News Can Income Tax Rate Hikes Close the Deficit? (interesting article)

[mheslep]

Debt commissioner and former Clinton administration chief of staff Erskine Bowles to OP: NO

Speaking to the National Governors Association, Bowles also said "we can't tax our way out" of the debt problem.[...]

http://content.usatoday.com/communi...ublicans-face-big-after-election-issue-debt/1

 

[NeoDevin]

I'm on PF mobile, and want to subscribe to this thread. There isn't a subscribe button on PF mobile, hence, this post

 

[mheslep]

2. So, the 1994 and 1995 budget cuts under Clinton with a Dem Congress ought to be owned (at least in some significant part) by Clinton and/or the Dem Congress.

Well again I give credit for some share of the 90's federal revenue increases to Clinton/Dem Congress stemming from income tax increases which they pushed hard for in the form of the http://en.wikipedia.org/wiki/Omnibus_Budget_Reconciliation_Act_of_1993" . I give them no credit for budget cuts because there were none per my observation, aside from the continued military cuts stemming from the USSR collapse - peace dividend continuing from Bush I. I'll go a step further and give Clinton credit for continuing the military cuts, as some Republicans might well have found a silly rationalization to reverse them despite the fall of the USSR had they been in power. I argue that Clinton and Congress in 92-93 increased the other-than-military spending across the board, taking place in 93-94.

And while the surplus may have been gone by 2001, before Bush pushed any fiscal buttons, the deficit continued to rise for at least the next 2 fiscal years, after several buttons were pushed, and with the still Republican Congress helping to push them.

Completely agree the 2000+ Congress and Bush spent too much money. I object, however, to the frequent assertion by Democratic politicians, especially Speaker Pelosi and Leader Reid, that the Clinton http://books.google.com/books?id=rT...=reid surplus far as the eye can see&f=false" which is at least wrong, and in Reid's case in particular I expect it is also a lie.

Extra additional note: The dot com boom (to my knowledge) started at least a year or two after the Republicans took over Congress, not during those first 2 years when Clinton had a Dem Congress.

Debatable, the dot com revenue started coming in before the 94-95 Congress: e.g., http://en.wikipedia.org/wiki/AOL#Growth" was created and rolling with Steve Case in 1989, Yahoo in 94.

 

[Office_Shredder]

Debatable, the dot com revenue started coming in before the 94-95 Congress: e.g., http://en.wikipedia.org/wiki/AOL#Growth" was created and rolling with Steve Case in 1989, Yahoo in 94.

There is a difference between revenue and boom. The boom was the inflated stock prices and massive quantities of money thrown around that generally fueled the economy in the 90's.

http://www.edinformatics.com/investor_education/nasdaq_composite.htm"

The NASDAQ Composite is tech heavy and generally used to track how the technology sector is doing. As you can see while there is some significant growth in the early 90's, it's not until about 1995 that the bubble really started to grow and be significant

 

[mheslep]

There is a difference between revenue and boom. The boom was the inflated stock prices and massive quantities of money thrown around that generally fueled the economy in the 90's.

http://www.edinformatics.com/investor_education/nasdaq_composite.htm"

For purposes of this discussion I'm only interested in what revenues flowed to the federal government in the 90s, and why. Capital gains revenue from the market speculation was no doubt part of the story, but the increased employment and salaries (personal income taxes) and business profits (business taxes) must still be responsible for most of the tax revenue increases associated with the dot com era.

 

[Office_Shredder]

For purposes of this discussion I'm only interested in what revenues flowed to the federal government in the 90s, and why. Capital gains revenue from the market speculation was no doubt part of the story, but the increased employment and salaries (personal income taxes) and business profits (business taxes) must still be responsible for most of the tax revenue increases associated with the dot com era.

Obviously these companies need to have money to employ people. Seeing how the vast majority of them made a conscious decision to have no revenue stream for the purposes of becoming a monopoly, all that money's coming through capital raising.

The growth in the NASDAQ went hand in hand with the growth of dot-com businesses

 

[mheslep]

Obviously these companies need to have money to employ people. Seeing how the vast majority of them made a conscious decision to have no revenue stream for the purposes of becoming a monopoly, all that money's coming through capital raising.

I don't follow the relevance, nonetheless I think that is only half right. Some of the front end businesses, those actually running dot.com's fit that description, but not the back end telecom companies like Cisco, 3Com, and Corning who made a killing actually shipping gear/cable and realizing the physical internet we now know. Edit: More importantly, they and those like them paid taxes on those earnings and hired more people who paid taxes on their salaries.

The growth in the NASDAQ went hand in hand with the growth of dot-com businesses

Lets look again that NASDAQ graph from the 90s. No real business activity or government revenue tracked that market spike percentage point for percentage point (except perhaps capital gains as I say), which could only be driven that fast by speculation. Main street businesses have an inertia and can't expand that fast, though they can cease output quickly.

 

[brainstorm]

Main street businesses have an inertia and can't expand that fast, though they can cease output quickly.

Ever heard of "hyper-inflation?" I believe it occurred in main-street businesses in the 1930s and I even read about an earlier example of the tulip-bulb market vastly expanding and collapsing upon news of excessive supply. Neither of those occurred through stock-exchanges, as far as I can tell.

 

[mheslep]

Ever heard of "hyper-inflation?" I believe it occurred in main-street businesses in the 1930s and I even read about an earlier example of the tulip-bulb market vastly expanding and collapsing upon news of excessive supply. Neither of those occurred through stock-exchanges, as far as I can tell.

<shrug>. Inflation <> business output. Second example is market speculation again, stock exchange or not.

We're drifting off topic here, which is how and at what rate does the government accrue revenue via taxes during a period of business expansion, specifically in the Clinton era.

I can't pull up a plot of revenue directly, but federal spending and the deficit are available:

Spending:

Deficit:

Grabbing the end data points (all 2005 dollars):
Deficit: $+0.3T '93, $-0.14T '01 (surplus)
Spending: $ 1.8T '93, $2.05T '01
gives us
Revenue: $1.5T '93, $2.19T '01

So federal revenues increased by $690B over the eight year period (46%), with $250B going to increases in spending, (http://www.usgovernmentspending.com...ack=1&size=m&title=&state=US&color=c&local=s") with the balance going to deficit correction. From the graphs we see that the revenue increase was relatively gradual and started even before the 1994 tax increases.

 

[brainstorm]

I realize you're not discussing this issue at the qualitative level, but I think it is relevant. The reason is that you are assuming that taxation and redistribution doesn't affect the value of currency in the bizarre ways that I believe it does.

Just consider the simple example of substituting record-distribution with music-file downloads via internet. Such an innovation increases record-company profits provided sales remain the same and costs decrease. The profit increase stimulates stock-purchases, which drives up the value of portfolios and may result in capital gains from sold stock.

If this money is spent instead of saved or otherwise frozen, it generates more sales, profits, increased-speculation, and so forth. This would be the case whether it was spent voluntarily or by government mandate/redistribution. The bizarre thing about redistribution is that it results in a sense among the recipients that their standard of living can increase due to them having more money - but the products they want to consume more of have their own supply-demand structures that respond to increasing demand with higher prices.

So increasing government spending during economic boom ends up transferring inflationary pressure to basic commodities, which translates into relative deflation of everything else relative to basic commodities. So, while tax revenue is increasing, the value of the currency is decreasing causing no net shift or possibly net loss of the inflation-adjusted value of tax-revenues.

I think this is actually occurring presently in the persistence of real-estate taxes based on assessment unadjusted for deflation. These and other taxes are based on fixed public expenditures in the form of union-protected pay and raise rates, etc. So, by maintaining wage rates of government employees and other budget items, the tax-redistribution is actually promoting re-inflation of deflated real-estate prices and other commodities. Some would argue that this is exactly the point of fiscal stimulus but it seems contrary to the ultimate purpose of government which should be to increase values and purchasing power, not decrease them.

 

[mheslep]

I realize you're not discussing this issue at the qualitative level, but I think it is relevant. The reason is that you are assuming that taxation and redistribution doesn't affect the value of currency in the bizarre ways that I believe it does. [...]

As it happens there's a fairly absolute rule on inflation that leads me to disagree across the board on all those fiscal examples:

http://en.wikipedia.org/wiki/Monetarism"

Inflation is always and everywhere a monetary phenomenon

I.e. inflation is about excess money supply, end of story.

 

[bleedblue1234]

"If this money is spent instead of saved or otherwise frozen..."

I stopped reading here...

I mean this stuff was figured out a while ago people, just read this book (one of many): https://www.amazon.com/dp/0517548232/?tag=pfamazon01-20

 

[brainstorm]

I.e. inflation is about excess money supply, end of story.

How do you define "excess" money supply except in terms of how it is used?

I stopped reading here...

I mean this stuff was figured out a while ago people, just read this book (one of many): https://www.amazon.com/dp/0517548232/?tag=pfamazon01-20

Please do me the courtesy of saying what you consider wrong with what I said instead of just referring me to a book. Imagine I went on your wild-goose chase only to discover you misinterpreted what I said. You're assumptiveness could cost me unnecessary time and energy because you didn't bother to state your reasons.

 

[mheslep]

How do you define "excess" money supply except in terms of how it is used?

Use of the http://en.wikipedia.org/wiki/Taylor_rule" , or something like it, seems to be best practice, though it has people scratching heads when it calls for zero or negative interest rates, as it does now.

 

[brainstorm]

Use of the http://en.wikipedia.org/wiki/Taylor_rule" , or something like it, seems to be best practice, though it has people scratching heads when it calls for zero or negative interest rates, as it does now.

I don't know if it makes sense to decrease interest rates during deflation, especially if deflation is the result of technological advances or other productivity advances that led to greater abundance, which caused the deflation. After all, there is more to buy with the existing money supply, which effectively already translates into increased money supply in deflated currency, which makes sense in terms of the real growth that caused the abundance-driven deflation to start with, no?

I think the bizarre thing about the current state of fiscal economy is "deflation denial," by which I mean that profit-maximization has motivated the supply-side to pretend like deflation is non-existent, hoping to actually grow by just maintaining previous price levels as much as possible. I'm tempted to call this stagflation, but I think that refers to something else. This is just inflation disguised as constant pricing due to it taking place in a context of real deflation.

Eventually, either productivity decreases will allow to abundance to decrease to fit with persisting price levels OR prices will decrease allowing more purchases with the current money supply, which would be a logical match for productivity increases (primarily in real-estate development and technologically enhanced products and processes). Presumably, without energy-conservation and efficiency-innovation projects succeeding, relative oil-scarcity will increase and that will cause inflation in all products whose fuel-costs are a larger proportion of the retail price.

Put simply, I think fuel-costs in supply-chain logistics are the biggest bottleneck for achieving uniform deflation. Every form of productivity is increasing, mainly due to technological advances. Only the complexity of supply-chains and divisions of labor create energy-inefficiencies which drive oil-scarcity and therefore fuel-prices up. This, in turn, neutralizes the gains in technological efficiency that could otherwise result in the expansion of markets and sales through lower prices.

Also, fuel-costs as a proportion of prices are not just amplified by logistics inefficiencies. Salary-levels are also driven by cost-of-living estimates, which factor in large amounts of fuel-usage and fuel-intensive consumption of products and services. Of course, try convincing people to reduce their salaries by driving less and giving up consumption and see how they respond - especially when they're represented by collective-bargaining agents.

So, where real-estate depreciation and digital media and IT can sufficiently innovate production and consumption practices, deflation should continue whereas more fuel-cost dependent commodities should continue to inflate, except to the extent they are saved by IT innovations and real-estate depreciation (as component costs).

In reality what is needed is major cultural and lifestyle transformations, which would allow more people to consume more real-estate and IT products and services while simultaneously reducing the demand for fuel-consumption. In other words, if conservation succeeds by culture transforming, inflation will be kept in check by a decrease in per-capita demand for fuel-intensive goods. If not, depreciation in real-estate and more efficient products and services will end up as nothing more than increased disposable income to further drive up inflation as oil-scarcity in pushed further by ever-increasing demand for fuel and fuel-intensive products.

Ultimately, I don't know if this will be a problem because price-increases force more conservation of spending, which should check inflation.

The question is why the government is running a deficit in the first place considering that the only reason economic problems are resulting from the deflation is that supply-pricing and demand-side behavior are not adjusting to new paradigms.

 

[mheslep]

Long awaited Fiscal Commission's Report is Out.

http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/CoChair_Draft.pdf

Surprisingly, overall I think most of the suggestions are excellent:

o All of the $100B domestic cuts (slide 20), especially :

• Cut the federal work force 10% (13.2B)
• Eliminate 250,000 contractors (18.4B)
• Eliminate all earmarks (16B)

o All of the $100B Defense Cuts (slide 19), especially:
Reduce overseas bases by one-third
Freeze federal salaries DoD for three years. (Five years ago nine DoD people made more than $170k/yr. Now almost 1000 do).

o Tax Reform: lower the rates, simplify code, broaden the base.

• Consolidate the code to three individual rates, one corp.
• Eliminate $1.1T tax expenditures, allowing an individual rate reduction to 8,14, and 23%, corporate rate reduction to 26%. If we get that, then I'm fine with:
  • Repeal state and local tax deductions, so no more robbing state Paul to pay state Peter.
  • Reduce the mortage deduction. Yes I have a mortgage deduction. Phase it out (slowly) I say if the rates drop.
  • Haircut the the itemized deductions and the employer health deduction
  • Repeal AMT, PEP
  • Eliminate energy tax preferences for oil and gas industry.
  • Gradually raise gas tax by 15 cents.
  .

o Social Security:

• **** Index retirement age to increases in longevity ****. Ding, Ding. Ding. (slide 45)

o Misc:
Enact comprehensive medical malpractice liability reform to cap non-economic and punitive damages and make other changes in tort law (slide 32)

 

[mheslep]

I'm reminded the commissions members are as listed below. I can't imagine anything approaching unanimity with Sen. Durbin and SEIU President A. Stern in there, as I see can't imagine them approving of nearly anything in the report except for the defense cuts. Gregg and Ryan in particular are powerful persuaders; I imagine they played a leading role.

Co-Chairmen:
Sen. Alan Simpson. Former Republican Senator from Wyoming.
Erskine Bowles, Chief of Staff to President Clinton
Executive Director:
Bruce Reed, Chief Domestic Policy Adviser to President Clinton
Commissioners:
Sen. Max Baucus (D-MT)
Rep. Xavier Becerra (D-CA 31)
Rep. Dave Camp (R-MI 4)
Sen. Tom Coburn (R-OK)
Sen. Kent Conrad (D-ND)
David Cote, Chairman and CEO, Honeywell International
Sen. Mike Crapo (R-ID)
Sen. Richard Durbin (D-IL)
Ann Fudge, Former CEO, Young & Rubicam Brands
Sen. Judd Gregg (R-NH)
Rep. Jeb Hensarling (R-TX 5)
Alice Rivlin, Senior Fellow, Brookings Institute and former Director, Office of Management & Budget
Rep. Paul Ryan (R-WI 1)
Rep. Jan Schakowsky (D-IL 9)
Rep. John Spratt (D-SC 5)
Andrew Stern, President, Service Employees International Union

 

[mheslep]

Oh, don't like, at all:

Keeps Obamacare largely intact, and adds back in single payer, public option. (slides 31-36)

 

[talk2glenn]

I find it interesting that during the 1950s, a period when the US experienced a previously unheard-of level of prosperity and economic growth, that the top US income tax rate stood between 84& and 91%, as compared to 35% today. (see reference below).

It's easy to pick and choose data points to distort the facts, but the simple truth is taxes are substantially higher in the US today than they were in 1950. The marginal income tax rates distort that truth, but total revenues as a percentage of GDP do not.

http://www.usgovernmentrevenue.com/...tack=1&size=m&title=&state=US&color=c&local=s

In 1950, the effective federal tax rate was 23% of GDP. In 2008, at current rate levels, revenue peaked at about 37% of GDP. This is an increase of ~60%. The subsequent decline is due to temporary tax credits as part of the stimulus and the recession. Once the credits expire and the new laws and regulations kick in, real rates will rise even higher than that 37% level.

 

[CAC1001]

Another thing to remember is that during the 1950s, that top marginal income tax rate only applied to literally rich people, and there weren't as many around then. I believe they also sheltered much of their income in trusts and so forth to avoid paying the tax.

 

[mheslep]

It's easy to pick and choose data points to distort the facts, but the simple truth is taxes are substantially higher in the US today than they were in 1950. The marginal income tax rates distort that truth, but total revenues as a percentage of GDP do not.

http://www.usgovernmentrevenue.com/...tack=1&size=m&title=&state=US&color=c&local=s

In 1950, the effective federal tax rate was 23% of GDP. In 2008, at current rate levels, revenue peaked at about 37% of GDP. This is an increase of ~60%. The subsequent decline is due to temporary tax credits as part of the stimulus and the recession. Once the credits expire and the new laws and regulations kick in, real rates will rise even higher than that 37% level.

You want this instead:
http://www.usgovernmentrevenue.com/...tack=1&size=m&title=&state=US&color=c&local=s

 

[WhoWee]

You want this instead:
http://www.usgovernmentrevenue.com/...tack=1&size=m&title=&state=US&color=c&local=s

Actually, this is the important one - 2010.
http://www.usgovernmentrevenue.com/...tack=1&size=m&title=&state=US&color=c&local=s

 

[Al68]

US tax rates are...lower than they have been during most of US history.

This is false, and obviously false. There was no income tax at all for most of US history. Specifically the period of time when the US went from literally nothing to the greatest nation in the history of the planet.

It was after New Deal, etc, when other nations started catching back up. Imagine what kind of standard of living and technology we would have now had the New Deal, Great Society, and (relatively) high taxes and regulation never happened. We'll never know, but we can imagine an economy not held back by government for all those decades.

 

[WhoWee]

This is false, and obviously false. There was no income tax at all for most of US history. Specifically the period of time when the US went from literally nothing to the greatest nation in the history of the planet.

It was after New Deal, etc, when other nations started catching back up. Imagine what kind of standard of living and technology we would have now had the New Deal, Great Society, and (relatively) high taxes and regulation had never happened. We'll never know, but we can imagine an economy not held back by government for all those decades.

I think most people would agree that we need a safety net. Unfortunately, common sense is rarely applied to Government programs or (put in the way of) opportunities for political gain.

Food stamps are a good example of the conflict. We hear that health care costs are on the rise because of poor eating habits that lead to obesity and diabetes. Processed foods are the usual targets.

Yet, aside from tobacco and alcohol, persons yielding food stamps can "purchase" anything they want - and REGARDLESS of VALUE. I see people in line with me (I'm paying with my cash and buying discount priced items typically) and they're using the state food card and buying the most expensive products on the shelf. I've actually engaged a few people in conversation and they've laughed and said they can't spend their monthly allocation.

IMO - this does not make sense. Why can't we provide people who need food assistance with basic (yes generic) and healthy staples? The idea is to help people TEMPORARILY - not cradle to grave.

 

[Gokul43201]

It's easy to pick and choose data points to distort the facts, but the simple truth is taxes are substantially higher in the US today than they were in 1950. The marginal income tax rates distort that truth, but total revenues as a percentage of GDP do not.

But total revenues are not a measure of the tax rate. They might be if the Laffer Curve were a straight line with positive slope.

In 1950, the effective federal tax rate was 23% of GDP.

It sounds like you are using the term 'tax revenue' synonymously with 'tax rate'.

 

[Gokul43201]

This is false, and obviously false. There was no income tax at all for most of US history.

The sentence you quoted made no mention of "income taxes". There were obviously taxes of other forms (import tariffs, for instance). To expose the falsehood of the statement you quoted, you'd have to show that the rate of taxation (of all kinds) was not higher in the past.

Specifically the period of time when the US went from literally nothing to the greatest nation in the history of the planet.

Do you have a citation for "greatest nation in the history of the planet"?

 

[Astronuc]

Re: Income tax in the US -
http://en.wikipedia.org/wiki/Income_tax_in_the_United_States#Early_Federal_income_taxes

 

[CAC1001]

Do you have a citation for "greatest nation in the history of the planet"?

I think one could say America is the greatest nation in the history of the planet. No nation has ever dominated so much economically, financially, politically, militarily, etc...nor provided such incredible wealth, standard of living, and opportunity for its citizens and potential immigrants.

 

[Astronuc]

I think one could say America is the greatest nation in the history of the planet. No nation has ever dominated so much economically, financially, politically, militarily, etc...nor provided such incredible wealth, standard of living, and opportunity for its citizens and potential immigrants.

The Roman Empire before it collapsed, or Alexander's empire before it collapsed.

 

[Gokul43201]

No other nation has provided the same standard of living to its citizens? I think there are a few that might disagree. Some of the other areas of dominance (that you've listed, and I can't say I understand what political dominance is, or the difference between economic and financial dominance) arise for no other reason than that the US has a huge population. Want to compare per capita GDP across countries? And of course, there's the remaining question of why your particular set of criteria should be what determines greatness.