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Friday, December 14, 2007

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


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.

    Posted by on Friday, December 14, 2007 at 11:25 AM in Budget Deficit, Economics, Politics, Taxes | Permalink  TrackBack (0)  Comments (27)


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