The benefits of tax cuts has nothing to do with encouraging consumption. Well, ok, maybe the theory is that tax cuts get you out of a recession by increasing consumption, but that is largely bullshit. The main purpose of tax cuts is to boost productivity, which works best during normal economic conditions.

Flyin Ryan, nothing in your link contradicts my statistics: the deficit has been less than GDP growth every year, so every year the relative size of the national debt has fallen. If that isn't good stewardship then I don't know what is.

Quote :

"Can someone explain to me how a government can take in less money through tax cuts across the board, fight two wars, increase bureaucracy on FDR levels, and still manage to be fiscally responsible without running large deficits?"

Simple, that is not what has happened. Congress cut the tax rates which caused the citizenry to abandon tax avoidance behavior, thus tax revenues have actually increased every year since 2001. Tax revenues have actually grown double digit percentages every year; which explains how we have fought two wars, increased bureaucracy, and still managed to shrink the outstanding debt as a percentage of GDP.

[Edited on April 3, 2007 at 12:19 AM. Reason : .,.]

4/3/2007 12:18:23 AM

i thought lowering tax rates meant people had more money to spend. is that not correct?

also,

4/3/2007 12:22:01 AM

^^Exactly.

Revenues are way up since the GW tax cuts. You can fault Bush and the previous congress for irresponsible spending, but his tax cuts have boosted the economy while maintaining a healthy revenue stream for the government. A shrinking deficit in the face of that bloated budget speaks for itself.

^Lowering taxes helps the economy in many ways. Of course people have more money to spend, but they also have more money to save and invest, which is much more beneficial in the long run. The reason that cutting taxes on the rich is so effective in boosting the economy is that those rich people invest their savings, which leads to an economic boom and more revenue for the government. A side effect that everybody bitches about is that the rich get richer faster than the middle-class and the poor.

Your graph is somewhat outdated. It should reflect the shrinking of the deficit over the last 2 years.

[Edited on April 3, 2007 at 12:28 AM. Reason : 2]

4/3/2007 12:23:01 AM

Quote :

"Congress cut the tax rates which caused the citizenry to abandon tax avoidance behavior"

So what we are saying is, we don't have a good system for enforcing the tax code if the rates are really high?

4/3/2007 10:13:41 AM

No, it means high tax rates dissuade individuals from productive behavior.

4/3/2007 10:38:21 AM

So by tax avoidance behavior, you literally meant stopping production, because making no profit is better than making some profit?

4/3/2007 10:43:40 AM

No, they engage is different behavior which, while less productive for society as a whole, has the benfit of producing income that someway avoids full taxation.

Just a few examples:
Raising taxes diverts capital away from legitimate business and towards: tax-free government bonds, illegal enterprises, illegal employment, capital intensive enterprises, overseas tax havens, tax-code favored industries, etc.

4/3/2007 10:58:17 AM

Quote :

"illegal enterprises, illegal employment, capital intensive enterprises, overseas tax havens, tax-code favored industries"

So we effectively have no way to combat this system? I assume ultimately we drive companies overseas? Then what?

4/3/2007 11:05:07 AM

Yes, we can combat it quite easily: just reduce the tax rate and people will halt their tax avoidance behavior.

Quote :

"I assume ultimately we drive companies overseas? Then what?"

Then what, what? Reduce the tax rate and new business will replace the lost business. Is there some aspect to this topic you wish to discuss but I have not addressed?

If you want a moral stance, it is not that simple. If the Government needs the money today, such as to fight a war, then cutting taxes to reduce undesirable tax-avoidance would be an immoral answer: we might reduce the behavior, but we might also lose the war.

4/3/2007 11:46:21 AM

Quote :

"If you want a moral stance, it is not that simple. If the Government needs the money today, such as to fight a war, then cutting taxes to reduce undesirable tax-avoidance would be an immoral answer: we might reduce the behavior, but we might also lose the war."

This sounds like a conundrum to me. What I was saying was, your idea to reduce often illegal tax avoidance strategies was to reduce taxes. Is there not a way to have high taxes AND actually collect them?

4/3/2007 11:51:42 AM

From my understanding all tax regimes break down after awhile. Some do this by engendering illegality, such as a high sales tax, but most do it by distorting economic activity to unproductive ends, such as the income tax.

Of course, we know exactly how to get around the problems associated with any given tax: have multiple forms of taxation. We already do this: local governments tax property, our state has a sales tax, and the fed. has an income tax. If we tried to fund all the government we have on a single tax the disruption would be crippling, but divided amongst four taxes the disruptions are manageable.

Now, the evidence states that income taxes above 40% become noticeably disruptive, but there is little evidence that a rate below 20% does much good at all.

As such, if we need more money (you did say higher rates) I would suggest we seek that revenue elsewhere as our existing tax regimes are largely tapped out. A currently untapped source would be a Value-Added-Tax, which does not become unduly disruptive until the 40% range, almost double the point at which a sales tax breaks down (around 20%).

4/3/2007 12:43:25 PM

And of course lowering spending is out of the question, right?

4/3/2007 4:15:56 PM

Quote :

"Revenues are way up since the GW tax cuts. You can fault Bush and the previous congress for irresponsible spending, but his tax cuts have boosted the economy while maintaining a healthy revenue stream for the government. A shrinking deficit in the face of that bloated budget speaks for itself."

What's happened is that due to inflation people are going into higher tax brackets, and they're paying more taxes due to the AMT (alternative minimum tax), at which deductions pretty much can no longer be used. And the AMT has never been indexed for inflation, meaning that it grabs more and more people every year. If you don't believe me, ask someone squarely middle-class that's paid taxes for 15-20 years.

That has little to nothing to deal with GW's tax cuts. All the rich people in this country that now have lower taxes are investing their newly-free money, but overseas, not in the U.S. Even in sports, off the top of my head, I know three English soccer teams that have been bought by American billionaires, one of which is a mega George W. Bush fundraiser (the Texas Rangers owner). Even though it is sports teams, it is foreign investment overseas. In more followed investment money, this has been true. I think the reason behind this is due to the aforementioned inflation and the coming decrease in the value of the dollar as it stops being the world reserve currency.

I'd love for an economist to explain to me how trickle-down economics works when the money leaves the U.S. and goes overseas.

Quote :

"Flyin Ryan, nothing in your link contradicts my statistics: the deficit has been less than GDP growth every year, so every year the relative size of the national debt has fallen. If that isn't good stewardship then I don't know what is. "

So what you're telling me is that Person A is better than Person B below?

Person A: $80000 total debt (house mortgage, BMW payment, school loans to Duke, etc.) with $100000 salary
Person B: $50000 total debt (renting, Honda payment, school loans to NC State, etc.) with $60000 salary

Person A is our government now, and Person B is our government X many years ago.

Debt is evil. Period. It's how I handle my finances. How about less deficit and more GDP? It's not like there's some economics law that says it's impossible. And the deficit and GDP are not correlated, so if GDP goes up it does not mean deficit should go up as companion (thankfully).

Quote :

"Simple, that is not what has happened. Congress cut the tax rates which caused the citizenry to abandon tax avoidance behavior, thus tax revenues have actually increased every year since 2001. Tax revenues have actually grown double digit percentages every year; which explains how we have fought two wars, increased bureaucracy, and still managed to shrink the outstanding debt as a percentage of GDP."

Why would a person setting up a tax shelter in the Caymans voluntarily remove himself from the tax shelter when taxes go down. His tax shelter allows him to pay far less taxes than the U.S. could ever do, cause...well...the Caymans don't have much of a military for starters.

And as far as revenues going up, it's mainly due to the AMT I highlight above, especially with the heavy inflation that is going on right now. There's a reason that the Republican Congress that was in power did not remove it despite heavy lobbying from conservative groups and people like Grover Norquist and Bob Novak. All those tax cuts and the AMT was not removed? Do you ever stop to wonder why?


So you agree with me though that when all this military equipment comes back from Iraq and Afghanistan, taxes will have to go up to pay for the replacement/replenishment? And if not, how else are you going to and what's your plan if you were in power? This is mega mega money, and no one knows about it.

[Edited on April 3, 2007 at 7:13 PM. Reason : .]

4/3/2007 6:45:57 PM

^^In theory it is possible, but the fact remains that spending has to increase or else you'll end up with an economic catastrophe.

4/3/2007 6:48:06 PM

^ And what makes you say that? Your statement doesn't seem to make any sense. Every dollar the government does not spend is another dollar it does not need to borrow.

Quote :

"So what you're telling me is that Person A is better than Person B below?"

No, I'm saying that the U.S. is better off debt wise in 2007 than it was in 2002.

Quote :

"I'd love for an economist to explain to me how trickle-down economics works when the money leaves the U.S. and goes overseas."

From what I know of the theory of trickle-down economics, it should really have been called trickle-up economics. But people didn't like the sound of making rich people richer, even if to do so they made everyone else richer first.

That said, what you describe does not appear to be large enough to show in statistics. On net, overseas investors are pumping $800 billion dollars into the U.S. economy every year (you might recognize the number as the trade deficit). That is, foreigners are investing $800 billion more in the U.S. than Americans are investing overseas.

Quote :

"How about less deficit and more GDP? It's not like there's some economics law that says it's impossible."

Yes there is, it is called the law of politics. No one ever got elected by not building a tea-cup museum or cutting social security payments.

4/3/2007 7:34:24 PM

Quote :

"That said, what you describe does not appear to be large enough to show in statistics. On net, overseas investors are pumping $800 billion dollars into the U.S. economy every year (you might recognize the number as the trade deficit). That is, foreigners are investing $800 billion more in the U.S. than Americans are investing overseas."

From November 22nd, 2006:

http://www.financialsense.com/editorials/conrad/2006/1122.html

Quote :

"Last weeks report from our Treasury on foreign investment in the U.S brings me to focus on the trade balance, related foreign investment, our loss of manufacturing, and the long-term implications. I have been monitoring the big imbalances of our economic system to determine if we are heading toward a big economic convulsion that would change our investments and our lives. I have been evaluating long-term historical measures of prosperity and economic movement, comparing the last big depression to now to see if we face similar situations. Some of the similarities look dangerous, like the large overall indebtedness of then and now. Some of the differences do not show so serious a situation today, such as the relatively stronger financial institutions that would surely get government bail-out if liquidity became a problem. But there is one difference that is much worse now: the trade deficit. First, here is the trade balance as usually reported, showing a big drop starting in the 1970s, as we began to buy more than we sold abroad: image]http://www.financialsense.com/editorials/conrad/2006/images/1122.h1.gif[/image] Accumulating the annual numbers above shows the position of how much the U.S. owes or is owed by the world: The question is what that means for our financial system. Decades ago, the U.S. was smaller and dollars were worth more, so we need a baseline to make the periods comparable. The method I use is to calculate the ratio of trade deficit (or surplus) to GDP. The positive position we enjoyed in the lead-up to the 1929 crash has eroded now to a negative position. The trade position of the U.S. was very strong before and during the great depression. The dollar was devalued against gold one time by Roosevelt , but was generally strong. In fact, we experienced deflation, meaning the purchasing power of the dollar increased, as prices of homes and other items crashed. The foreign situation of accumulated international debt is exactly the opposite of what it was in the 1920s. This important difference shows why the dollar then turned out to be strong, even in the face of disastrous economic contraction that brought 25% unemployment. Now, the accumulated trade deficit hangs over the dollar so that this time looking forward, the opposite conclusion is more likely: the dollar will succumb to decreasing purchasing power. Many commentators suggest that if we are headed toward recession or, even worse, to depression, that will be deflationary just like it was in the 1930s. I believe we are headed toward serious financial times, but I do not see the deflation of that time returning. Foreigners lending us $2.5B per day can’t continue forever. When it fails, we will not see deflation but big inflation. Foreigners all wanting to get out of dollar positions will drive the dollar down and prices up as they bid for assets other than dollars. We can look at today’s numbers from the Treasury on foreign investment to see the size of foreign support by their reinvestment of their trade surplus in our Treasuries, agencies, stocks and bonds. I monitor the reinvestment as an indicator of pressure on the dollar. The data from today, averaged over the last 3 months, does not show a problem. Foreigners are still investing in U.S. financial assets, despite pronouncements from the Chinese and other central banks that they want to divest some of their U.S. holdings. In aggregate they are continuing to invest. The reinvestment by foreigners is equal to the trade deficit, so imbalances have escalated together as shown in the chart below: The underlying data from today show this source of reinvestment may be more precarious than the surface shows. China is the country we watch most closely because they hold the biggest hoard of foreign currencies of $1 trillion. China still added to their U.S. dollar denominated holdings, even if at a slower rate this month. The other two biggest purchasers are London and Grand Cayman Islands . They are different because they are money centers, and are passing through investments from other countries from such sources as hedge funds and countries that prefer anonymity, like oil countries. The surprise is the amazing size of the investment from London : Investing money centers are potentially able to change their position on a whim, as seen in London ’s negative move in July. London ’s investment of $47B is huge compared to the worldwide net foreign purchase of $88B. This trade deficit and investment juggling act has succeeded, and on the surface has held together. When you look at the components, the underpinnings do not look so stable. The other side of the trade deficit is that foreign cheap labor has replaced manufacturing in the U.S. , hollowing out our lower and middle class incomes. The chart below shows U.S. manufacturing jobs as % of total jobs. The expanding trade deficit matches the decreasing U.S. manufacturing jobs. This is exactly as expected, but it is not good for the long-term economic strength of the U.S. The destruction of productive capacity will decrease our long-term wealth creation. With U.S. production decline, there is less need for investment in that productive capacity. Investment, which is the basis for future growth, has moved to Asia. U.S. corporations seeking to increase profits by cutting costs actively supported these moves. That means less wealth for the U.S. because we are not producing as much. The economy will weaken because we are not paying our workers to make the things we import, so they will have less to spend. Foreigners have put off the problem in the short term by lending us the money to buy their exports and maintain our lifestyle. But this can only continue until foreigners fear that they may lose by holding too many dollar investments that start to decrease in purchasing value. So in conclusion, the trade deficit is very serious, especially in the long term. It is part of the hollowing out of American production and wealth creation. As a consequence of borrowing to buy those foreign goods, we have sold off some of our future profits as we have to pay interest on Treasuries and dividends on stock holdings, with the result that the dollar will weaken. Foreigners have continued with the deadly embrace of extending more credit to us, so we appear wealthier than we are. But should they try to extricate themselves from their dollar holdings, the consequence will be a devaluing dollar. Even if we head toward a massive economic slowdown 1929-style, a serious deflation is unlikely because of the negative position of our trade deficit. A weakening dollar will be supportive to gold and precious metals in the long term. Bud Conrad"

[Edited on April 3, 2007 at 7:48 PM. Reason : .]

4/3/2007 7:40:58 PM

I read nothing there to contradict my statements:
"foreigners are investing $800 billion more in the U.S. than Americans are investing overseas."

Quote :

"The destruction of productive capacity will decrease our long-term wealth creation"

It would, if it was taking place. Between 2002 and 2005 the productive industrial capacity of the United States increased 16% and utilization increased around 8%.
http://www4.ncsu.edu/~gsparson/data/industrialoutput.gif

Click the link, the graph is really awesome

4/3/2007 7:54:59 PM

^ I now know how businessmen in 1928 sounded.

"Our financial outlook is good. Look at this graph of the last four years."

Blast from the past: http://www.brentroad.com/message_topic.aspx?topic=425058

[Edited on April 3, 2007 at 8:09 PM. Reason : .]

4/3/2007 8:00:45 PM

No, businessmen in 1929 sounded exactly like businessmen in 2000 sounded: price per earnings ratios of 100 will be normal in the future, being a "New Economy" and all.

4/3/2007 8:07:01 PM

haven't the democrats been promising to raise tax rates for the upper tax brackets for a while now?

also, at least they aren't running a severe deficit anymore that will cause severe inflation like under nixon.

4/7/2007 1:27:50 AM

Sorry, Keynes was wrong, inflation is not driven by Government spending, borrowing, or taxation. Inflation is a product of monetary policy which is set by the Federal Reserve, nothing more, nothing less.

4/7/2007 9:31:06 AM