The pressure to raise taxes is more like a vice with the left jaw being surpluses and the right jaw of the vice being shortages. The question common to both situations is "How much is enough?" For some people, there will never be enough for education and for others there will never be enough for convention centers and sports teams. The fear of foolishness has left us. Ever since the federal government bailed out New York, there has been a feeling that that same safety net somehow was spread out under all cities.

In 1994, The Clinton Administration crafted a document through the Office of Management and Budget that ordered government bureaucrats not to implement policies that did not delivered benefits of at least 125% of the cost of the program. OMB circular 94 is still in force on the federal level even though it gave the bureaucracies too much leeway in defining and calculating a benefit. Thus, many of the benefits were counterfeit because they could not be turned into actual cash or even pawned.

One of the most contentious benefits was a value of human life.(embryos not included) The more that value was raised, the more justification was created for more government action. Before 1994 agencies assigned their own estimates of human worth. The one used for highway calculations went up six times faster than the inflation rate between 1967 and 1995.

After reading several calculations of fiscal impact on Tennessee state bills before our legislature, it is obvious that some kind of similar reform needs to take place at the state level. The cost of building county seat connector roads is reckoned as zero as long as no one accelerates the pace of the current plan. That bill passed unanimously even though, according to the TDOT long Range Plan, there is $2 Billion missing to fund the plan.

I suspect that the federal government is not forcing states to put seat belts in school buses because of the OMB guidelines. The state however, may go where angels fear to tread.

OMB Circular 94 also has curbed the Federal Highway Administration from suggesting or supporting economic development projects using roads as primary or only effort. Tennessee has therefore surged ahead of all contrary evidence and crafted its own goofy plans.

When the government takes money from the most productive sectors of the economy and consumes it on ineffective programs, it is a self inflicted wound to all. The average economic efficiency declines. I have a money market account that has been able to average 13 percent per year growth since the mid fifties. When taxation on any level prevents me from putting money into that account or any other viable alternative, the government must use that money for a purpose that meets or exceeds that average rate of return. Failure to do so diminishes the prospects of all.

Posted by: Danny L. NEwton at June 11, 2007 12:38 PM

Bill:

Tax cuts do NOT increase tax collections. That is such nonsense that even the most diehard supply-siders will not even make such a ridiculous (and overly simplistic) claim anymore. It is just NOT true. Ask an economist. Even the rosiest predictions (by Bush's own economists) say that Bush's tax cuts will recoup 25%-30% of their total cost to revenue. Conservative estimates (and the CRS) put it at 7%.

And if the Bush tax cuts (mainly on dividends and capital gains) were to have generated the recent economic growth, the myth/theory/narrative is that this will make it easier for businesses to invest and raise funds, etc.

Well this is not abstract theory. We can look. And is this what we have seen? NO . . . NO . . . NO! Investment has not been the main driver of growth. Business are not spending their hard [politically] earned windfalls.

What has been driving growth? Housing and consumer spending. Increasing spending (gov't and consumer) is the only way to stimulate growth. We have been doing a lot of both over the last five years.

The first order effect of cutting taxes is to reduce revenue. In theory this could also encourage greater economic activity and therefore expand the tax base. There is NO EVIDENCE for this and plenty to the contrary.

No one with half an idea what they are talking about, believes the "economic reality" to which you site and subscribe. Reality requires facts. All you have is fuzzy correlation and a baseless narrative that has been sold to you, Bill.

Stop repeating lies that you have been gullible enough to swallow. Use the googles if you have to but actually do some thinking for yourself.

Posted by: Morris Berg at June 12, 2007 8:17 AM

Morris, all you need to do is study a little history and you'll see that when federal taxes are cut, an economic boom follows - and that economic boom generates higher revenue. JFK did it. Reagan did it. Bush did it.

Bush's tax cuts included taking millions of people off the income tax rolls, and cutting taxes big-time for the middle class. I know - I'm middle class and it saved me plenty.

The tax cuts meant people had more money to spend at the malls and on houses and cars. The consumer-lead recovery you mention was funded by lower taxes.

To say there is "no evidence" that tax cuts lead to greater economic activity and expand the tax base is to have your brain stuck firmly up your posterior. There is evidence aplenty.

Posted by: Bill Hobbs at June 12, 2007 10:53 AM

"Morris, all you need to do is study a little history and you'll see that when federal taxes are cut, an economic boom follows - and that economic boom generates higher revenue."

1st: You offer this statement with NO EVIDENCE. Your anecdotes don't form the basis of complex macroeconomic theory, and neither does your assertion that there is evidence aplenty.

2nd: Even if we accept your premisses (cut followed by boom), you have offered nothing by way of causation. Explain how A caused B. Don't just say it. FIND SOME EVIDENCE and account for the massive increases in government debt-spending and the effects on growth indicators (hint: look at private v. public job creation then look to see how many private jobs were NOT construction-based).

3rd: Please explain the boom that followed Clinton's tax hikes (even pre-dotcom boom)? Please explain what happened from 2001-2003 (after first Bush cut)? Please explain the effect of Reagan's tax hikes (82, 83, 84, 85, 86, 87).

4th: Do you even have the slightest idea of the difference between supply-side tax cuts and demand-side tax cuts (based on old school Keynesianism)? Until you do, dare not besmirch Kennedy's name with such ignorance.

5th: Compare the amount of money the middle-class received from tax cuts vs. the amount over the same period that has been "created" as debt or from equity inflation.

Finally: Please explain how the highest period of growth in U.S. history (1933-1973) also saw its highest tax rates on the rich (70 to 91 percent) and a general tax rate that reached a plateau in 1969.

How does your nuanced "head up derrier" analysis account for this? Ultimately, though, you need to at least show some evidence for your argument.

Maybe macroeconomics is more complex, heh? Maybe that is why NO SERIOUS ECONOMIST claims that tax rates have any real effect on broader economic growth beyond basic near-term Keynsian demand-side increases?

Maybe you have no idea what you are talking about and maybe you should do some more reading. I do not doubt your sincerity. I doubt your grasp of economics.

Bill: You can make another childish remark and just assert the existence of evidence in support of your argument OR you can actually produce something other than anecdote and myth . . .

It should be easy if - as you say - evidence is aplenty.

Posted by: Morris Berg at June 12, 2007 12:45 PM

To understand the possible revenue and economic effects of tax cuts, it merits examining the effects of the 1920s tax rate cuts engineered by Treasury Secretary Andrew Mellon under Presidents Warren Harding and Calvin Coolidge.

Changes in marginal income tax rates cause individuals and businesses to change their behavior. As tax rates rise, taxpayers reduce taxable income by working less, retiring earlier, scaling back plans to start or expand businesses, moving activities to the underground economy, restructuring companies, and spending more time and money on accountants to minimize taxes. Tax rate cuts reduce such distortions and cause the tax base to expand as tax avoidance falls and the economy grows. A review of tax data for high-income earners in the 1920s shows that as top tax rates were cut, tax revenues and the share of taxes paid by high-income taxpayers soared.

When the federal income tax was enacted in 1913, the top rate was just 7 percent. By the end of World War I, rates had been greatly increased at all income levels, with the top rate jacked up to 77 percent (for income over $1 million). After five years of very high tax rates, rates were cut sharply under the Revenue Acts of 1921, 1924, and 1926. The combined top marginal normal and surtax rate fell from 73 percent to 58 percent in 1922, and then to 50 percent in 1923 (income over $200,000). In 1924, the top tax rate fell to 46 percent (income over $500,000). The top rate was just 25 percent (income over $100,000) from 1925 to 1928, and then fell to 24 percent in 1929.

Secretary Mellon knew that high tax rates caused the tax base to contract and that lower rates would boost economic growth. In 1924, Mellon noted: "The history of taxation shows that taxes which are inherently excessive are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business." He received strong support from President Coolidge, who argued that "the wise and correct course to follow in taxation and all other economic legislation is not to destroy those who have already secured success but to create conditions under which every one will have a better chance to be successful."

It is often assumed that broad cuts in income tax rates only benefit the rich and thrust a larger share of the tax burden on the poor. But detailed Internal Revenue Service data show that the across-the-board rate cuts of the early 1920s-including large cuts at the top end-resulted in greater tax payments and a larger tax share paid by those with high incomes. Figure 1 focuses on those earning more than $100,000. As the marginal tax rate on those high-income earners was cut sharply from 60 percent or more (to a maximum of 73 percent) to just 25 percent, taxes paid by that group soared from roughly $300 billion to $700 billion per year. The share of overall income taxes paid by the group rose from about one-third in the early 1920s to almost two-thirds by the late 1920s. (Note that inflation was virtually zero between 1922 and 1930, thus the tax amounts shown for that period are essentially real changes).

The tax cuts allowed the U.S. economy to grow rapidly during the mid- and late-1920s. Between 1922 and 1929, real gross national product grew at an annual average rate of 4.7 percent and the unemployment rate fell from 6.7 percent to 3.2 percent. The Mellon tax cuts restored incentives to work, save, and invest, and discouraged the use of tax shelters.

The rising tide of strong economic growth lifted all boats. At the top end, total income grew as a result of many more people becoming prosperous, rather than a fixed number of high earners getting greatly richer. For example, between 1922 and 1928, the average income reported on tax returns of those earning more than $100,000 increased 15 percent, but the number of taxpayers in that group almost quadrupled. During the same period, the number of taxpayers earning between $10,000 and $100,000 increased 84 percent, while the number reporting income of less than $10,000 fell.

The decade of the 1920s had started with very high tax rates and an economic recession. Tax rates were massively increased in 1917 at all income levels. Rates were increased again in 1918. Real GNP fell in 1919, 1920, and 1921 with a total three-year fall of 16 percent. (Deflation between 1920 and 1922 may also help explain the drop in tax revenues in those years, evident in Table 1).

As tax rates were cut in the mid-1920s, total tax revenues initially fell. But as the economy responded and began growing quickly, revenues soared as incomes rose. By 1928, revenues had surpassed the 1920 level even though tax rates had been dramatically cut.

Conclusion

The tax cuts of the 1920s were the first federal experiment with supply-side income tax rate cuts. Data for the period show an initial decline in federal revenues as tax rates were cut, but revenues grew strongly during the subsequent economic expansion. After the cuts, total tax payments and the share of total taxes paid by the top income earners soared.

Unfortunately, Wall Street messed things up in 1929 with the stock market crash caused primarily by its allowing stock purchases to purchase stock essentially on credit ("margin").

Posted by: Bill Hobbs at June 12, 2007 2:40 PM

You claim that "no serious economist" believes tax cuts stimulate economic growth.

But some do: Two Nobel laureate economists - Robert E. Lucas Jr. of the University of Chicago and Edward C. Prescott of Arizona State University - credit the Bush tax cuts with the economic growth in 2001-2003.

Of course, tax cuts are not the only factor in economic growth. Interest rates, regulatory policy, and a myriad of other factors also impact the economy.

Posted by: Bill Hobbs at June 12, 2007 2:47 PM

The Good, the Bad, and the Ugly . . .

First the good:

This is an actual response. And from what I can see (I recognize a couple of sites as coming from reasonably neutral discussions), you may have encountered new info that you would not have had you just accepted this as unassailable truth. I hope you realize that the issue is much more complex than tax cuts = economic growth = tax collections.

Next the bad:

"You claim that 'no serious economist' believes tax cuts stimulate economic growth."

Um . . . how about NO? I didn't.

What I wrote was: ". . . NO SERIOUS ECONOMIST claims that tax rates have any real effect on broader economic growth beyond basic near-term Keynsian demand-side increases?"

I also want to point out that your rebuttal to the argument not made - taken from Altman's informal NYT poll - fails to include Altman's full description: "Two were Nobel laureates known for their conservative views." And even if we could read more into the response of these two gentlemen (which we can't because that is all there is), you failed to mention the rest of the 49 responses Altman received to the question he posed to 177 members of the National Bureau of Economic Research?s program on economic fluctuations and growth: ?Which factor was most important for the economy?s growth from mid-2003 through the end of 2006?? with the following responses (paraphrased): (a) Bush's tax cuts; (b) pent up demand follwing recession; (c) both; (d) neither - regular buz cycle; (e) can't tell.

Now this was very informal and not scientific but only 5 (including the two you mentioned) said tax cuts most important. What is more glaring are the results you omitted: "Three economists chose pent-up demand, and three answered both. But the majority, 30 economists, answered neither or supplied an answer not listed."

Now we can see that things aren't quite so simple, heh? Regardless, please don't attribute claims to me that I have not made.

As for the Ugly:

The Roaring Twenties, huh? Is that all you got? Any example from a more relevant period . . . one with a more matured econmy similar to today?

OK . . . now there are quite a few problems with the CATO analysis you yanked this from, but I will address a couple of points:

(1) At the end of WWI, 95% of Americans paid no taxes. By the end of the 20's 80% so. So only the wealthiest were taxed. And the author's weak deflection about inequality is laughable: sure the number earning over 1000,000 increased fourfold (328%) but the number over a million grew by 1448%.

Furthermore, by 1928, those over 100,000 were only 0.01% of US population. Between 1923-1929, the lower 93% of the nonfarm population actually experienced a 4% drop in real disposable per capita income and farmers got it worse.

Between 1921-1928, total tax collections grew from $719 - $1,160 million because the share of the total tax burden paid by the rich (those making over $50,000) rose from 44.2% to 78.4%.

Since the rich are the only ones paying taxes, you give them a bigger slice of the pie and we get more revenue!!! Brilliant idea . . .

If you actually had a middle class that is larger that the rich, you probably would have seen an overall drop in tax revenues, much like what happened during the Reagan years.

Anyway . . . if that is all you have, fine. But what about something more current . . . and not followed by a huge Depression (I am not blaming it on tax cuts mind you . . . just pointing out the "experiment" is lacking in relevance).

You really should not believe everything you are fed, Bill . . . try not to rely on CATO, Heritage, and the Free Republic and you may actually learn something.

Cheers,
Moe

Posted by: Morris Berg at June 12, 2007 5:34 PM

Bill:

For the record: I just want you to know that I actually applaud your reporting on the Copeland Cap issue and a few other issues that are either ignored or mudddied beyond recognition by the Nashville/TN press.

What motivates me is NOT ideology, but merely truth. That is why when I hear the mantra of "tax cuts pay for themeslves [and then some]" I react the same way as you do when you butt your head against some other myth that has been repeated enough to garner truthiness status. Whether tax cuts are desirable is (a) more political than economic; and (b) a political matter that we are all entitled to different opinions about . . . the empirical effects, the measurable consequences, however, are NOT.

We all have differing opinions and values when it comes to fiscal priorities (as priority necessitates choice and choice necessitates some value judgment). But to debate and make these choices - collectively and through our elected officials - we need honest input even if the truth does not support OUR priorities.

To say "tax cuts pay for themselves" with no other caveat or nuance is akin to sayin the "budget is done" without mentioning Copeland and its ramifications. It is misleading at best and misinformation at worst (whether wittingly or unwittingly repeated).

You don't have to take a side on any issue to demand that all the facts be on the table.

Posted by: Morris Berg at June 13, 2007 8:27 AM

Name:


Email Address:


URL:

Remember personal info?
YesNo
Comments:

Email this entry to:


Your email address:


Message (optional):