Solve the Deficit - Interactive Simulation

[Shaun @ Tru6]

Originally Posted by wdfifteen

Logically, it depends on the state of the economy. If an economy is in a crisis of capacity (where demand outpaces production), cutting taxes to allow business to expand and hire more people would logically increase revenue.

Or ship jobs overseas.

Originally Posted by wdfifteen

When an economy is in a crisis of demand (where debt and unemployment keeps consumers from buying - which is the state the US and much of the world is now) cutting taxes on business just gives them more money to stash in the bank. They aren't going to use it to increase production capacity when consumers aren't buying/can't buy the products they make. That's the current situation - American companies have a record nearly $2 trillion sitting on the sidelines now. What is going to get this economy moving is cash in the hands of consumers, not cuts in the taxes of producers.

More cash in the hands of consumers could just go back into the Stock Market with lower capital gains taxes. The Laffer Curve Theory was developed in the 70s. What's the delta of consumer involvement in the Stock Market in the 70s vs. today?

Will volume make up for lower capital gains?

[Lothar]

Did it. 96% spending cuts, 4% taxes.

There is a lot that wasn't even offered as an option.

[jyl]

The Laffler article argues that total federal receipts rose in the years following the Coolidge, Kennedy, and Reagan tax cuts. That is not actually true for the Coolidge cuts (1918-1925 top marginal rate went from 77% to 25%, total federal receipts did not increase in the following four years), it is true for the Kennedy and Reagan cuts (1963-1965 top marginal rate went from 91% to 70% and 1980-1982 top rate went from 70% to 50%, respectively, total federal receipts increased in the following four years).

However, the Laffler article is misleading, because it leaves out this fact. Total federal receipts also rose in the years that did not follow any tax cut. If you compare tax cut periods to non-tax cut periods, there is no evidence that receipts grew more in years following tax cuts.

Here is a chart showing the top marginal federal income tax rate (blue line), total federal tax receipts (red line). The receipts line is log plotted, so the slope of the line indicates the percentage growth. In the few years following the Kennedy and Reagan cuts, the slope of the line is no different than in other years of the period.



Strictly speaking, the data actually suggests that receipts grow more in years following tax increases than in years following tax cuts.

Here is a scattergram plot of receipt growth and tax rate change. Each point is a year, and represents the percent growth of average receipts in the four following years over the average receipts in the four preceding years, versus the change in average top marginal rate in the four following years over the average rate in the four preceding years. I used four year periods because that's what the Laffler article did. The trendline slopes positive, meaning that increasing rates tend to coincide with higher growth in receipts.



If you still believe Laffler curve "theory", given nearly 100 years of actual data that don't support it, consider this. Laffler did not say that lower tax rates always cause higher tax receipts. He theorized that there is a point above which tax rates become "prohibitive". His theory was that when rates are at or above that prohibitive point, increases in rates cause declines in receipts while decreases in rates cause increases in receipts. When rates are below the prohibitive point, his theory was that the reverse happens: increases in rates cause increases in receipts while decreases in rates cause decreases in receipts. That's implicit in the shape of the curve, shown below.





The Laffer Curve: Past, Present, and Future | The Heritage Foundation
Laffler Curve article that P-O-P refers to
http://www.gpoaccess.gov/usbudget/fy10/pdf/hist.pdf
Federal receipts, see table 1.1 p. 21
Consumer Price Index, 1913- | The Federal Reserve Bank of Minneapolis
CPI and inflation, 1913-2010E, base year is 100= avg of 1982-1984.
INFLATION AND THE CONSUMER PRICE INDEX
calculating constant dollars from CPI

[jyl]

From the peak of 2007, total receipts fell -18% to 2009, or $463BN. About 1/3 of the current budget deficit is due to the cyclicality of the economy as it affects receipts - economy declines, govt gets less tax revenues. About 2/3 is due to the cyclicality of the economy as it affects spending - govt acts as a "shock absorber", spending more in bad times to support economy and fend off even worse declines. Then there is some structural part to the budget deficit. As the economy improves, govt needs to dial back the spending (some of that is going to be automatic - stimulus programs end, UE benefits decline), tax revenue will rise, and deficit can and should fall. That needs to happen over the next five years. The second document I linked to shows current projection of deficit declining from peak $1.8TR to $500BN in five years, with no changes to tax or other policy. More should be done, but trying to do it too quickly risks knocking the legs out from under what is still a wobbly economic recovery.

[wdfifteen]

Originally Posted by jyl

From the peak of 2007, total receipts fell -18% to 2009, or $463BN. About 1/3 of the current budget deficit is due to the cyclicality of the economy as it affects receipts - economy declines, govt gets less tax revenues. About 2/3 is due to the cyclicality of the economy as it affects spending - govt acts as a "shock absorber", spending more in bad times to support economy and fend off even worse declines. Then there is some structural part to the budget deficit. As the economy improves, govt needs to dial back the spending (some of that is going to be automatic - stimulus programs end, UE benefits decline), tax revenue will rise, and deficit can and should fall. That needs to happen over the next five years. The second document I linked to shows current projection of deficit declining from peak $1.8TR to $500BN in five years, with no changes to tax or other policy. More should be done, but trying to do it too quickly risks knocking the legs out from under what is still a wobbly economic recovery.

+1
I'm battening down the hatches. I'm not replacing my BMW when it goes off lease (I'll have to get by with the truck and the Porsches :-( ) and I've pulled the plug on a $350k project start-up because I think with the new philosophy in congress what you just said WILL happen.

[wdfifteen]

Originally Posted by jyl

If you still believe Laffler curve "theory", given nearly 100 years of actual data that don't support it, consider this. Laffler did not say that lower tax rates always cause higher tax receipts. He theorized that there is a point above which tax rates become "prohibitive". His theory was that when rates are at or above that prohibitive point, increases in rates cause declines in receipts while decreases in rates cause increases in receipts. When rates are below the prohibitive point, his theory was that the reverse happens: increases in rates cause increases in receipts while decreases in rates cause decreases in receipts. That's implicit in the shape of the curve, shown below.

He also notes that what makes taxes "prohibitive" is psychological. Regardless of the tax rate, if people sense that taxes are too high, they will start taking actions to avoid them. His theory is psychological guesswork, not the mathematical certainty it has been held out to be.

[RWebb]

Originally Posted by jyl

I've never seen anyone provide evidence that tax cuts lead to tax revenue increases in the real world. With 100 years of pretty good data, you'd think the people who believe this could list each federal tax cut and show that >50% of them resulted in higher revenues from that tax the following year. No proof, no credibility.

not only no proof, there is not even much data that suggests it might be true

[jyl]

Originally Posted by wdfifteen

+1
I'm battening down the hatches. I'm not replacing my BMW when it goes off lease (I'll have to get by with the truck and the Porsches :-( ) and I've pulled the plug on a $350k project start-up because I think with the new philosophy in congress what you just said WILL happen.

Aka Japan's botched recovery, or 1937-1940 in the US.

[ronster]

I took the neocon, conservative Republican route and took away all taxes for the wealthy and the mega corporations, in fact gave them more tax breaks so they would have more money to invest in business and workers overseas. I also removed the financial oversights that were supposed to keep the stock brokers and money lenders under some form of control while eradicating Social Security, Medicare, Unemployment benefits, Welfare and any other "social" programs that are the only lifeline between a life and homelessness. After all it's only the old, indigent, unemployable (read most American families) that will be out on the street. I increased the military budget so prison camps can be built to put the homeless masses in. I also earmarked funds to start the construction of special "showers" and furnaces once they're too old or indigent to perform as slaves. After all "those" people are disposed of America will be free, white, conservative and most certainly on the road to recovery.

[gtc]

0% Taxes
100% Spending Cuts
-and-
I saved the Smithsonian and our National Parks.

My Choices

[widebody911]

Originally Posted by ronster

I took the neocon, conservative Republican route and took away all taxes for the wealthy and the mega corporations, in fact gave them more tax breaks so they would have more money to invest in business and workers overseas. I also removed the financial oversights that were supposed to keep the stock brokers and money lenders under some form of control while eradicating Social Security, Medicare, Unemployment benefits, Welfare and any other "social" programs that are the only lifeline between a life and homelessness. After all it's only the old, indigent, unemployable (read most American families) that will be out on the street. I increased the military budget so prison camps can be built to put the homeless masses in. I also earmarked funds to start the construction of special "showers" and furnaces once they're too old or indigent to perform as slaves. After all "those" people are disposed of America will be free, white, conservative and most certainly on the road to recovery.

Glenn Beck, is that you?