Is Stephen Moore "That Stupid"?

I'm very pleased that the press seems to finally be getting it: tax cuts have not paid for themselves. Politicians too, for the most part anyway, but there is one notable exception noted below. Justin Fox has a nice write-up, as does Avi Zenilman at Politico who summarizes the positions of Republican candidates on the "tax cuts pay for themselves"claim and reviews academic work on this issue:

Continuing with the 'shameless commie propaganda' on tax cuts and revenues, by Justin Fox: The comment screening software here seems to have gone hyperactive in the past few days... I will try to fish regularly in the junkpile, where I find gems like this comment to one of my Arthur Laffer posts from alex:

Shameless Commie Propaganda (I simply refuse to believe that you are that stupid)

1. Mr. Laffer did state the evident and nothing else: (1) if government will collect 100% nobody will show up for work, (2) if government won't collect nothing it will have no revenues and (3) there is a maximum somewhere in between.

2. So "diminishing returns" is far from being the biggest danger of raising taxes, the biggest dangers is sliding into area of negative impact on Laffer's curve.

3. Tax cuts did paid for themselves: e.g. in 1984 federal revenue were greater than in 1982 and grew up until 2001 and again after tax cut of 2003, revenues in 2004 were greater than in 2002 and are growing ever since

http://www.irs.ustreas.gov/pub/irs-soi/table_6_2006_dp.xls

Now I simply refuse to believe that alex, or WSJ editorialista Stephen Moore, who makes similar claims to #3 all the time, is that stupid. So what does that make them? Definitely disingenuous, maybe something worse.

If you take the very simple step of adjusting for inflation, you'll find that real federal revenues were lower in 1984 than in 1982, and lower in 2004 than in 2002. So alex's claim #3 is, on its face, false. But that's not really the issue: Eventually, tax revenues did come to surpass their 1982 and 2002 levels in real terms. Which proves absolutely nothing about the efficacy of tax cuts. The U.S. economy has a tendency to grow, whether or not Congress is cutting taxes. And over time, that tendency will produce higher government revenues, whether or not Congress is cutting taxes.

Now I'd like to believe that well-designed tax cuts can make the economy grow faster. But would any non-charlatan want to argue that all of the economic growth post-1982 and post-2002 was tax-cut-induced? Of course not. Arthur Laffer certainly didn't when I quizzed him on it. So the question becomes a far more complex one of separating the tax-cut-induced growth from the rest. Now I'm pretty sure alex and Stephen Moore are too stupid to figure out answers to that. I know I am. So I rely on the verdict of economists who study tax matters, who are pretty much unanimous in concluding that the Reagan tax cuts were, taken in their entirety, a big money loser for the federal government and that the Bush tax cuts will turn out the same way.

The final refuge of the tax-obfuscation scoundrel is usually to point out that those pointy headed economists at the Congressional Budget Office and elsewhere are often way off in their projections of future tax revenue. It's true: Since 2003, revenues have risen faster than anyone at the CBO or even the White House projected. But it's not like they're biased toward the downside: The fall in tax revenues between 2001 and 2003 was also much sharper than any of the pointy heads projected.

The main reason for this inaccuracy is that any such projection depends heavily on forecasts of future economic growth. Economists really aren't any good at forecasting recessions and recoveries, so what the CBOers and their ilk usually do is plug in numbers based mostly on estimates of long-run growth, which will inevitably be undershot during downturns and overshot during booms. Lately this undershooting and overshooting has grown more pronounced. My guess is that it's a result of increased income inequality: An ever bigger share of government revenue is coming from a small group of high-end taxpayers (not because their tax rates are higher than they used to be, but because they're making much more money than they used to), and those high-end incomes include a lot of stock option gains, performance bonuses, and the like that are extremely sensitive to even slight changes in economic growth.

And, from Mathew Yglesias:

Supply-Side Madness, by Mathew Yglesias: Avi Zenilman and the dread Politico put out a solid piece making the point that the central plank of Rudy Giuliani's economic policy outlook is hokum: Tax cuts do not, in fact, increase revenues no matter how many times Giuliani says they do.

Here's more from Zenilman at Politico:

Giuliani consistently echoes President Bush’s assertion in February 2006: “You cut taxes and the tax revenues increase.”

But there’s a growing sentiment among many conservative economists — including those who generally support cutting taxes to spur economic growth and job creation — that Giuliani’s statements are simplistic and at worst misleading. ...

While Sen. John McCain, former Gov. Mitt Romney and other GOP presidential contenders have distanced themselves from previous comments supporting the broad claim that reduced tax rates lead to more government revenue, Giuliani has made it central to his economic message. ...

The “On The Issues” section of his website, pointing to his record as New York mayor, says, “City government saw its revenues increase from the lower tax rates.” ... But Chris Edwards, tax policy studies director at the libertarian CATO Institute, said: “It sounds like Mr. Giuliani was a little sloppy in his statements there.” Giuliani’s claim that tax cuts could recoup the trillion or so dollars that the AMT currently collects “seems like a silly argument,” Edwards added. ...

“There are circumstances in which lower tax rates can actually increase revenue, but that is not the general result,” said Martin Feldstein...

Conservatives have argued that some economic models underestimate the growth effects of tax cuts, and consequently overestimate the lost revenue. But tax reductions actually increase revenue in only very narrow cases, several economists said, such as when the marginal tax rates on capital gains are too high.

Still, Michael Boskin, a Giuliani economic adviser and Stanford professor who chaired the President’s Council of Economic Advisers under George H.W. Bush, said that the mayor’s claims about revenue and taxes need to be considered in a broader context.

“The mayor has been very clear that he has an aggressive plan to work on both sides of the fiscal equation — both controlling spending and reducing and reforming taxes. All of the elements of the program are designed to reinforce each other and help the economy grow,” he said.

I need to break in - that's trying to have it both ways. He's not really lying because he really means you should cut programs too? Of course cutting programs increases revenues improves the fiscal balance (though, like Laffer, I can think of counterexamples at the extremes where that isn't true), but that's not the issue and not what Giuliani is claiming. Continuing:

In December 2005, Congressional Budget Office Director Douglas Holtz-Eakin concluded that a 10 percent reduction in the income tax would spur enough extra economic growth to offset maybe a third of the lost government revenue. Holtz-Eakin ... is now advising McCain.

In 2005, ... Gregory Mankiw co-authored a study that examined “the extent to which a tax cut pays for itself through higher economic growth.” The authors concluded that a broad reduction in rates “recoup only about a quarter of the lost revenue through supply-side growth effects”...

Edmund McMahon, the director of Empire Center for New York State Policy at the conservative Manhattan Institute, supported many of the Giuliani tax cuts. “If absolutely no rate cuts had been enacted under Rudy, all else being equal, total revenues might have been $1 billion to $2 billion higher when he left office...

Other campaigns ... have backed off this kind of supply-side rhetoric.

In March, McCain told the National Review, “Tax cuts, starting with Kennedy, as we all know, increase revenues.” Two months later at a Fox News debate, he said that the Bush tax cuts “have dramatically increased revenues.” Aides to the McCain campaign told Politico that these were oversimplifications, and that he hasn’t said anything similar since.

Romney also hit the lower-taxes-higher-revenue gong at an April 2007 speech to the pro-tax cut Club for Growth. But economic observers have noted that he has avoided that tack since, and the campaign has just released a “Conservative Blueprint for Lowering Taxes” that said nothing about increasing government revenue.

Comments

[James Killus]

I think we've had a good breakthrough here on Economist's View even on the first point:

1)If government will collect 100% nobody will show up for work.

People will show up to work if you give them a nice lunch. Slaves will show up to work because of the chains thing. Soviet Workers showed up to work because of some combination of those two things. Volunteers show up to work even when they aren't getting paid.

The zero revenue at 100% taxation is where the lie begins. One does not have to believe that 100% taxation is a good thing to understand this (though aren't we all in favor of 100% tax rates on ill-gotten gains? We should be so lucky that it would eliminate criminal activities).

"Supply side" rhetoric has become just another litmus test for Movement Conservatives. You have to sing the hymn in order to be in the priesthood. "Tax cuts pay for themselves" is to economics as "Intelligent design" is to biology, just another burden laid upon us by our brethren on the Right.

[calmo]

nice "brethren" James, lay it on us again...
It B true us stand alone ants ain't nothin but fodder for the anteater. Better find brothers and form a colony before you get sucked away.
"Brother James" bein not so good as "Brethren James" to my ear, maybe because it conveys the impression of just another singleton ant while "brethren" sounds like an army?

Those luxuriating volunteers who don't need monetary remuneration for their efforts

Volunteers show up to work even when they aren't getting paid.

are not big favorites with the paid 'help' they work beside from my experience (playin around as usual, but not confused about the big help I am not.)

[Mark Thoma]

The Laffer curve is all wrong, by Bluematter: No, I'm not referring to supply-siders arguing lower tax rates will bring in more revenue, I'm talking about the very foundations of the curve. Yes, I admit this is pedantry, but it may come in handy next time someone at a cocktail party starts explaining what the Laffer curve is all about (if you go to this sort of cocktail parties that is). Here's a recent description at Tim Worstall's blog:

Trying to explain this idea to an eager Cheney, "Laffer pulled out a cocktail napkin and drew a parabola-shaped curve on it," writes the liberal New Republic journalist Jonathan Chait. "The premise of the curve was simple. If the government sets a tax rate of zero, it will receive no revenue. And if the government sets a tax rate of 100 per cent, the government will also receive zero tax revenue, since nobody will have any reason to earn any income.

A 100% tax rate on everything was tried before, of course: they called it communism. Whereas not advisable, government revenues sure weren't zero. And even if you rule out authoritarian methods, it is very likely that even at such high levels of taxation some market activity would take place simply to support non-market, non-taxable activities. And of course, I would expect considerable social pressure on individuals to work (if you don't work alongside me, we all die), plus a lot of activity from people who actually enjoy doing their job.

Thanks for bearing with me - now I got this off my chest I can return to posting mildly interesting stuff again.

[save_the_rustbelt]

On Steven Moore - yes. Or perhaps he just does whatver his paymasters want - same effect.

And why waste breath on the 100% tax issue, just clouds real issues.

Why quote Bluematter, who really doesn't know what he/she is talking about (or he is a lousy writer, or both).

Calmo is in rare form today, that is good.

[pgl]

So Justin turns on one of his rightwing trolls. Good for Justin! It would seem that the comment caves of Angrybear have been infested with these trolls as well - and we Bears are Angry about it. Nice job tying this supply side stupidity to the GOP campaign trail! But as I note over at Angrybear, Michael Boskin is way too sensible to be working for RUDY. Then again - why is Greg Mankiw hanging out with Romney?

[The Baron]

As I've posted before, where are the researchers who are actually trying to quantify the Laffer Curve? We all argue about a napkin scribble, and a few do studies to show that one particular tax policy at one particular time did or did not have a specific affect on economic growth, but no one is trying to discover the broader principle...probably because they are all afraid that it might not support their particular agenda.

I think everyone can agree that different tax rates, on different income brackets produces different amount of government revenue. 100% on $15k and under, and 15% on $1M and over, will produce a different revenue stream than a flat 25%, etc. Bluematter points out that the Laffer Curve may be thick tailed to the right, and he's probably correct. Heck it may even be thick tailed to the left. 0% taxation, but the Government can still finance itself through printing money, so revenue is still not zero. So what? The basic principle that there must be some tax rate, that probably changes based on economic conditions, that maximizes both government revenue and economic growth, must exist.

Why is everyone continually arguing about the details of where we may be on the curve, or denying the existence of the curve, when it is patently obvious that some curve must exist, and that we have no idea what it looks like, or where we are on it?

Lets get some real, unbiased research done, then we can start arguing about some aspect of reality, rather than just using poor documentation to push our individual political agendas.

[datacharmer]

Save the rustbelt - Thanks for your kind words. I think you are cute too.

[Mark Thoma]

Real unbiased research has been done, and it doesn't support that tax cuts are self-financing. Not even close. So I'm not sure what your complaint is, unless it's that the research doesn't agree with what you think it should say.

The details are important becasue some people think - wrongly of course - that we have been on the right-side of the peak. So where that peak is, if it exists, and its magnitude, are questions worth asking. When we do ask, we discover that those who make the self-financing claim have no foundation to make it. It's more of a wish.

[O]

Here's a link to a recent paper on the Laffer curve by Trabandt and Uhlig. The authors take a stab at figuring out where the peak is relative to where we are now:

http://ideas.repec.org/p/hum/wpaper/sfb649dp2006-023.html

See figure 2 in particular, presented for the US and the EU.

[jefff]

"Of course cutting programs increases revenues..."

Really? How?

[Mark Thoma]

I didn't word that very well, I meant increases the surplus or decreases the deficit as the case may be - good catch - I'll adjust the wording. The second part of the statement does refer to revenues though i.e. that cutting critical programs can reduce GDP and reduce revenues (by more than you save by cutting the program).

[pgl]

Bob McManus over at Angrybear made the same catch as Jeff did. Bob in his comments provided his own well worded edit.

[jefff]

Just a slip of the fingers then, and I agree about the second part.

[robertdfeinman]

One more point.
One of the premises of the Laffer argument is that it is necessary to cut the top income tax bracket. If there are other brackets to be cut that is just some bones thrown to the masses for political reasons.

Obviously only the top bracket really needs to be cut because that's where the disincentive to work must lie. Everyone else can still make more money before reaching this negative incentive level.

This is more baloney. If there really was a Laffer curver then disincentives might be different for people in different socioeconomic segments. There are examples, people decline working overtime because they have enough money, for example. So any Laffer effect should have many curves, not just one.

The real motivation unmasked, yet again - it's all about more money for the wealthy.

[Jenna's Bush]

So what does that make them?

Liars.

[Bruce Webb]

Well I suppose we could try empiricism. I am no tax expert but IIRC the early 60s produced surpluses so on balance the reduction from 90% to 70% in top rates was pretty good evidence that the former rate was on the wrong side of the Laffer curve (assuming it has validity). The Reagan tax cuts from 70% to 50% at first blush suggest we moved past the peak on the other hand we had a huge increase in defense spending that may be enough to explain the large Reagan deficits. The Bush years were instructive even with the peace dividend his initial cuts proved too sharp to correct the fiscal situation though his later correction seemed to help, Clinton actually inherited a fiscal situation that was not deteriorating quite as rapidly. Then Clinton's 39% top rate resulted in a total turn around from 1992 deficits to a rapid improvement by 1996 or 1997 when the Unified budget hit surplus (I may be off a little here) to 2000 when both Social Security
and the General Fund hit surplus.

Obviously the whole matter is complicated and to some degree distorted by Vietnam, the Cold War, and Iraq War spending. Then again you can't contol for every variable. Looking back over 40 years what was the top rate that operationally turned deficits to surpluses? If you say 39% you are winner.

While we all know correlation does not equate to causation, that doesn't mean you can discount to zero. God knows the supply siders have not hesitated to take credit for every uptick in any economic measure as proof of the magic of tax cuts.

If we look at first order effects there is a good case that the peak of the Laffer curve is a 39% top rate. It worked better than than Reagan's Poppy's 35%(?) or Junior's 35% 35%

[Bruce Webb]

My iPhone betrayed me and I couldn't find a way back.

Want to test the Laffer curve? Try eight years at the rate that produced the best results, i.e. Clinton Administration. We can argue second order effects later.

[Bruce Webb]

Well even that didn't work somehow ' Reagan's 50%' dropped out of the last comment but one

[tom]

Is Mark Thoma "That Stupid"?

I am very pleased to report that most Americans are getting it: the money that the government takes in taxes are earned by the American people and are not subsidies from the government that have to be "paid" for.

Mark Thoma thinks that all income earned by Americans belong to the government. Tax cuts, therefore, have to be paid for in some way like it is a subsidy from the government. Americans are not buying this idiotic language that "tax cuts have not paid for themselves" because it equates a tax cut to a subsidy.

Liberals like Mark Thoma just don't get it and that is good news because when elections role around Liberals won't get it (votes).

[James Killus]

Oooh, goody, a troll. Can I keep him if I promise not to feed him past midnight and keep him way from water?

Even within the hermetically sealed universe of the right wing economics nut, the notion that "all money belongs to the people who earned it," makes no sense, as they simultaneously argue against both the legitimacy of "fiat money" and the legitimacy of taxes that are paid solely in "fiat money." If fiat dollars have no intrinsic worth, then what is the problem with sending some of them to the government? Frankly, this seems like a much better deal than having to give them your gold, or, for that matter, your lupins (I know, wrong Moore).

Believe it or not, right wing nuts make an even more fundamental mistake than this, which is to believe in the magic power of government. In this, they are just like socialists, only with the sign reversed. The U.S. Government is a collection of organizations, somewhat loosely arranged (especially if one counts the entire federal system of state and local governments). The evil magic potion of government is then compared to the magic pixie dust of the "free market," which upon further analysis and refinement, produces the climax design: the corporation, an organization that somehow manages to escape the evil magic of government, despite being organized under legislatively derived laws and having been granted all manner of special privileges (limited liability, powers of eminent domain, subsidies, special tax laws, the list really is endless, isn't it?) that look to any reasoned analysis to be functions of government.

I've wondered for a while what sort of result one might get if one applied the sorts of Laffer Curve/supply side analysis to corporations instead of government. After all, corporations are internally command-and-control organizations, the command functions (i.e. management) extract funds from the rest of the organization by fiat; divisions within a corporation get budgets that are decided by management, and do not get to keep the funds they generate as property. Instead, all cash flow goes into the general fund and is budgeted out by the central command structure, rather like the Politburo ran the Soviet Economy, in fact.

Under a "supply side" view, managerial salaries, dividends, stock repurchaes, and retained funds (those not devoted to direct investment) are simply "dead weight costs" on the corporation, and if one wishes for the corporation to grow, those costs should be minimized. Now that I've explained this in simple, back of the napkin terms, I'm sure that there will be an immediate call for reforms in corporate governance by conservative economists who are sure that economic "efficiency" is the be all and end all of their profession.

You don't suppose that our anonymous troll is just a sock puppet for Stephen Moore, do you? Could he be stupid enough to...oops, almost lost the train of thought there.

[skeptonomist]

Rather than argue about the Laffer curve, maybe rational people should devote their attention to why people give any credence at all to such things as "tax cuts pay for themselves", and what kind of counter-propaganda is required. One fundamental problem is that arguments for tax cuts tend to assume that tax money disappears from the economy, and I suspect that many people intuitively credit this. Of course it does not, and as Bluematter points out the Laffer curve is ultimately irrelevant.

It would be helpful if Politicians and other policy makers (presumably Democrats) pointed out some of these basic economic facts. The comparison of Government with Corporations (e.g. as by James Killus above) should also be a good point of attack: if government really did shrink away, who doubts that we would be ruled by Corporations (perhaps ultimately just one)?

[calmo]

Such a relief to hear a calm, collected voice that is not immediately exhausted by the sound "Kudlow" or "StephenMoore" of "LafferCurve", skepto.
How do you do it?
You wanna listen to an uncalm (and this izit isn't it: provoke and teach your audience to bray back) voice? (tis me on this site back in March)

There is, after all, that senior writer for the WSJ, Stephen Moore who recommended Kudlow for none other than the post of Secretary Treasurer when it appeared Snow was on the way out. Yes, that recommendation was based on the argument that both GWB and Kudlow overcame substance abuse problems and therefore knew where each other was coming from. (How can you still be standing?)
You see how we suffer, people, but there is a remedy: the Python skit where Marx, the only distinquished panelist, is unable to field the undistinguished question and expresses his sorrow. ("Oh shit")

No, you can stay clear, calm and collected --responding to this guff with equanimity...grace even. Ok, maybe it's not too later for me to learn this.
So are you closer to 97 than 57? ...we symphoniacs need to know.

says...

The WSJ bringing Moore on board so they would have a somewhat well-known economist who spews the extreme supply-side garbage is the equivalent of Rush Limbaugh finding a doctor who would prescribe Oxycontine. Limbaugh went "doctor shopping". The WSJ went "economist shopping".

[ajay]

Weirdly, there is something wrong with all three of Laffer's 'evident' points.

1. Mr. Laffer did state the evident and nothing else: (1) if government will collect 100% nobody will show up for work,

Not true, as noted above. Assuming that (in this monolithic state) people's basic needs are taken care of - otherwise they'd starve! - people will do jobs they enjoy; people will do jobs they feel have social merit; people will do jobs that give them non-monetary rewards, such as status or fame; people will do jobs simply as an alternative to sitting around the house all day getting bored; people will do jobs as a way of assisting their lucrative black-market money-making jobs (as happens to a large extent in the poorly-paid but job-secure Italian civil service).

(2) if government won't collect nothing it will have no revenues

Again, not necessarily. Governments have other sources of revenue than taxation. The Hong Kong government owns land and rents it out. The Saudi government controls the nation's oil reserves. The British government in the 1970s owned a large number of industrial corporations; British Steel, British Aerospace, British Coal, etc. All these sources could in theory replace tax revenue to some extent. Why shouldn't a country with a large Singapore-style national investment fund and a small welfare state get by without any taxation at all, and still provide essential services?

and (3) there is a maximum somewhere in between.

"A maximum"? Why? Why shouldn't there be lots of maxima? Why shouldn't there be maxima that change position and magnitude depending on which direction you approach them from, as in a hysteresis curve? Who says it has to be a smooth curve with a single peak?

[pgl]

says - Stephen Moore is NOT an economist (even if he plays one on TV sometimes).

I also see some foul mouthed fellow names "tom" is trying to do his best imitation of Don Marek who infects the comment box over at Angrybear with his usual tirade that liberal economists are both Marxist and stupid. How utterly pathetic!