Mark Thoma: “Tax Cuts Won’t Build Schools”

Pro-cyclical arguments (the same ones that got us into this mess) are saying that we shouldn’t begin public works projects because they might take a while. Mark Thoma shreds these them to little tiny bits.

I particularly enjoy how he notes that we’ve run a test of the “tax cuts solve everything” theory and how it’s pretty clear that it failed. Miserably. While ballooning the deficit with nothing to show for it.

8 Comments

  1. Andrew
    Posted January 23, 2009 at 1:48 am | Permalink

    I found the article interesting but hardly balanced and at times flat out wrong. It is a fact that tax cuts did increase revenues for a time. In fact the initial deficits predicted ended up being about a quarter of what was predicted at one point. The the housing / banking crisis slowly built up and that had nothing to do with tax cuts.

    But I agree that a tax cuts only mentality is wrong. Infrastructure is key to any economy but a lot of infrastructure is the State’s responsibility. I would prefer the money ties between the state and federal government over time be reduces and even eliminated.

    At whatever programs are introduced they should not lead to a gradual dependence on government because that is death to the human spirit.

  2. Rob Koberg
    Posted January 23, 2009 at 8:55 am | Permalink

    How much do you think we should pay in taxes?

  3. Posted January 23, 2009 at 9:10 am | Permalink

    Andrew:

    The point isn’t that tax cuts were to blame, it’s that they’re not a solution. On that much we agree = )

    Rob:

    Depends on how much you make. For the 90% case of “we”, less than we do now. For the others, more than they do now. I favor a slightly progressive tax system vs. the slightly regressive tax system we do now. Remember that governments make large mistakes in capital allocation by mis-directing cuts as well as increases. This is the biggest problem with the Bush years tax policy: it put money into the hands of people who were least likely to use it for productive things. If our biggest issue that there wasn’t enough capital floating around the system (yesteryear’s issue), then tax cuts would solve a problem we have. Given that we’ve created much of our current plight on the back of too much liquidity looking for too few opportunities, then tax cuts for the rich (and by rich, I mean the really really wealthy) only exacerbate the extant failures. The goal now is to create sustainable spending, not investment.

    Regards

  4. Posted January 23, 2009 at 4:48 pm | Permalink

    Andrew I’ll have to disagree with your assessment that tax cuts increase revenue for some time. As a whole, tax cuts reduce revenue and you can see this in the historical tax revenue tables.

    I think you may have been thinking specifically of the Capital Gains Tax. Typically, cutting capgains causes people to sell investments, to cash in on the lower rate. This causes a spike in capgains revenue, despite the lower tax rate. The spike is typically only a year or two and then revenue goes down … at that point, it’s difficult to tell what the long-term cause & effect is, and it’s a debated topic.

    There are several places to look at various tax tables and aggregates. One interesting place, is Bush’s 2006 budget ( http://www.whitehouse.gov/omb/budget/fy2006/pdf/hist.pdf ). Aside from the obvious tables, page 5 holds a really interesting couple of paragraphs where Bush’s own budget blames most of the national debt on the peacetime Reagan-era tax cuts, without corresponding spending cuts. In fact, if you look closely, you’ll see that most of the current national debt came after Reagan and Bush’s large tax cuts, with the remaining being typical growth a small amount leftover from WWII & Vietnam.

    One can argue how effective those cuts were in growing the economy, but there is (at least not yet) any statistical basis (but we have a very small sample size).

    Dylan Tynan

  5. Posted January 25, 2009 at 7:16 am | Permalink

    I find the major flaw in the article to be the limitation of choice to tax cuts or increased government spending.

    Among other reasons, the Bush regime failed because they tried to cut taxes AND increase spending. That’s obviously a recipe for disaster with no budget surplus. (Dylan T: this is exactly the reason both Bushes and Reagen failed with their policies)

    As a nation, as long as we spend more than we make, we’re on a spiral death trap servicing our debt load as we suffer the effects of Dutch Disease: http://en.wikipedia.org/wiki/Dutch_disease

    The currently proposed infrastructure improvements, while certainly useful, will most likely just drive up the cost of construction. Needed or not, the skills of the unemployed portion of our population is unlikely to match up particularly well with the acceleration of public infrastructure projects.

    As you know, my libertarian views believe that we should cut all federal income tax, significantly reduce government spending, and get rid of the federal reserve system, but that’s something that’s more likely to happen only after things get terribly bad.

    Over the past decade, anyone that did the right thing and saved money has been punished dramatically through decreased value of equity whether it be stocks, cash, or home.

    If you spent beyond you means this decade, while you’re suffering now, overall you’re probably better off than someone that saved as the result of 8 great years of life. A system that fails to reward saving over spending, by individuals, corporations, and governments is destined to get into the mess we’re in now, and there’s little that the government can do in this situation other than to try and restore confidence.

    But without solving the deficit spending problems (spend less already), no amount of tax cuts, stimulus packages, or increased government spending will solve the problem. Instead it will continue to punish those people that choose to save, through further devaluation of our currency.

  6. Alex
    Posted January 25, 2009 at 10:35 am | Permalink

    Tax cuts in and of themselves are not a solution, but neither is government spending. Basically, the last eight years were an experiment in tax cuts AND ballooning government spending. That formula does not work ;). Did you know that the three wealthiest suburbs in the nation all ring washington DC?

    Why is it that tax cuts with cuts in government spending are not helpful? Frankly, that would restore confidence faster in our economy than anything else. Take a look at the graph here: http://research.stlouisfed.org/fred2/series/AMBNS?cid=124. That’s from the St. Louis Fed and represents the monetary base after the initial round of bailouts. That hockey stick should terrify anyone. What happens when the stimulus and more bailouts are added to it? That money supply will have to be deflated in some way…if you look at the uptick in 1998, some feel that the deflation of that bubble in the money supply helped contribute to the popping of the tech bubble.

    Expect inflation like we have never seen before in this country.

  7. Posted January 25, 2009 at 7:40 pm | Permalink

    Here are a couple of questions I am curious about:

    Whenever the government wishes to penalize something and discourage it (such as cigarrettes and alcohol), it taxes it, because taxing something discourages actually doing it.

    Don’t you think that taxing those who are economically productive will do the same?
    It’s not like you’re taxing certain kinds of wealth production, you’re advocating the penalizing of ALL wealth production.

    While it’s nice and populist to say that “we” should pay less taxes and the “rich” should pay a higher percentage, why is it that you feel it’s better to flat our take the money, rather than incentivizing socially beneficial behavior?

    Also, here’s a good real world example of what the issue with heavily taxing people and businesses is:
    I work for an awesome internet company that is a decent sized company (the company has grown from 4 people in 2004 to 100 people this year). We have offices in China, Europe, Brazil, with employees all over the world.
    The company pays well, but we are continually short staffed.
    A LARGE part of the problem is that the US office, because it’s located in California, pays the highest business taxes in the world.

    No joke, our LA office pays higher taxes than our office in communist China.

    Do you know what we would do if we had more money? Hire more employees.

    But because our state government is clogged with unions who somehow think that their members are entitled to a pay scale out of touch with economic realities, and because our politicians bribe their constituents with their own money, we keep raising taxes (on the rich) so they can skim off the top when they dole out an employment benefit that doesn’t cover a persons living costs.

    All that to say this: taxing the rich is not the answer. I agree that infrastructure is critical, and that now is a great time when the cost is low.
    But for all you Obama supporters claim of being progressive, forward looking original thinkers, almost all of you stick to the same tired lines of “tax the rich”.

    How about some new, original ideas that incentivize beneficial social behaviors, economic contribution and stop looking at the rich as if they’ve become rich through deception, trickery, or fraud. Most people who are rich got that way because of hard work, long hours, persitence, acumen, and a little luck.
    Contributing to society through economic development and providing jobs should be encouraged.

    Also, perhaps you’ve seen this, but here’s an interesting look at why any equitable tax cut benefits the rich: http://gregmankiw.blogspot.com/2007/03/barstool-tax-policy.html

  8. Posted February 8, 2009 at 3:39 pm | Permalink

    Nate:

    This is about perspective and taking a broad view of the system. You comments are pretty squarely in the camp of narrow perspective that the Former Occupant and his crew occupied. For example:

    You note that in some cases, taxes are used as punitive measures to curb a particular activity, but you fail to note that this is done only by dis-proportionate tax rates. Taxes are like *all other* forms of regulation, meaning that when executed correctly, they create the same burden for all market participants. As a result, we chose to make taxes different to achieve different social outcomes. In the case of the wealthy, we wish to ensure that the engine of economic success actually is merit, not heredity. In the case of excise taxes on cigarettes, those taxes are higher than taxes on alternatives to reduce demand. If taxes on the alternatives were the same, then calling them “high” wouldn’t make sense. Markets work by comparison and pricing things in opposition to other things. You can’t site an example of a high tax rate as a deterrent without suggesting what the rate is high relative to.

    Similarly, you take the stance that any instance describes the entire class when you suggest that any taxes reduce incentive to create wealth. Further, you have to ask several follow-on questions: why do we as a society want people to create wealth? Is there a marginal incentive reduction that is balanced by other forces? If you want to argue that the person who isn’t likely to spend what they make (i.e., the rich) are going to be equally de-motivated or that the impact of their incremental motivational change is going to be disastrous, then I’m afraid you’re simply arguing both against history and against you own interest.

    Greg Mankiw helped architect the current mess. His arguments in that piece (admittedly not even his, but he posts them without comment, so it’s safe to assume he backs them) are reductionist in the absurd. Like most fresh-water economic thinking they pay no mind to what the tax burden is used for, assuming it’s all waste, and plays to a sense of fairness and not profit maximization. A rational market participant will accept any reduction in tax burden, regardless of how happy it makes them. Indeed, that kind of rational self interest (recently debunked in the large, FWIW), is what conservative economics is based on. You can’t hvae it both ways: will your idealized market participants take their ball and go home when their feelings are hurt by the big bad tax man? Or will they calculate their odds and place their gambles accordingly? Which is it?

    I won’t spend the time to point out the clear logical fallacies in the rest of your argument (lets call it an exercise for the reader), but the point about China rankles since you have omitted serious and important data: your tax liability in China is at least 10% higher than you suggest due to repatriation duties on profits. Or were you not going to pay it since China’s enlightened policy making was causing you to you consider moving there?

    Regards