Friday, November 12, 2010

The Highest Tax Cuts

I'm too busy to write something this morning, so I'll just pose a question.  In most cases (except when the state has some resource that pays for everything--oil, for example), taxes seem necessary to run a country.  A country like ours is based on a social contract.  The people establish government to "provide for the common defense, promote the general welfare, and secure the blessings of liberty." 

So our taxes support the police and the army, provide "general welfare" works like education, social security, and potentially health care, etc.  These structures reflect the fact that no one in a country of this sort has absolute rights, including rights to property.  The goal is to maximize individual rights and common benefit at the same time, in some maximized give and take.  We all surrender some of our rights for the benefit we receive by not having to protect ourselves and potentially for having fall back networks for such a time as we cannot take care of ourselves.  I believe a good deal of the current furor either has lost sight of these aspects of the Enlightenment context in which the Constitution was formed or never knew it.

So the question of going back to the previous tax rate on those earning over $250,000 a year reduces to one question and one question only.  It is not a question of morality.  After all, it's the way the rate was 10 years ago and no doubt better than what the rate was under Reagan.  Definitely better than the rate under Nixon. 

The question as far as I can see it is a purely economic one.  Yes, reinstating this tax level will generate much needed money for the economy with incredible deficits.  But given free market dynamics, does it economically do the economy better to keep this money flowing in the hands of such individuals?  I really don't know.  This is the key question I don't hear anyone discussing.

So I am posing an economic question today, not a moral one.  Which course would be better for the economy--raising the money through taxes or keeping that money flowing in the hands of such individuals?

18 comments:

Dan said...

Actually, it IS discussed. While I am still not entirely sure of the practics in leaving the tax cut in place at this level, there IS a discussion as to why it could be necessary.

There are small businesses who file in certain ways (sole proprietor, possibly) where their businesses would also suffer if the tax rate went back up. It could cost the company an employee, equipment, etc.

That is the argument. It is being discussed.

Ken Schenck said...

Fair enough. It always seems to be the "thievery" argument I hear, which I think is an unhelpful diversion.

John C. Poirier said...

Lowering the tax rates of the highest earners in fact provides the quickest and surest economic stimulus, as it puts more money in the hands of those who use their personal holdings as *direct industrial capital*. That's the whole reason for doing it. Unfortunately, this isn't widely recognized, partially because the logic behind it is often dismissed as "trickle down", which doesn't really represent how it works. (I can tell you, from personal [family] experience, that it works. My father had the easiest time employing more people when the tax rates were fairest to the higher-earning classes.)

From an economic standpoint, raising taxes on the rich is the dumbest thing a government could do. Unfortunately, the rhetoric of "the rich get richer" -- usually expressed so as to imply that the poor must then get poorer (as if there were no such thing as newly created wealth) -- usually keeps the argument as such from actually being stated in a fair way. Politicians who favor lower taxes for the rich are usually derided as simply looking out for their financial supporters, when in fact they're simply doing what's in the economy's best interests.

Ken Schenck said...

This is the kind of stuff I want to know, John. I think it's pretty well established that high taxes hurt an economy and lower taxes improve it. My questions are 1) at what point do tax cuts reach their maximum benefit. Like how fast you drive and how much gas you use. There's a range of both speed and gas mileage.

So there must be a range where the amount of taxes raised is higher because you are stimulating the economy by keeping as much money in spenders hands as possible. But there must also be a point where you have made them so low that it diminishes overall taxes raised. What is the sweet spot?

2) Are the wealthy spending their money right now? One of the compaints of the banks the government bailed out is that they are not lending with it.

Jake Hogan said...

Dr. Schenck

I always enjoy your thoughts. Generally, few small business are run as sole proprietorships. These would be the kinds of businesses that are subject to personal income taxes instead of business taxes. The vast majority of those who would pay more taxes if the rates were raised on those making $250,000 a year are wage-earners or those who own a business but whose business profits are taxed under business law. The only way that higher taxes would hurt hiring in LLCs or other forms of incorporated businesses is if the owner had to raise her pay to make up for an extra 3% tax hike.

The real question is whether taxes being lowered are a good "stimulus." The thinking is that they are, and yet lower taxes result in money spent in other ways besides those that would stimulate the economy the most. Generally, though, it's hard to argue that taxes being lower now would somehow fix the economy. Every economic expansion in American history since 1932 or so has occurred with tax rates FAR higher than they are now.

Ken, you seem to indicate there is some kind of curve after which an increase in taxes would result in less economic growth. For the political scientist, this is an empirical question, and from what I've gathered, generally higher taxes do not result in less economic growth until the taxes get to the place of consuming 60-70% of economic output--we're not even close.

For a counter-example to the US, take a look at the German economy and they way that they have managed to weather this recession (and their export industry over the past 20 years). While there are other factors at play, if higher taxes were "job-killers" and all the other things the GOP accuses them of being, remarkable German success since reunification would never have been possible.

Ken Schenck said...

I'm going to plow through an economics textbook before I'm 50. It's going to happen ;-)

Thanks Jake...

Anonymous said...

Economics is not a science and demonstrably doesn't work. We shouldn't just tax the rich, but look into, and stop, what has enabled them to acquire their money at the expense of others in the first place.

Nathan Crawford said...

Ken,

I think it depends on who you are reading, as it's not well-established that lower tax rates equal more money in the economy. This is the argument economists like Paul Krugman and others make (and, remember, while Krugman is a liberal, he's a liberal because of his economics).

What we are seeing now is that even with the tax cuts, small businesses (whatever that is? - technically, KOCH Industries is a small business) don't/can't reinvest that capital because of the unsure nature of the economy. Besides, only around 3% of these "small" businesses would be affected. And, if it was thought about, why not make the tax rate hike for a small business at 500,000 instead of 250,000.

Further, these were always meant to be temporary because of the large amount of debt added by these cuts. So, they're not really tax cuts as much as a 10 year tax reduction to "stimulate" the economy (did well, eh?)

Lastly, though, to talk of social contract and the nature of economics and then to take morality and ethics off the table is a major mistake as it misses the most important component of the economy - humans and humans don't always act the way they are expected to. They do make economic decisions based upon their morality and ethics. And, even as this discussion has been framed, there has been a certain conservative element that see tax cuts as the "right" thing to do.

JohnM said...

This is a rhetorical question, unless of course someone who knows can provide an explaination for not-an-economist me: Stimulating the economy aside, how will tax cuts, for any income level, help in any way with the aforementioned incredible deficit?

Jon said...

The only problem with your "promote the general welfare" premis Ken, is that increasingly we have stood by as Christians and watched our Government supplant the place of our God. Our government has now become the redemptive agent! Of course the only problem is that when any institution interposes itself between man and God, it can't bear up under the enormous weight. Consequently, because Government isn't God it can't do the things God can and it is going broke - Rapidly. I suggest you visit the website usadebtclock and watch the numbers spin so fast it makes you dizzy.
As an undergrad at IWU in the 1990s I sat in lectures given by Dr. Glenn Martin and Dr. Ivan Pongracic where the fallacy of putting faith in government was continually demonstrated. The basic problem with increasingly high tax rates is that they discourage investment in the future, they discourage hiring by entreprenuers, they are a drag on profits. And even though profit seems as if it has evil overtones, the truth is that it is biblical. "Cast your bread upon the waters and after many days it shall return."
The economist Arthur Laffer represented graphically that governments can only raise taxes so high before revenues to the govenment actually start to fall. Furthermore, it has been demonstrated over and over again, first with John Kennedy, then with Ronald Reagen, and most recently with George W. Bush, that the surest way to increase revenue to the government is to reduce tax rates to job creators. But the main problem is that Congress spends all of the revenue and more besides. The root of the problem of taxes and debt is not economic at its core, it is spiritual. One's theology always drives ones economics!

Ken Schenck said...

Jon, thanks for the resources you suggested on the other post. I may very well start with Hazlitt.

I wish I had a really good label for the Martin approach from my perspective. Basically, I find the "ideological framework" approach to realia highly problematic. I think of it something like this:

When I paint a picture of reality, I try as much as possible to construct the picture out of the dots of reality itself. This is a quasi-empiricist or even Aristotelian kind of approach. You try to derive the universals of your picture as much as possible from the particulars you can actually see.

Martin's approach often uses terms like worldview or presuppositions, which I have no problem with in itself. The problem is that this sort of ideological approach paints most of the picture without paying much attention to the data. It interprets the dots of reality by way of the rest of the picture that it draws out of nowhere.

This would be fine if we could be sure that the rest of the picture was truly revealed. There are so many different ones, though, it hardly seems likely. I hardly know what to say when I hear these ideological narratives.

Jake Hogan said...

Jon

Not to begin an argument, but since we are discussing empirical matters, the idea that tax cuts increase revenue is absolutely, patently, and indisputably false. It is simply not true in the short or mid term. As much as it may make sense logically (or not), it does not play out in an actual evidence-based examination of recent economic history.

And to argue that tax cuts, like those from Ronald Reagan, for example, led to greater growth in the long-term future that increased revenue is to make an unfalsifiable argument. Did the 1986 tax reform make our economy more competitive? Perhaps it did, but it surely did not increase revenue. Just because increases in revenue happened at a later point doesn't mean that the tax reductions resulted in it, after all, the US economy is almost always in a state of growth, which naturally will result in higher government revenue, ceterus peribus.

Food for thought.

Jon Bachman said...

Jake, I don't know what planet you studied economics at but if you want charts and graphs I'll find them for you. Lower tax rates relatively speaking increase economic activity - surely it is easy to conceive that the opposite must be true. And so if you need more proof I would refer you to the words of Chief Justice John Marshall, "The power to tax is the power to destroy." Enough said

Scott F said...

Quoting John Marshall is not only an attempt to appeal to authority (naughty naughty) but a fallacious one at that. What exactly did John Marshall (b 1755) know about modern economics? Jeesh!!

Go here for the chart showing that revenue growth was exactly the same under Reagan as under Carter - tax cuts and all.

In 2006, the CBO figured that the positive effects of the Bush tax cuts would pay for only 10% of their cost.

Scott F said...
This comment has been removed by the author.
Scott F said...

Ken,

I appreciate your numerous insights into the Bible and its history but I worry about your economic knowledge. Let's all try to bring the same skepticism to economic claims as we do to the translatioins in the NIV ;^) Even I read Krugman with at least a pinch of caution.

If there any Randians reading this, I was never here ...

Jon B said...

You'll have to forgive me Scott, but in matters economic, I'll always side with capitalists over socialists every time.

Paul Krugman, you can't be serious... The left leaning thinking of some people today is absolutley mindboggling. Tell me Scott F., if increased tax rates are such a boon to a nations economy then why don't we raise them to 99% of income? Heck, if they're that useful why don't we make it 125% of income and make Americans borrow to pay the difference? Oh I almost forgot, we've borrowed it from China and Ben Bernanke... Nevermind...
To see how Krugman has cooked his tax revenue book please click on link provided...

http://www.cato-at-liberty.org/paul-krugman-on-carter-and-reagan-wrong-again/

Jon Bachman said...

To my (high taxrates are good audience)I submit the following to clarify the current debate - most importantly because high tax rates are not just a revenue problem but a real kitchen table family problem!

Time to address tax cuts is now
Published: Thursday, November 18, 2010 1:07 AM EST - Marion, IN Chronicle Tribune Editorial

There has been lots of debate about whether or not the Bush-era tax cuts should expire at year’s end, as they are scheduled to do. Most of that debate seems to have q uelled by now, as Democrats, including President Barack Obama, have said they are willing to extend the cuts for at least a portion of the public.

Good for them. The new problem is this: For those who want the tax cuts extended, which seem to be most of us now, how do we get it accomplished?

The U.S. House of Representatives is meeting for what can only be described as a lame-duck session. Republicans will take over majority status in January. A new speaker will take over; new committee chairmen and chairwomen will be in place. There doesn’t seem to be much urgency on the part of the current Democrat majority to take any action on the tax cuts. They have to be done before year’s end, because that is when they’re scheduled to expire.

Sometimes, we are done no favors by the current workings of government. This is one of those times. There doesn’t seem to be any indication that anything will get done in time to save the tax cuts.


For those who think these tax cuts affect “only the rich,” here are some facts about what will happen in 2011 if the tax cuts expire:


•Currently, there are six tax rate brackets — 10 percent, 15, 25, 28, 33 and 35, based on income levels. If the Bush tax cuts expire, the 10 percent bracket would disappear, and those paying into that bracket — those making less than $34,550 — would now pay 15 percent. Are people who make less than $34,550 rich?
•The child tax credit was doubled when the Bush tax cuts took effect — from $500 to $1,000. It would revert back to $500 without an extension of the tax cuts. That’s $500 less per child for lots of working families.
•The “marriage penalty” was eliminated with the Bush tax cuts. As a result, married couples that filed jointly received a standard deduction twice that of a single filer. Tax rates were adjusted for joint filers to remove the penalty. The penalty returns if the tax cuts expire. Married couples don’t magically become rich when they tie the knot.


Despite all that, those in Washington seem concerned with doing everything except addressing the tax cuts. As a result, we could all be stuck, in effect, with a tax increase.