 - $307,050 $36,690.00 35% $141,250
$307,050 $94,720.00 38.6% $307,050

With these differences in amount of income taxes owed, wouldn't you think that a vastly higher percentage of fed income taxes would be covered by the rich? That is where my statement about tax shelters comes in. The rich are paying a higher percentage of their income as taxes. It's just that it isn't by as much as we think, and not nearly what it ought to be considering the far larger brackets they are in. Is the system unfair to the rich when compared to a flat tax? Yes. Is it as unfair as it is designed to be? No.

What I get tired of is these silly numbers being used to justify tax cuts that are weighted to the rich.

David Horowitz: "95 percent of your taxes are taken from the five percent of people who drive your economy, and then you accuse them of just talking money."

Sean Hannity: "the top one percent pays 37 percent of the taxes"

Here is a chart from the New York Times. I cannot vouch for the source of any of this information. The chart figures in excise, state, and local taxes and computes the average tax burden by income groups:

http://graphics7.nytimes.com/images/2003/01/20/business/21DOUBLE.chart.jpg

Glengoyne

11-08-2003, 12:29 PM

Well Sperril, Your charts seem to bear out what you indicated, but I knew I wasn't just imagining seeing charts that more reflected what I was saying. These charts (http://www.taxfoundation.org/prtopincometable.html) seem to be closer to what I was referring to. Now yours do come from the CBO, while the chart I linked to was attributed to IRS data. Why they are different, is anyone's guess.

You can feel free to discount the charts I linked because they come from a possibly biased source(taxfoundation). I really dont' know anything about them other than I found them on Google, and there was a headline proclaiming that the income tax results from 2001 indicate a higher degree of progressivity. So they seem out to contradict your premise right off the bat.

I personally wouldn't mind a flat tax, but then a lot of poor people would be paying a HELL of a lot more taxes than they are now.

You mention a couple of quotes from Hannity and Horowitz. I would suggest I found what source Hannity used for his number, and I can only guess that Horowitz is dyslexic, and thought that 95% of taxes number came from the top 5% of tax payers as opposed to the top 50%.

What I get tired of is people who completely disregard the numbers, even yours, and proclaim that any tax cut proposed by a republican is a tax cut for the rich.

wbonnell

11-08-2003, 02:44 PM

(warning: this is a vacuous post that doesn't offer any additional insight)

Wow! I *think* I've learned a bit about economics, but since I'm untrained in economic/statistical theory, I have no way of verifying these numbers. It looks to me that, much like schools of philosophy, all sides seem to be able to adequately defend their positions. Since there doesn't seem to be any comprehensive way to prove which theory is optimal, perhaps we should change our focus to what is ultimately "fair" (irrespective of the benefit to the economy). Of course, that slope is no less slippery...

QuikSand

11-08-2003, 06:21 PM

Since we're on the topic, I'll mention that the matter of tax incidence (the study of who actually pays taxes) is an area that I personallly find rather fascinating.

There is always a debate about "how far to go" in assessing tax incidence. For instance-- one of sperril's first comments above is that it's corporations who hire people (for the most part). Well, in assessing taxes and their incidence, we have a decision to make-- do we look at corporate taxes and simply stop there, or do we try to find out what individuals end up bearing those burdens? If we do the latter, then we have to make some assessments-- are corporate taxes borne by a business's owners/shareholders, by its customers, or some combination of both? It can be challenging.

We look at something like a simple sales tax, levied by nearly every state. We generally would agree that this tax is paid by the customer -- in most states, the tax is even required to be stated on the receipt that we get, separately itemized on top of the purchase price. The retailer, in this case, is really just acting as a "collector" for the tax, on behalf of the state government. The taxpayer is really the consumer.

It gets harder, though, when we talk about a tax like the property tax - assessed on the value of real property (land and buildings). What about the case of an apartment building? Perhaps it is owned by a business, or even by an individual? If the government taxes that property -- who really pays that tax? Sure, it's the owner who writes a check to the government for the amount due - so it's the owner tho remits the tax, but is that really who bears the burden? Most analyses (but not all) suggest that it's really the renters of apartment buildings who end up bearing the burden of property taxes -- that the taxes just get "passed through" to them as customers of that business. This is not an indisputable assertion, but one that helps reveal how challenging true tax incidence analysis can be.

And getting to wbonnell's point -- understanding incidence (who pays taxes) is probably a pretty impoprtant underlier to understanding fairness (who ought to).

Plus, every time we take a simple snapshot of tax statistics and start to talkk about what is fair or progressive, there is usually a countervailing argument about what tax system provides the best incentives... which is essentially ignored by the attention we can pay to a static calculation. Always another bend in the road with this stuff...

wbonnell

11-08-2003, 06:27 PM

In my mind, the question that begs asking is:

Is taxation a necessarily complex concept or is it rendered complex by a tax law?

QuikSand

11-08-2003, 06:40 PM

Originally posted by wbonnell
In my mind, the question that begs asking is:

Is taxation a necessarily complex concept or is it rendered complex by a tax law?

There's a long answer to that, of course, but I reckon the simplest answer is: it doesn't have to be so compliicated, but there are some logical reasons why it is.

Simply put - let's say that policymakers want to do something that will give an incentive to certain businesses to go out and hire people (the kind of thing that we've been talkinng about in thiis thread). One option is to put some money into the government's budget for this program -- essentially to have the government write checks to the businesses who qualiify for the benefit by doing the things that we hope they will (like hire new people).

An alternative way to do the same thing is to recognize that those businesses are already paying the government taxes - so why not avoid the notion of having our checks to one another cross paths in cyberspace, and instead just give the business a credit against the taxes that they woudl have been paying. Seems simpler.

But there's another, perhaps more sinister, benefit to this as well. If you have a "spending program" to do this (as I first envisioned), then it has to go through an annual budgeting process -- every year the policymaking bodies have to decide whether this is the best thing to be spending money on, and whether it should fit into the budget. Plus, you have all the anti-government types takinng potshots at the "bloated government" you've created, even if it's in the name of pro-business sorts of things.

By going the "tax credit" route - you miss all this stuff. Put the tax credit system into law, and it accomplishes the same things as the cash giveaway program we originally thought of, but it doesn't require us to actually give away the cash, it just depletes the receipts we take into the government. Voila! You've shrunk the size of government, avoided tha annual defense of your program's budget, and you've accomplished the incentive program that you wanted in the first place. It's a very tempting path to take, as you can see (I hope).

Extend this kind of logic, and you can understand how liiterally thousands of well-intentioned policymakers have opted to pursue making changes to tax law as the way of choice to effect the kinds of incentives or rewards that they seek. Note, I didn't say "federal government" anywhwre in here -- those at lower levels are guilty of this, too, but it's the federal government and the monolithic federal tax code that (rightfully) gets the most heat.

wbonnell

11-08-2003, 07:00 PM

And then we're back to arguing the function or role of a government, aren't we. Should a government serve the people or the corporation? (Or both?)

Certainly, the goverment can offer corporations tax relief under the pretense of serving the people, but, on the surface at least, it appears disingenuous.

In my opinion, the tax code is out of control. It is intuitive to me that a simplified tax system would make economic decisions more tractable (fewer variables and all).

sperril

11-10-2003, 07:02 PM

Originally posted by Glengoyne
Well Sperril, Your charts seem to bear out what you indicated, but I knew I wasn't just imagining seeing charts that more reflected what I was saying. These charts (http://www.taxfoundation.org/prtopincometable.html) seem to be closer to what I was referring to. Now yours do come from the CBO, while the chart I linked to was attributed to IRS data. Why they are different, is anyone's guess.

You can feel free to discount the charts I linked because they come from a possibly biased source(taxfoundation). I really dont' know anything about them other than I found them on Google, and there was a headline proclaiming that the income tax results from 2001 indicate a higher degree of progressivity. So they seem out to contradict your premise right off the bat.

I personally wouldn't mind a flat tax, but then a lot of poor people would be paying a HELL of a lot more taxes than they are now.

You mention a couple of quotes from Hannity and Horowitz. I would suggest I found what source Hannity used for his number, and I can only guess that Horowitz is dyslexic, and thought that 95% of taxes number came from the top 5% of tax payers as opposed to the top 50%.

What I get tired of is people who completely disregard the numbers, even yours, and proclaim that any tax cut proposed by a republican is a tax cut for the rich.

I won't necessarily write off a source because the source is partisan. The argument I would make is that, once again, the numbers you are using are income tax only. My numbers for income tax from the CBO only went to 1995, but showed a higher tax burden for the rich than your 2001 taxfoundation / IRS numbers. The reason our final numbers don't agree is because income tax is only one of many federal taxes. Income taxes are more heavily shouldered by the rich, but excise taxes are more heavily shouldered by the poor. My example, again, is that if you are a multi-millionaire, and I am making $20,000 a year, we both pay the exact same dollar amount in excise taxes (assuming we both drink the same amount of alcohol, use the same amount of gas, and smoke the same number of cigarettes, etc....) A poor person easily pays more in excise taxes in a year than they do in income taxes. For a rich person, they pay many times more in income taxes than they do in excise taxes.

In short, I won't argue with you that the rich pay too much income tax on the federal level. My argument is that you are refusing to discuss any other tax other than federal income taxes. My numbers are different because I am accounting for all federal taxes. This evens out the playing field a bit. If you factor in state and local taxes, this almost levels the playing field completely.

I agree that the Dems tend to accuse all Republican tax cuts as helping out the rich. Income tax cuts, assuming they are a flat percentage, give more money back to the rich. This is to be expected, as the rich pay more income taxes. This is completely fair.

My problem with the Bush tax cuts stems not from the income tax, but from the other taxes. The estate tax, which is paid as a percentage value of a deceased person's estate, was the first tax that was attacked by the Bush administration. Bush, and his fellow Republicans, campaigned that the estate tax was a "death tax" that hurt families when their loved ones passed away. This isn't exactly the case. The first problem is that the first $675,000 of the estate is tax exempt. The second problem is that any liabilities are subtracted from the taxable portion of the estate. The estate tax was only paid by the super-wealthy.

The second tax cut I have a problem with is on stock dividends. Conservatives claim that this is a double-tax. You get taxed on the money you make, and then get taxed on the remaining money if your investments are successful. This is true. This is also true of any sales tax, property tax, excise tax, or any other tax other than income tax. Again, Bush is willing to remove a double tax that is disproportionatly paid by the wealthy, but hasn't done a thing about excise double-taxes that are disproportionatly paid by the poor.

Flat taxes sound great on paper, but do not function correctly in everyday society. If we set the flat tax at 15% for the sake of argument, would you be willing to pay a percentage of your annual income as a user fee to visit a national park? How about a percentage of your annual income to fill your car with gas? Maybe you condone removing all excise taxes and trying to run the country solely on income taxes? Now you have a bureacracy problem. My state's Department of Natural Resources, for example, is mostly funded by user fees. If you want to fish, you must purchase a license. The fees for the license pay for game enforcement. The more people that fish, the more enforcement is necessary, more licenses are bought, and more money is available for the increased enforcement. It is a self-sustaining system. If you choose not to fish, you also don't have to pay to enforce laws on those who do. Without these excise taxes, the fed, state, and local governments would be forced to set and reset funding levels every year for the various excise funded agencies. It would be a bureacratic mess.

That is the crux of the problem. The rich are perfectly willing to whine about percentages, but only when it comes to the one tax they pay disporportionately. When asked if they are willing to apply the percent-of-income rule to any other tax, you will hear basically no discussion. The minute I hear Ralph Nader offer to pay the same percentage of his income in gasoline taxes as I do, I will get behind his flat tax ideas.