Good Math/Bad Math

Wednesday, May 17, 2006

Political Bloviators and Bad Economics

As the republicans' political fortunes gradually decline, they are naturally going on the warpath to try to discredit any voices speaking against their policies. In particular, there's been a lot of hysteria from some conservative gasbags terrified that the tax cuts handed to the wealthiest Americans might not be made permanent.

Any honest analysis of economic data during Bushes time in office is extremely clear: the republicans have dramatically decreased revenues (by 297 billion in 2004, the most recent year for which I could find complete figures), while dramatically increasing spending (31.5% increase between 2001 and 2004).

Of course, the incredibly simple arithmetic of a balanced budget is apparently beyond political bloviators.

Here's how a balanced budget is supposed to work:
Revenue - Spending = 0

Now, what happens if we increase spending and decrease revenue?
Revenue - Spending < 0

But that doesn't stop our conservative geniuses, like John McIntyre of "Real Clear Politics":
The Washington Post's Sebastian Mallaby is on a crusade to discredit pro-growth or supply-side economic policies. Today's column titled "The Return of Voodoo Economics" makes one wonder about what he doesn't like about 4% growth, under 5% unemployment, housing and the stock market higher, wealth being created and tax revenues at all time highs. I guess he pines for the pre-Voodoo Economics days of the 1970's when the highest marginal tax rate was 70% and the country had anemic growth, high unemployment and a Dow languishing below 1,000.

What gives Mallaby the right to think that he is a "serious" person when it comes to economic policy, but President Bush, Vice President Cheney, Majority Leader Frist and Finance Chairmen Grassley are not? Is Mallaby really that arrogant? Did it ever occur to Sebastian that maybe he is letting his ideological views get in the way of an honest appraisal of the facts?

Why is it so hard to explain the concept to many "intellectuals" that the idea is to grow the pie as big as possible, and that taking a smaller percentage of a bigger pie can yield more than a higher percentage of a smaller pie? Mallaby can quote all the economists and studies he wants to justify his attack on the economic wisdom of lower tax rates.

I'll just look at what happens in the real world.

Yeah, you see, you can quote all the studies and economic analyses you want - the fact that "Revenue - Spending < 0" isn't a problem in McIntyre's world. In McIntyre's world, cutting revenue increases revenue.

Sorry Johnny-boy, that's not how things work. Spending more money than you have is going to be a problem, sooner or later. You can't borrow money forever. And borrowing money so that you can hand it over to the wealthiest people in your society, well, that's not particularly what I calla brilliant idea. (And in the interests of full disclosure, my wife and I are quite definitely in the range where we are benefiting from those tax cuts. If they expire, it will cost us rather a lot of money.)

Growth produces wealth, which leads to higher tax revenues and a more prosperous nation. Less growth produces less wealth and in turn lowers tax revenues. High tax rates retard economic growth; low tax rates encourage more growth. It really isn't that complicated.

You see, dogma overcomes math. The simple and undeniable fact that the Bush tax cuts have decreased revenue - a fact that not even the Bush administration denies - that's just the babblins of a bunch of egg-head intellectuals. "Reality" is that lowering taxes increases revenues.

36 Comments:

  • To echo a theme you have sounded here before, McIntyre's argument only works as long as it is not quantitative:

    "Why is it so hard to explain the concept to many "intellectuals" that the idea is to grow the pie as big as possible, and that taking a smaller percentage of a bigger pie can yield more than a higher percentage of a smaller pie?"


    Answer: When you "explain the concept," it is not hard on them, it is hard on you -- because "intellectuals" tend to ask questions in return, questions such as "If we cut tax rates from (e.g.) 20% to 18%, will the economy grow by 11% in response? 'Cuz that is what it would take to make it pay for itself." and "Did the economy grow enough to make tax cuts revenue-neutral in 1982? How about in 2001?"


    Damn intellectuals -- they never have appreciated the beauty of a good hand-waving argument.

    By Anonymous jre, at 3:04 PM  

  • Well, actually, its not so much bad economic modeling and bad economic empirics. There are models that would support his position. It all depends on how responsive GDP is to taxes. If GDP is highly elastic with respect to taxes, its possible that lowering the % rate of taxes could increase overall growth enough to lead to a net increase in revenue. Conversely if GDP is relatively inelastic to the tax rate, then the growth from cutting taxes wouldn't offset the lower marginal rate, leading to a lower net revenue.

    MarkCC's data suggests that in real life the parameters of the model are such that (these) tax cuts haven't had a big enough effect on GDP for the growth-effect to offset marginal-rate-effect. But there may be other states of the economy and/or other kinds of tax cuts that would be self financing.

    Steve

    By Anonymous Anonymous, at 3:17 PM  

  • "bad economic modeling and bad economic empirics"

    make that as bad economic empirics

    Steve

    By Anonymous Anonymous, at 3:17 PM  

  • Your political biases seem to be driving you to some bad math of your own. Some cursory research would have illustrated that the laffer curve (the idea in theory that cutting taxes can increase tax revenue) is widely accepted among economists of all stripes. It was the basis of JFK cutting taxes in the early 1960's. Now it is obviously not a linear function. At a 100% tax rate, there will be no taxes collected, as no one will work. Taking the tax rate from 90% in the early 60's or 50% in the early 80's has a much greater effect than taking the marginal rate from 39.6% to 35%, especially since most wealthy people fall into Alternative minimum tax and were unaffected by the tax reform.

    By Anonymous steve, at 3:36 PM  

  • MarkCC,

    Normally, I love the stuff here (what I can follow of it). But I'm not sure this one is a homer like most of your take downs.

    This shouldn't be construed as support for McIntyre, per se, but rather that the other side of the issue isn't as clear cut as "spending more than you have." Indeed, in lots and lots and lots of cases in the past, deficit spending has been proscribed as a remedy for economic downturn. The argument, to put it over simplistically, suggests what Steve above implies, that growth will cover tax cuts in some sense, as well as a belief that so long as the government can pay back its interest payments on borrowing, then things should be fine (since the debt is owed to itself, the government is largely believed to be able to extend loan repayment times, though again this is highly simplistic; and often incorrect, see "time-inconsistency" of policies for example). The largest example would be FDR's attempts to move the US out of the depression by creating massive government spending programs (the WPA) that went well beyond tax receipts. Keynes is often connected with this notion of a government increasing spending to help the economy and decrease unemployment (Keynes is more nuanced by far, but generally that's what people think of as part of "Keynesianism" -- government control and spending; contrasted with something like Milton Friedman's suggestion that there is some possible idea of an 'optimal' unemployment insofar as you can't ever really have 100% employment since the definition is slippery, and so the government spending ends up crowding out private spending, making matters worse, etc.)

    Meanwhile, Bush's economic policy has looked quite a bit like that planned under Kennedy, though we can't ever really know. Kennedy moved for tax cuts and ran to the right of Nixon on defense issues (the "Missile Gap" that never really existed) and looked to ramp up spending on defense and other issues that were meant as front line efforts in the Cold War.

    It's possible to find a lot of intelligent defenses of deficit spending at certain points in an economic cycle, and of the notion that stringing the country into a balanced budget amendment would remove a useful tool of fiscal policy. Some of these come down to philosophical arguments (the appropriate role of government, acceptable levels of failure in businesses and personal ventures, etc.). Point being, I think, that while McIntyre's engaging in slippery chatter, it's not exactly the case that the side he's attempting to represent is simply ignorant of math. He might be, however.

    I think what might be more solid is the simply fact that you cannot have more with less. If you couldn't buy the candy bar today with the money you have, and the money you gain tomorrow is less than the price increase for the candy bar tomorrow, you STILL CAN'T BUY IT, without a loan, of course. (I think of this as the Wimpy Accounting Method. "I'll gladly pay you in 2075 for three trillion hamburgers today. But I'll only pay you at todays prices. I get the interest benefit, and you get to give me my hamburgers.") Cutting taxes and then ramping up spending beyond growth or inflation is largely the same thing. The government has less money in relative terms, but wants to buy not only the newest stuff around, but replenish all the old stuff too.

    By Blogger Henry, at 3:38 PM  

  • steve, henry:

    I don't dispute that there are conditions under which lowering taxes can raise revenues. Notice that in my post, I do *not* say that *lowering taxes* and raising spending is the problem. The problem is that the current tax cuts have *decreased* revenue.

    What I am criticizing is the fact that people like McIntyre insist that lowering taxes will raise revenues *even when the data specifically shows that it is not true*.

    By Blogger MarkCC, at 3:54 PM  

  • The other point about the Laffer curve is that it can reduce government expenditures in theory. If the 10% tax cut spurs investment and employment growth then outlays for welfare, unemployment programs etc. can be reduced.

    Futhermore the empirical evidence on the Kennedy and Reagan tax cuts is pretty conclusive:


    http://www.heritage.org/Research/Taxes/bg1765.cfm

    "President Kennedy proposed massive tax-rate reductions, which were passed by Congress and became law after he was assassinated. The 1964 tax cut reduced the top marginal personal income tax rate from 91 percent to 70 percent by 1965. The cut reduced lower-bracket rates as well. In the four years prior to the 1965 tax-rate cuts, federal government income tax revenue--adjusted for inflation--increased at an average annual rate of 2.1 percent, while total government income tax revenue (federal plus state and local) increased by 2.6 percent per year (See Table 4). In the four years following the tax cut, federal government income tax revenue increased by 8.6 percent annually and total government income tax revenue increased by 9.0 percent annually. Government income tax revenue not only increased in the years following the tax cut, it increased at a much faster rate.

    ,,,


    These across-the-board marginal tax-rate cuts resulted in higher incentives to work, produce, and invest, and the economy responded (See Table 7). Between 1978 and 1982, the economy grew at a 0.9 percent annual rate in real terms, but from 1983 to 1986 this annual growth rate increased to 4.8 percent.



    Prior to the tax cut, the economy was choking on high inflation, high interest rates, and high unemployment. All three of these economic bellwethers dropped sharply after the tax cuts. The unemployment rate, which peaked at 9.7 percent in 1982, began a steady decline, reaching 7.0 percent by 1986 and 5.3 percent when Reagan left office in January 1989.

    Inflation-adjusted revenue growth dramatically improved. Over the four years prior to 1983, federal income tax revenue declined at an average rate of 2.8 percent per year, and total government income tax revenue declined at an annual rate of 2.6 percent. Between 1983 and 1986, federal income tax revenue increased by 2.7 percent annually, and total government income tax revenue increased by 3.5 percent annually."

    By Anonymous steve, at 4:01 PM  

  • Mark CC said

    "The problem is that the current tax cuts have *decreased* revenue."

    Actually, tax revenues have increased since the 2003 tax cuts were passed (the issue is that thanks to Iraq, Katrina and other projects the increases have not kept pace with spending)

    According to the CBO, tax revenues have been:

    2002 $1.9T
    2003 $1.8T
    2004 $1.8T
    2005 $2.2T

    By Anonymous steve, at 4:19 PM  

  • I refer you all to Kevin Phillips' book "The Politics of Rich and Poor", Random House, 1990 which demonstrates with government numbers how, after the Reagan tax cuts, in the 1980's the rich got richer and the poor got poorer. It destroys the Republican concept of trickle-down, or as they re-named it, supply-side, economics.

    By Anonymous Karl, at 4:43 PM  

  • Mark is right. Steve is wrong.
    The budget numbers are at http://www.whitehouse.gov/omb/budget/fy2007/

    Download spec.pdf and hist.pdf for all the data your heart desires.

    Taking a longer series, we have for federal receipts:

    1990 1.032T
    1991 1.055T
    1992 1.091T
    1993 1.154T
    1994 1.259T
    1995 1.352T
    1996 1.453T
    1997 1.579T
    1998 1.722T
    1999 1.828T
    2000 2.025T
    2001 1.991T
    2002 1.853T
    2003 1.782T
    2004 1.880T
    2005 2.154T

    That trend looks to me like it took a sharp dip after the 2001 tax cuts, and has only recently started to recover. And -- lest we lose sight of the main point, McIntyre is clearly arguing not just that tax cuts are stimulative (they are, though these particular cuts are probably very inefficient in that respect), but that the economy would grow enough to make up for the revenue lost to tax rate cuts. It clearly has not done that, no matter how you cut it.
    As an exercise for the reader, I recommend you go to that table on pp. 25-27 of hist.pdf and plot the "Outlays" and "Deficit" columns, then mark where the major tax changes of the past 25 years have occurred. That alone ought to be enough to convince a fair-minded assessor that tax cuts do not pay for themselves. Give it up.

    By Anonymous jre, at 4:50 PM  

  • 1990 1.032T
    1991 1.055T
    1992 1.091T
    1993 1.154T
    1994 1.259T
    1995 1.352T
    1996 1.453T
    1997 1.579T
    1998 1.722T
    1999 1.828T
    2000 2.025T
    2001 1.991T
    2002 1.853T
    2003 1.782T
    2004 1.880T
    2005 2.154T

    - Tax Receipts are higher in 2005 than any prior period, so the tax revenue has recovered - which was the issue at hand.
    - 2001 was a recession year and the 2001-2002 receipts reflect a huge decline in capital gains taxes due to the 45% decline in the stock market over the period (by the same token receipts in 2000 are an abberation on the positive side from capital gains taxes and between 1991 and 2000 capital gains revenue increased by nearly 6X)

    By Anonymous steve, at 5:14 PM  

  • Well, I'm not sure what the time series is supposed to prove. Fiscal policy isn't reflected instantly in tax receipts. Since a lot of firm spending is planned several quarters in advance, and since the effects of changing spending strategies can take a while to move through the system, the sharp decline at the same time the tax cuts went through are less than 100% positively correlated. The decline in receipts from the recession might play a pretty big role in the decline. Of more interest to me is the percentage year-on-year change which, even if only taking those years listed in jre's post, show that the move from 03 to 05, and especially the 04 to 05 year, are pretty large relative movements as opposed to previous years, including the boom times of the 90s. Plus, with changing tax incetives, the numbers of the 90s have to be considered in light of a large movement of companies to lower-tax countries like Bermuda. That is to say, that it's just not that easy to say "see, the receipts went down, therefor this was bad." I'll admit to having been for the tax cuts, but driven into deep, drink-in-hand-depression at the rediculous spending on idiotic policies that the GOP-led congress decided were a necessity. I just don't see that there is clear proof that tax cuts haven't raised receipts; the comparison is against a state where there were no tax cuts but with all else being equal, which isn't an easy thing to identify.

    And I think it's a bit slippery to use the phrase "pay for themselves" without specifying a time frame. How long is long enough to say that it did or didn't work? It's not going to happen the same year, so barring more drunken-sailor spending (HAH), does it have to pay for itself over 2 years, 3, 4, 10? The "rich->richer, poor->poorer" argument is specious as well, as most economists I've ever known have pointed out. The question is intertemporal status for the same individual. How has a single person done over time, rather than an income class? It's not the same people that are in it from year to year, so something more specific than "poor getting poorer" has to be defined. This isn't to say there aren't conditions that have devolved (social mobility has taken a disturbing downturn), but rather that things like this are far more complicated. And, I still contend, not as black and white as the original post contends.

    By Blogger Henry, at 5:18 PM  

  • Mark,

    Sorry Johnny-boy, that's not how things work. Spending more money than you have is going to be a problem, sooner or later.

    Right. Deficit spending now often means higher taxes in the future.

    You can't borrow money forever.

    Well...maybe. So long as GDP is growing at a decent rate and your borrowing is less than the growth rate of GDP I'd say it is probably sustainable for a pretty long time. Eventaully you'd have to pay people back, but the actual debt level to GDP could remain constant or even decline.

    And borrowing money so that you can hand it over to the wealthiest people in your society, well, that's not particularly what I calla brilliant idea.

    Errr...uhhhh...what?

    Oh I get it, a person's money actually belongs to the government and they are lucky to keep whatever the government lets them. Is that how you see it?

    Just curious because that last part pretty much derails a decent post on Conservative Bad Math.

    jre,

    "Did the economy grow enough to make tax cuts revenue-neutral in 1982? How about in 2001?"


    Well, you'd also have to factor in the increases in defense spending...or more accurately take those into account. As Mark implicitly noted, increasing spending by itself can result in a deficit.

    Mark is right. Steve is wrong.
    The budget numbers are at http://www.whitehouse.gov/omb/budget/fy2007/

    Download spec.pdf and hist.pdf for all the data your heart desires.

    Taking a longer series, we have for federal receipts:

    1990 1.032T
    1991 1.055T
    1992 1.091T
    1993 1.154T
    1994 1.259T
    1995 1.352T
    1996 1.453T
    1997 1.579T
    1998 1.722T
    1999 1.828T
    2000 2.025T
    2001 1.991T
    2002 1.853T
    2003 1.782T
    2004 1.880T
    2005 2.154T


    Uhhhmmm, not quite. jre you are forgetting to factor in the recession which was a foregone conclusion by the time Bush got into the White House (note I'm not blaming Clinton or Bush here, simply noting that by the time Bush got into the WH, with the benefit of hind sight, the recession was pretty much unavoidable). Recessions also lower revenues. For example, looking at your data we can see that as a percentage of GDP in 1990/1991 revenues declined (although they increased in absolute terms). And if we look at the data for 1983 we see another decline which is right in line with the 1981/1982 recession. Also, 2000 was a pretty damn good year in terms of tax revenues. The last time that reciepts had a similar share of GDP (20.9%) was back in 1944. So, the short answer is that things aren't so simple as merely looking at the tax rates as the sole drivers of tax revenues.

    By Blogger Steve, at 6:18 PM  

  • The "rich->richer, poor->poorer" argument is specious as well, as most economists I've ever known have pointed out. The question is intertemporal status for the same individual. How has a single person done over time, rather than an income class?

    Another thing is that income is somewhat of a misleading indicator of well being. A person who makes quite a bit of money, but only spends $20,000 for consumption is living a life very much like a person who earns only $20,000 (after taxes) and spends it all. This is why economists tend to prefer data on consumption expenditures vs. income data.

    Another problem with income data is that it doesn't incorporate some types of "income"/consumption such as health care/medical consumption and insurance. Most people don't consider their employer paid benefits income, but most economists would.

    By Blogger Steve, at 6:22 PM  

  • steve:

    How about we turn off the reactionary bullshit, eh?

    I never even suggested that "a person's money actually belongs to the government and they are lucky to keep whatever the government lets them. Is that how you see it?"

    The government provides services to its citizens: from military, to law enforcement, to business regulation, etc. Those services cost money. The government needs money to pay for those services - that's what taxes are for.

    The question becomes, what is the appropriate way to distribute the cost of those services onto the population? And that's something that people can disagree about in a civil way.

    I happen to believe in a progressive tax code. But that's not what I'm arguing here.

    The tax cuts passed by the Bush administration, and which they are attempting to make permanent, are causing a *huge* deficit, because revenues aren't matching expenditures. When you're *increasing* spending, to decrease revenues by cutting the taxes paid by the wealthiest segment of society is not reasonable.

    As I said in the post: my wife and I have benefited significantly from Bush's tax cuts. The catch is, we don't *need* that money. The tax rate that we were paying was fair and reasonable for the services that the government provides. On the other hand, we have plenty of family and friends who don't make as much as we do, and some of them could *really* use some relief from taxes, because they're income isn't much beyond what they need to get by - and the governments slice, for people in their situation, can make the difference between getting by, and going into debt just to survive.

    Cutting taxes for *us* in a time of deficit spending and war - while leaving taxes pretty much unchanged for the vast majority of people who are struggling - that's just stupid.

    By Blogger MarkCC, at 6:34 PM  

  • Mark,

    The government provides services to its citizens: from military, to law enforcement, to business regulation, etc. Those services cost money. The government needs money to pay for those services - that's what taxes are for.

    National defense is a pure public good. We all consume it equally. Hence this is "giving the money" to the rich, poor and everybody in between.

    The idea that money is being borrowed to be handed over to the rich is hyperbole of pretty much the same kind you are decrying.

    The question becomes, what is the appropriate way to distribute the cost of those services onto the population? And that's something that people can disagree about in a civil way.


    Sure, fine. And the people who pay the bulk of that cost are in the upper end of the income distribution link. There are a couple of things to note there. First that for the bottom two quintiles the share of taxes is actually negative (most likely due to the EITC). Those in the fourth and fifth quintile pay over 96% of the income taxes and about 85% of total federal taxes.

    As for those who are at the lower end of the income distribution and taxes, on a federal level there isn't much there to cut. These people end up paying lots in taxes due to things like state and local taxes, sales taxes and the payroll taxes. While the latter are indeed federal taxes cutting them with the impending shortfalls in both Medicare and Social Security is not a good idea. However, taxes at the lower end of the income distribution were cut at the federal level. So while you have a good point about the total tax burden, in reality it is besides the point of your initial post. Neither President Bush nor any other President can, could have, or will be able to do much about it.

    Oh, and a brief bit of history. During one war this century the U.S. ran up a public debt that was well in excess of GDP. During WWII I believe that public debt as a share of GDP was around 104% or so by the end. So running deficits during a war isn't all that unusual, in fact, it is probably to be expected. As for the wisdom of cutting taxes at the same time, that is a bit more debatable.

    And upon finishing your comment I see you are completely incapable of defending your initial claim that money is borrowed by the federal government and given to the wealthy. Is that an example of bad math where no math is actually present? Looks that way to me.

    By Blogger Steve, at 7:40 PM  

  • I messed up the html on the link. Here it is again, but corrected:

    link

    By Blogger Steve, at 7:42 PM  

  • Steve said:
    "The "rich->richer, poor->poorer" argument is specious"
    Would you explain that to me please.
    I refer you again to Kevin Phillips book.
    It seems to me that the given reason for cutting taxes is to stimulate the economy. I fail to see how giving comparatively large amounts of money back to the comparatively few people who already are making more money than they can spend stimulates the economy more than giving a smaller amount of money back to the vast majority of people who make less than they need to live decently.
    It seems to me that a sensible way to cut taxes is to take the total amount of the cut and give every tax-reporting entity an equal share of it.

    By Anonymous Karl, at 8:41 PM  

  • steve:

    I'm starting to get *very* pissed off at having words put in my mouth.

    I said that we're deliberately cutting revenues and increasing spending, which puts us into deficit (which means borrowing money), and that a sizeable portion of that revenue cut is in the form of a tax cut to the wealthiest people. Tell me - how does it wrong to say that the government is borrowing money in order to lower taxes on the wealthiest people when the country is in deficit largely because of the tax cuts for the wealthiest people?

    And the war is no excuse. Yes, it's common to run deficits during a war. It is *not* common to lower income taxes on the wealthiest citizens, give subsidies to corporations raking in records profits, and then say that you need to borrow money "because we're at war".

    By Blogger MarkCC, at 8:45 PM  

  • karl:

    I'm with you on that. The idea that somehow this governments tax cuts are an "economic stimulus" is horseshit.

    I also have to comment that it's amusing to see people like steve insist that "rich get richer, poor get poorer" is nonsense because income distribution statistics aren't really meaningful; but then when they want to show that rich people pay more taxes, suddenly figures calculated in exactly the same way become worthy of quotation.

    By Blogger MarkCC, at 8:48 PM  

  • (btw I am a different Steve than the one with the blog)

    The Bush tax cuts did benefit working families - the child tax credit was doubled, the bottom rates lowered, etc. On the other hand, most wealthy individuals are in the Alt Min bracket which was not changed from 28% so they saw little benefit from the program other than the reduction in capital gains rates.

    Fundementally when you set the top rates too high, the wealthy spend their efforts on tax shelters to preserve their wealth rather than constructive investment that spur economic growth. At top brackets, an individual in NY or CA has a marginal tax rate (including state and local taxes) of nearly 50%

    By Anonymous steve, at 8:50 PM  

  • "How about we turn off the reactionary bullshit, eh?

    I never even suggested that "a person's money actually belongs to the government and they are lucky to keep whatever the government lets them. Is that how you see it?""

    Yes, it's a straw man argument, designed to parody your position and make it easier to refute.

    By Blogger Orac, at 11:28 PM  

  • I said that we're deliberately cutting revenues and increasing spending, which puts us into deficit (which means borrowing money), and that a sizeable portion of that revenue cut is in the form of a tax cut to the wealthiest people. Tell me - how does it wrong to say that the government is borrowing money in order to lower taxes on the wealthiest people when the country is in deficit largely because of the tax cuts for the wealthiest people?

    It isn't wrong. But that also isn't what you wrote. What you wrote is that the government is borrowing money to give it to the rich. This is false. A more accurate statement is that the government is borrowing money so that the rich (and the poor) can keep a larger protion of their income. It isn't my problem that this pisses you off as you are the one who is inaccurate here.

    And the war is no excuse. Yes, it's common to run deficits during a war. It is *not* common to lower income taxes on the wealthiest citizens, give subsidies to corporations raking in records profits, and then say that you need to borrow money "because we're at war".

    I'm pretty sure that taxes across the board were cut. Look at the data I linked too, in 2002 the lowest income quintile's share of taxes went from -2.6 tp -2.9. Also, the effective tax rates declined for all income quintiles as well. It isn't that taxes were just cut for the rich, they were cut across the board. Since the rich pay a larger portion of taxes, they got a larger share of the cut.

    As for all the corporate pork, that is true. There is a goodly amount of that. But there are other spending programs that are rotten fiscal policy too. The Medicare Drug program for the Elderly. There is quite a bit of idiocy on which to blame the Republicans and Bush, no need to go about using the hyperbole.

    Orac,

    Yes, it was a strawman, but I like to call is sarcasm, unfortunately it wasn't as obvious as I thought.

    Now this is a better example of a strawman,

    I also have to comment that it's amusing to see people like steve insist that "rich get richer, poor get poorer" is nonsense because income distribution statistics aren't really meaningful; but then when they want to show that rich people pay more taxes, suddenly figures calculated in exactly the same way become worthy of quotation.

    I didn't say it was nonsense, but that in terms of measuring welfare economists prefer to use consumption expenditures. Since income taxes are levied, under current law, on income and not consumption looking at taxes as a function of income seems reasonable.

    Next time I'll be more like Mark and just say, "its just wrong."

    By Blogger Steve, at 11:54 PM  

  • Actually, I mentioned that the "rich/richer" argument was specious. And I would still say it is for some of the reasons already mentioned. First, relative poverty isn't the most cut or dry issue, unless you're just willing to accept that the government says "under this line, you're poor" and excuse the behavior that gets people to that level. I was technically poor for a number of years before and during school, but have since moved well beyond it. At the time, I was counted as poor according to my income, but during that time was increasing my skillset which allowed for a movement out of the category. On a longer timeline (say, 25+ years) the poor are in an absolute sense much better off now than they were before. For instance, television was once a luxury item, but is now almost ubiquitous. (Indeed, we see an effect from this in the obesity rates: obesity strikes young, poorer people more than young, wealthier people. One of the arguments is bad food and time watching television instead of doing more active things. Everything has a cost.) Are the poor "poorer" now because the middle class has burgeoned and the median income swelled? If so, then the poor are rather the same in relative terms (buying power, which is what I think steve was referring to in terms of economists looking at expenditure rather than income), but the distribution looks as though money is being situated higher up the income ladder.

    But there is also another confounding issue, which impacts the "rich/richer" argument. Given the way companies are structured in the US, a huge proportion of small businesses are incorporated as "S-type" corporations. This means that the income from the business is reported as the income of the individual who runs it. So, the person who owns a corner convenience store has a reported (to the IRS) income of whatever the store makes, which is probably WELL above the $200K line people think of as "rich". Now, takehome pay for this person may only be $50K, and she might be supporting a number of family members. In many family situations, one owner has a store and employs family members. The family members income may fall very near the poverty line, but their expenditure is low because they may have food/housing covered by the store owner. Of course, this isn't a majority of the population of the US. But the US Census bureau does chart a number of things like absolute average income for the SAME family. The change in this level over, say, a 10-15 year span is much greater for the lower income brackets, meaning there is larger absolute and relative movement for people starting in the lower brackets (quintiles, usually). Each year roughly 18-20% of the people who are in the lowest bracket have moved up one or more. And some move back down. But then you have to take into account inflation, the relative change in prices, etc. For instance, the relative cost of housing went way down when interest rates fell, so people across the spectrum were far more able to purchase homes (spurring to some extent the housing boom we see/saw). Another example is the spread of participation in the stock market that occured in the 90s. What was once the purview of only the wealthy has become (for good -- Google -- or ill -- Enron) a regular portion of the average American's portfolio of wealth.

    MarkCC -- not sure if it was me you're suggesting claims that the "rich/poor" argument is bad on one hand but the "rich pay more taxes" is great on another, but I don't think I've made that claim. The issue is that there is a problem with definition of the argument, I think. The traditional method for pointing to growing disparity in rich and poor is the distribution of total national income, where the rich have a greater percentage than they did, say, 10 years ago. What this masks, however, is the absolute rise in income (a smaller share of a bigger pie possibly being bigger than the original slice of a smaller pie, and so on), and the hidden nature of inflation, which ends up working much like a tax on those who consume more (incidence is of interest here as well: the poor buy items that have to be replaced more frequently like clothing, but the rich pay more on each purchase because of the price of the good -- how this washes out is highly dependent on location, but it's not a clear line). The rich do pay more in taxes, which I would say is fine under a progressive system, and one that the US has been more than willing to adopt. But since the definition of what exactly income is -- the tax code is stunningly large not because of tax rates, but because of the political drive to offer favors and subsidies based on definitions of what is and isn't taxable income -- ends up wrapping into it things like small businesses, cutting tax rates for high income brackets is by no means simply a break for "rich people". I have small business owners in my family that have hired a lot more people because of the decline in the tax rate -- more money went directly into the company as soon as it was freed up, and capital purchasing increased when capital depreciation rules changed. But that's anecdotal, so of little use other than to illustrate my meaning.

    The "poorer/richer" claim is made based on a certain set of criteria, as is the claim that the rich pay more taxes and thus will naturally see a much larger return to tax cuts. It's often not the SAME set of criteria, however, so without stating them, I think it's just as hard to denounce one and accept the other as it is to say that if you believe one, you have to believe the other. The poor are not the EXACT SAME set of people from year to year, while the people who get a tax break are the exact people who paid the taxes in the first place, introducing a difficulty right at the start.

    I agree again, however, that doing this at a time when you're spending is jumping at a phenomenal rate is simply idiotic. My only issue was to point out that the notion of cutting tax rates could ultimately increase productive, taxable work in the US (all else equal). Any tax cut will decrease revenue in the short term, so I just wasn't clear on your point that "while under some conditions tax cuts could increase revenue, these have decreased revenue" since I would suggest that those "some conditions" include a relevent time frame.

    By Blogger Henry, at 11:09 AM  

  • amazing. on a blog dedicated to the analysis of good and bad math, a political issue gets 25 lengthy comments and counting; the previous lambda calculus post just one.

    By Anonymous yet another Steve, at 12:20 PM  

  • In 1905:

    [I had] a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules -

    (1) Use mathematics as a shorthand language, rather than an engine of inquiry.

    (2) Keep to them till you have done.

    (3) Translate into English.

    (4) Then illustrate by examples that are important in real life.

    (5) Burn the mathematics.

    (6) If you can't succeed in (4), burn (3). This last I did often.

    By Anonymous Alfred Marshall, at 1:10 PM  

  • One of the interesting fallacies I see all the time in discussions of economics (which all of us are equipped to understand are fantastically multi-variate systems with behaviours that are probably impossible to predict in detail) is this line of thinking:

    Alice: action X resulted in change Y therefore change Y caused action X.

    Bob: No, change Y did not occur -- look at this data.

    Alice: Oh well change Y would have occurred if not for this other variable Z.

    Repeat ad nauseum.

    By Anonymous BMurray, at 1:48 PM  

  • Steve wrote: "Next time I'll be more like Mark and just say, 'its just wrong'."

    Now, that's not fair. Mark rarely says "its just wrong". More often he says something like "That's bulls***, you s***head."

    By Anonymous Nat Whilk, at 2:55 PM  

  • Nat:

    Care to take a moment and back that up? Can you cite a single instance in the entire history of my blog where I've said anything remotely like "that's bullshit you shithead" to a commenter?

    By Blogger MarkCC, at 3:22 PM  

  • Hi,

    There is an elephant in the room, and that is the fact that the US is not paying its way in the wider world. At the moment, US consumption is fed by imports which are financed by investment from overseas; chiefly from Japan and now China. One day this will end: there will be nothing worthwhile left to buy and the investors will want their money back. World-wide economic chaos ensues.

    There is no evidence that politicians or government economists are doing anything about the problem.

    I am a Brit, and the situation here is the same except on a smaller scale. I take no pleasure in it.

    Regards,

    John Green

    By Anonymous John Green, at 4:08 PM  

  • There's an additional factor in this whole economic scene that isn't being addressed.

    Even assuming that reducing taxes will accelerate economic growth and might even result in greater tax revenue given sufficient growth, the economy can only grow so fast before inflationary pressures start slowing it down again anyway. If the economy can't grow enough to offset the tax rate reduction, revenues can't increase.

    And that's the situation we're already seeing. The Fed is steadily raising interest rates to try to slow the economy before inflation gets out of hand. If tax rate reductions are still stimulating high economic growth, then allowing the reductions to phase out would presumably have the same effect as interest rate increases, making them desirable to slow economic growth to a sustainable pace.

    By Blogger Lord Runolfr, at 5:06 PM  

  • Mark,

    I think you missed one interesting factor - the fallacy that our tax system is progressive.

    Given the tax cuts on capital gains and dividends, I'm not sure that's the case.

    Consider two individuals.

    Harry is a successful tradesman, and has a salary of $100,000 per year. He has $20,000 of deductions, so his taxable income is $80,000. He pays:

    $16,906 in payroll taxes
    $ 5,580 in social security
    $ 1,305 in medicare taxes
    $23,791 in total

    George is the son of an investment banker. He doesn't draw a salary - his income comes from capital gains and dividends. For sake of argument, assume $50K of each, and that his capital gains are long-term.

    He pays:

    $ 7,500 capital gains tax
    $ 7,500 dividend tax
    $15,000 in total

    That's really the worst case - these taxes vary from 5% to 15% - so the actual tax is probably less.

    So, to summarize, the guy who makes his money in wages pays 23% of his income in tax, and the guy who gets his money from investments pays 15% (it's actually probably closer to 10%).

    That is a huge inequity. And if the numbers get bigger, it gets worse, since the income tax brackets are progressive but there is no progressiveness in dividends or capital gains.

    Like Mark, I'm in a position where I stand to personally benefit from such policies, but have family who are on the other end of it.

    By Anonymous Eric, at 5:11 PM  

  • Well, let's see. On this thread, we have you saying "How about we turn off the reactionary bulls***, eh?" and "The idea that somehow this governments tax cuts are an 'economic stimulus' is horses***." On a post on Monday, you enlighten us about some "miserable walking s***bag" who is also, apparently, a "s***head". The Duke lacrosse rape case brought to our attention a practitioner of bad math who was identified the first four times as an "a**hole" but by the fifth mention had been downgraded to a "jackass". And you thought that the proper response to Richard Swinburne's questionable probabilizing was to meditate on the odds of flying monkeys zeroing in on his house and "pelt[ing] it with their feces." There appears to be a trend here.

    By Anonymous Nat Whilk, at 7:20 PM  

  • Nat:

    In other words, you can't come up with a single instance where I've said anything like "that's horseshit you shithead" to a commenter.

    I make no apologies for calling people like Vox Day a shithead - they've earned it. But I do *not* resort to crude insults of people who comment on this blog.

    If you find my writing so objectionable, feel free to not read it. No one is forcing you. But if you're going to keep reading and commenting, I'd really appreciate it if you could stick to talking about the actual subject of the post rather than personal attacks.

    By Blogger MarkCC, at 8:15 PM  

  • So running deficits during a war isn't all that unusual, in fact, it is probably to be expected.

    In the past this made perfect sense; WWI, WWII, Vietnam, Korean war, etc. However, Iraq was a war that was supposed to cost under 4 billion including rebuilding, according to the administration's first estimates. This year, if I remember correctly, they have spent somewhere in the neighborhood of 250 billion, numbers which outstrip the original estimate for the total war by a factor of over 60.

    By Anonymous Anonymous, at 1:17 AM  

  • Well, yes $250B so far (though costofwar.com says $280B).

    But the long-term cost is likely to be $2T.

    Which would make it a factor of 500

    By Anonymous Anonymous, at 4:46 PM  

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