A humble question

[PolySciGuy]

I don't want to appear cocky here, I would just like to know why supply side economics wouldn't work. This is definitely not my area of expertise so I have no idea. Maybe I am wrong on what SSE is, i think it is when the government lowers taxes to increase the GDP (eventually) and stimulate the economy so that eventually they take in the same revenue.

 

[The Real McCoy]

I don't want to appear cocky here, I would just like to know why supply side economics wouldn't work. This is definitely not my area of expertise so I have no idea. Maybe I am wrong on what SSE is, i think it is when the government lowers taxes to increase the GDP (eventually) and stimulate the economy so that eventually they take in the same revenue.

The 2 major objections I usually hear are that tax cuts disproportionately favor the rich and that they "take money away from the government" increasing the budget defecit.

 

[Kandahar]

I don't want to appear cocky here, I would just like to know why supply side economics wouldn't work. This is definitely not my area of expertise so I have no idea. Maybe I am wrong on what SSE is, i think it is when the government lowers taxes to increase the GDP (eventually) and stimulate the economy so that eventually they take in the same revenue.

Most people believe that the government has other responsibilities besides simply maximizing the GDP.

 

[PolySciGuy]

oh, I had always just thought that the underlying idea just wouldn't work, but it would work? In theory?

 

[Kandahar]

oh, I had always just thought that the underlying idea just wouldn't work, but it would work? In theory?

It depends. If your only goal is to maximize GDP growth, cutting taxes may accomplish this if A) it is accompanied by a proportional cut in spending, and B) the spending is cut from areas that don't directly improve GDP growth.

For example, if you cut taxes and cut spending on, say, social security (which doesn't directly improve GDP growth), then it's likely that GDP growth would increase. Whether or not the increased growth is sufficient justification to do that, however, is an open debate.

On the other hand, if you cut taxes and cut spending on highways, then GDP growth would likely decline. The marginal benefit to GDP from having public infrastructure outweighs the marginal benefit of having slightly lower taxes.

And if you cut taxes and didn't cut spending at all (as our government is fond of doing), it would most likely be counterproductive because it would cost MORE than if you had just paid for government services NOW. For the same reason that it's better to pay in cash if you can, than to charge things to your credit card.

 

[PolySciGuy]

ok, thanks for all the information

 

[Iriemon]

I don't want to appear cocky here, I would just like to know why supply side economics wouldn't work. This is definitely not my area of expertise so I have no idea. Maybe I am wrong on what SSE is, I think it is when the government lowers taxes to increase the GDP (eventually) and stimulate the economy so that eventually they take in the same revenue.

The theory behind "supply side" economics is that when folks are able to keep more of their money, they will be incentivized to work harder. If you tax them at 99%, the theory is that folks will not have much incentive to bust their *** to make more money, when they only get to keep 1% of it.

From this theory Laffer developed what is called the Laffer curve. It takes the supply side theory and applies it to Govt revenues. Under his theory, if taxes were cut from a high marginal rate (say 99%) to a lower rate (say 90%), the greater output created by more incentevized workers would grow the economy faster, and thus overall revenues would be greater than at the higher tax rate.

Many anti-tax conservatives ignore the opposite side of the theory -- if taxes are low, cutting them does not create much greater incentive, and there will not be sufficient increase in marginal economic growth (ie greater than it would have been) to result in marginally greater revenues. Marginal revenues will fall.

To illustrate, consider two hypothetical scenarios. Scenario A has a tax rate of 90%. Scenario B there is a tax rate of 10%. Now let say there is a tax cut of 5 percentage points. In scenario A, the tax rate is cut from 90% to 85%. People get to keep 15% of their money instead of 10%, a 50% increase, which would probably have an incentivizing effect. The effect on govt revenue is nil, since the tax rate decreased only slightly more than 5%. The 50% greater incentive will quite possibly induce people to work harder, earn more, and make up the 5% loss of of revenue from the tax cut. Supply side economics will work.

Now consider Scenario B. People kept 90% of their money before the tax cut, now they keep 95%. A slightly more than 5% increase. Probably won't incentive them a whole lot. But from the govt revenue side, the tax revenues have dropped from 10% to 5% -- a 50% decrease in revenue. People will have to work twice as hard to make up the difference, which they probably won't do since they are only keeping about 5% more of their money. The net result is that revenues will fall from what they would have been.

A simplified explanation, I agree, but it shows why tax cuts as an absolute rule won't necessarily increase government revenue.

Supply side is a theory, but I think there is some merit to it. At a very high level of taxation, incentive to produce can be reduced. On the other hand, IMO that is not a fixed, straight line function. There are lots of things that affect incentive. You could argue that a relatively higher rate of taxation (not too high) incentives folks to work harder to make up the difference for the tax. And you could argue that with low levels of tax, the more productive members of society (typically paid more) can afford to retire earlier, and take their skills out of the market.

The data I have seen does not suggest that a change in the rate between 39% to 35/33% (as happened in '01 iwth the Bush tax cuts) had the significant impact on economic production that conservative claimed it would. I certainly have not seen stats to suggest that people are working harder now than they did in the 90s, and the economy is not growing any better. Revenues, measured as against GDP, are far lower than they would have been.

Also, top marginal rates in the 60s were 70%, 91% in the 50s, and real economic growth in both those decades were stronger than in the 70s, 80s, 90s, or 00s so far. This also in my mind cast doubt on the proposition we are anywhere near the Laffer point where raising taxes would reduce revenues, or vice versa.

In sum, while I think that supply side theory has merit, at the levels of taxation we have had in this country over the past 50 years suggests that the current rates of taxation are nowhere near the point where decreasing taxes would increase marginal revenues or increasing taxes would decrease marginal revenues.

 

[Iriemon]

It depends. If your only goal is to maximize GDP growth, cutting taxes may accomplish this if A) it is accompanied by a proportional cut in spending, and B) the spending is cut from areas that don't directly improve GDP growth.

For example, if you cut taxes and cut spending on, say, social security (which doesn't directly improve GDP growth), then it's likely that GDP growth would increase.

I'm not sure this is necessarily a correct proposition. If you cut spending on SS, the effect is a wash. The guy who is taxed gets to keep a little extra money, but the SS beneficiary gets the same about less. The Guy paying taxes has more to spend, but the SS beneficiary has less. There is a wash effect on the economy. Unless the tax cut incentives harder work and greater production, the net effect of change in tax policy will largely wash out, and you wouldn't see a significant change in economic production.

This conclusion is born out by the data. There have been dramatic changes in tax policy in this country over the past 50 years -- from a top marginal tax rate of 91% in the 50s to 28% in the last half of the 80s. Yet there is no correlation between tax rates and real GDP growth. Real GDP growth was actually stronger in the 50s and 60s with top marginal rates of 91% and 70% respectively, than in the 80s, 90s, and 00s, which corresponded to much lower marginal tax rates.

And if you cut taxes and didn't cut spending at all (as our government is fond of doing), it would most likely be counterproductive because it would cost MORE than if you had just paid for government services NOW. For the same reason that it's better to pay in cash if you can, than to charge things to your credit card.

I agree with that. The interest expense on the Govt is a drag on Govt spending resources -- basically send tax revenues out to Govt lenders for no gain, which is now occurring at the rate of a couple hundred billion a year.

Ultimately, Govt borrowing can also squeeze the available amount of credit, because the Govt competes for lenders in the same market businesses do. The Govt has a major advantage -- it is viewed as a risk free loan, or as close to one as is possible. For that reason, many investors lend money to the US Govt because they view that as one of the safer places to put their money. But that takes away credit that would otherwise be avaiable to businesses, which must then offer higher rates of return to attract lenders,
raising the real cost of money to business which is a drag on the economy. Because of the explosion of worldwide credit, however, this fear has not materialized to the extent some speculated earlier.

 

[SFLRN]

. There have been dramatic changes in tax policy in this country over the past 50 years -- from a top marginal tax rate of 91% in the 50s to 28% in the last half of the 80s. Yet there is no correlation between tax rates and real GDP growth. Real GDP growth was actually stronger in the 50s and 60s with top marginal rates of 91% and 70% respectively, than in the 80s, 90s, and 00s, which corresponded to much lower marginal tax rates.

You're skewing the numbers. The economy grew rapidly after the fifties in spite of high taxes. When the economy transforms, as it started to in the 50s-70s it is inevitable that very fast growth rates ensue. When a certain kind of business activity first begins it can grow quite rapidly. As it becomes more widespread the growth slows, as it did in the 80's. However, there is no doubt though that lowering taxes inevitably leads to more GDP growth. Private individuals spend their money much more efficiently than the government can. Businesses also spend more efficiently versus a government agency because they have a direct incentive, the threat of being out of business, to stay very efficient and very productive. For the most part, governmental agencies receive very little competition and do not have to be cost effective to stay in business. However, when you do lower the tax rates investors will use it more efficiently than the government could. This is also because of the deadweight loss that occurs with taxes. Higher tax rates do hurt the economy.

 

[Iriemon]

You're skewing the numbers.

How so?

The economy grew rapidly after the fifties in spite of high taxes.

Yup. That's what I said. Which goes against the argument that lower tax rates mean greater growth.

When the economy transforms, as it started to in the 50s-70s it is inevitable that very fast growth rates ensue. When a certain kind of business activity first begins it can grow quite rapidly. As it becomes more widespread the growth slows, as it did in the 80's.

This is an interesting but pretty vague assertion. What is the evidence to support this theory? Wasn't the economy "transforming" in the 80s, 90s, and 00s with the computer and internet? So why didn't we see superior growth during that time frame?

Whatever the explanation, a 91%/70% top tax rate in the 50s/60s did not appear to cause significant harm to the economy, did it?

However, there is no doubt though that lowering taxes inevitably leads to more GDP growth.

I agree that a certain high level of taxation can stymie incentive and productivity. I think there is a big doubt that lowering taxes fromj 39 to 33% for example has a significant impact on economic growth. Why is this contention "no doubt?" Because the conservatives have repeated this mantra ad naseum to push their cut tax and borrow strategies?

Private individuals spend their money much more efficiently than the government can. Businesses also spend more efficiently versus a government agency because they have a direct incentive, the threat of being out of business, to stay very efficient and very productive. For the most part, governmental agencies receive very little competition and do not have to be cost effective to stay in business. However, when you do lower the tax rates investors will use it more efficiently than the government could. This is also because of the deadweight loss that occurs with taxes. Higher tax rates do hurt the economy.

I agree that there can be a deadweight loss on Govt spending. However, not all tax dollars are deadweight losses. You yourself admitted:

On the other hand, if you cut taxes and cut spending on highways, then GDP growth would likely decline. The marginal benefit to GDP from having public infrastructure outweighs the marginal benefit of having slightly lower taxes.

And as I pointed out in my previous post, a simple transfer from a taxpayer to a social security beneficiary does not represented a loss, it merely transfers who the spender/invester is.

I agree that there can be a point where taxes and Govt spending become more and more deadweight and inefficient. However, when you net out the true deadweight loss, and offset the loss that would also be associated with business/individual spending, there appears to be little significant effect on the economy given the tax rates the nation has had since the 40s.

If tax rates had a significant impact on the economy, over time you would see a correlation between lower taxes and greater economic growth. The more significant the impact the greater would be the correlation. But there is no such correlation at all.

 

[SFLRN]

How so?

You're trying to show there is no correlation for lower tax rates and more economic growth when you are not controlling for any of the confounding variables during those time periods.

Yup. That's what I said. Which goes against the argument that lower tax rates mean greater growth.

You're misunderstanding what I said. The economy can still grow with high taxes rates. But high tax rates do not in any way help promote economic growth. You are showing a correlation but not factoring in the number of different variables in that equation that offset your statements. Heres an example. If we lowered taxes to almost nothing in India the economy would certainly benefit. However, some small country could have much higher tax rates and discover a huge source of oil. Country 2 could most certainly see rapid economic growth, despite the high taxes. That doesn't mean the higher taxes were any better. It simply means that the economy could grow in spite of those higher taxes.

This is an interesting but pretty vague assertion. What is the evidence to support this theory? Wasn't the economy "transforming" in the 80s, 90s, and 00s with the computer and internet? So why didn't we see superior growth during that time frame?

There was definately a transformation in both areas. However, increases in productivity in the 50's was greater than that of the 90's. There are a multitude of other variables as well.

Whatever the explanation, a 91%/70% top tax rate in the 50s/60s did not appear to cause significant harm to the economy, did it?

No, not at first. The effects of regulation were seen quite clearly in the 70's.
Here is the evidence on lower taxes and greater growth. OpinionJournal - Outside the Box
Taxes and Growth | an NCPA project
NCPA - Study #215 - Measuring the Burden of High Taxes

I agree that a certain high level of taxation can stymie incentive and productivity. I think there is a big doubt that lowering taxes fromj 39 to 33% for example has a significant impact on economic growth. Why is this contention "no doubt?" Because the conservatives have repeated this mantra ad naseum to push their cut tax and borrow strategies?

I am not advocating cutting taxes and borrowing. I am advocating cutting taxes and spending. It is no doubt that taxes and public spending is inherently inefficient. It goes to the saying, "you don't spend someone else's money as carefully as you would spend your own."

I agree that there can be a deadweight loss on Govt spending. However, not all tax dollars are deadweight losses. You yourself admitted:

I]On the other hand, if you cut taxes and cut spending on highways, then GDP growth would likely decline. The marginal benefit to GDP from having public infrastructure outweighs the marginal benefit of having slightly lower taxes.[/I]

You're quoting someone else. Not myself. I will address the point though. I am not advocating cutting infrastructure spending, that facilitates the market. Many other forms of government spending do not.

And as I pointed out in my previous post, a simple transfer from a taxpayer to a social security beneficiary does not represented a loss, it merely transfers who the spender/invester is.

It is an inefficient transfer of wealth. When you move that money from one person to the other you have to pay to physically transport the money and for the bureacracy to make sure the money isn't stolen. You are also creating a deadweight loss in the market you are taxing. When taxing the work place this then means less labor force participation. That ultimately means slower long-term economic growth because less human capital is being utilized. Taxes distorts incentives and that means money is not invested where it would normally create the most utility or wealth.

I agree that there can be a point where taxes and Govt spending become more and more deadweight and inefficient. However, when you net out the true deadweight loss, and offset the loss that would also be associated with business/individual spending, there appears to be little significant effect on the economy given the tax rates the nation has had since the 40s.

If tax rates had a significant impact on the economy, over time you would see a correlation between lower taxes and greater economic growth. The more significant the impact the greater would be the correlation. But there is no such correlation at all.

You're misunderstanding the statistics. There are about a million different factors that can go into economic growth. Tax rates in and of themselves do not determine our GDP growth. They can add to economic growth, but they are one of many factors. If we discovered a huge supply of oil then our economy would grow despite taxes. That does not mean that the higher taxes helped economic growth. That doesn't even mean the higher taxes had no negative effect. But this is exactly what you're saying. That we can simply use correlation as a measuring stick. For this very same reason nearly every single econometric study controls for a multitude of variables, because if you do not your study proves nothing.

 

[Iriemon]

You're trying to show there is no correlation for lower tax rates and more economic growth when you are not controlling for any of the confounding variables during those time periods.

This is true. Any suggestion how to do that?

You're misunderstanding what I said. The economy can still grow with high taxes rates. But high tax rates do not in any way help promote economic growth.

Don't disagree, depending upon what you mean by "high taxes". IMO, a certain level of taxes does encourage economic growth, by providing for the common defense, infrastructure, and domestic tranquility.

You are showing a correlation but not factoring in the number of different variables in that equation that offset your statements. Heres an example. If we lowered taxes to almost nothing in India the economy would certainly benefit. However, some small country could have much higher tax rates and discover a huge source of oil. Country 2 could most certainly see rapid economic growth, despite the high taxes. That doesn't mean the higher taxes were any better. It simply means that the economy could grow in spite of those higher taxes.

Sure. You guys are the ones arguing that cutting taxes increases growth. What is the basis for proving that? If tax policy had a significant impact on economic growth, over time you would expect to see a correlation because over time the other factors even out. Multivariable analysis.

There was definately a transformation in both areas. However, increases in productivity in the 50's was greater than that of the 90's. There are a multitude of other variables as well.

A transformation of what? If that is a significant variable, as you are implicitly asserting, what was the transformation and why didn't it happen in the 80s, 90s, and 00s.

Is that true re: productivity? I haven't seen that data, would be interested to.

No, not at first. The effects of regulation were seen quite clearly in the 70's.

Now it is you who is asserting a cause to one variable while discounting the effect of the many others.

Here is the evidence on lower taxes and greater growth. OpinionJournal - Outside the Box
Taxes and Growth | an NCPA project
NCPA - Study #215 - Measuring the Burden of High Taxes

Back at ya.

Tax Cuts: Myths and Realities, Revised 2/13/07
Does Cutting Tax Rates Increase Economic Growth?
Claim That Tax Cuts “Pay For Themselves” Is Too Good To Be True: Data Show No “Free Lunch” Here, Revised 7/27/06
Bush's Tax and Budget Policies Fail to Promote Economic Growth
Sluggish private job growth indicates failure of tax cuts

I am not advocating cutting taxes and borrowing. I am advocating cutting taxes and spending. It is no doubt that taxes and public spending is inherently inefficient. It goes to the saying, "you don't spend someone else's money as carefully as you would spend your own."

I agree that spending can be cut. The articles you cited mentioned that. Get out of Iraq, cut defense spending to 2000 levels and make SS means tested, and eliminate much of the pork generated over the last 6 years would get us a lot closer to a balanced budget.

You're quoting someone else. Not myself. I will address the point though. I am not advocating cutting infrastructure spending, that facilitates the market. Many other forms of government spending do not.

Sorry for the misquote.

It is an inefficient transfer of wealth. When you move that money from one person to the other you have to pay to physically transport the money and for the bureacracy to make sure the money isn't stolen. You are also creating a deadweight loss in the market you are taxing.

Depending upon the nature of the transfer, the loss may be minimal.

When taxing the work place this then means less labor force participation.

How so? If taxes are increased to 39% that means folks are going to start dropping out of the labor force?

You're misunderstanding the statistics. There are about a million different factors that can go into economic growth. Tax rates in and of themselves do not determine our GDP growth. They can add to economic growth, but they are one of many factors.

Apparently they are an insignificant factor, as there is no correlation over time between drastic changes in tax policies and economic growth. If tax policy were a major factor, this would be reflected over time.

If we discovered a huge supply of oil then our economy would grow despite taxes. That does not mean that the higher taxes helped economic growth. That doesn't even mean the higher taxes had no negative effect. But this is exactly what you're saying. That we can simply use correlation as a measuring stick. For this very same reason nearly every single econometric study controls for a multitude of variables, because if you do not your study proves nothing.

If so, then what proves that lower taxes have significantly improved economic performance, as you are contending?

 

[SFLRN]

This is true. Any suggestion how to do that?

It would take a book's worth of writing for us to discuss how one controls for those many different factors and would detract from the overall debate.

Don't disagree, depending upon what you mean by "high taxes". IMO, a certain level of taxes does encourage economic growth, by providing for the common defense, infrastructure, and domestic tranquility.

I'm not arguing against the common defense. I am arguing against other forms of government spending that are much more inefficient.

Sure. You guys are the ones arguing that cutting taxes increases growth. What is the basis for proving that? If tax policy had a significant impact on economic growth, over time you would expect to see a correlation because over time the other factors even out. Multivariable analysis.

The basis is Microeconomics. Taxes inherently create a deadweight loss. deadweight loss: Information from Answers.com
Firstly, significant is different than having an impact. Every time you lower taxes the economy won't magically boom, but you will benefit the economy. If you significantly reduce them then there will most certainly be a boom.
I imagine you are referencing Neo-Conservatives. I am not a neo-conservative or even a conservative. I am a libertarian.

A transformation of what? If that is a significant variable, as you are implicitly asserting, what was the transformation and why didn't it happen in the 80s, 90s, and 00s.

Largely because the same transformation can't occur again and again. The U.S. economy can't switch from manufacturing to service and then do it again. By default transformations mean you can't have the same transformation again unless the economy degresses to its older state.

Now it is you who is asserting a cause to one variable while discounting the effect of the many others.

Excuse me, regulation was one of the big factors in the recession. It wasn't the only factor, it was one of them.
"This policy had already had some impact in the oil industry and had led to shortages of oil even before the embargo. This situation is reflected in the decrease in domestic production in 1971. As mandatory price restraints were lifted, domestic production soared to relieve the shortages. The embargo at the end of 1973 added an additional shock to a market that was already in transition.{7} As a result, even as general price controls were lifted, shortages in the oil industry continued because of other regulations which were imposed in the energy industry."http://www.leaderu.com/offices/cleveland/docs/boom.html

Tax Cuts: Myths and Realities, Revised 2/13/07
Does Cutting Tax Rates Increase Economic Growth?
Claim That Tax Cuts “Pay For Themselves” Is Too Good To Be True: Data Show No “Free Lunch” Here, Revised 7/27/06
Bush's Tax and Budget Policies Fail to Promote Economic Growth
Sluggish private job growth indicates failure of tax cuts

Firstly, those sources are all liberal think tanks. Secondly, their main complaint about defceit spending. I am for cutting the spending in correspondance with cutting the tax rates. One of your sources even implies we raise government spending to increase employment. We are not debating fiscal policy. We are debating whether or not taxes have an effect on the economy.

Depending upon the nature of the transfer, the loss may be minimal.

Its still a loss though.

How so? If taxes are increased to 39% that means folks are going to start dropping out of the labor force?

Not immediately. However, when you do raise tax rates you will distort incentives and cause an inefficient use of resources. People will work less hours. The effect isn't necessarily immediate. It takes time for labor markets to react. But they do indeed react.

Apparently they are an insignificant factor, as there is no correlation over time between drastic changes in tax policies and economic growth. If tax policy were a major factor, this would be reflected over time.

You can't use correlational data to throw out modern economics. Our economy will grow in spite of taxes. I am not arguing that we will collapse because of our tax rates. But you're trying to argue that because there isn't some correlation there isn't causation. There are so many different variables that go into the economy that I could show a relationship and you could point to some other factor. Its not an issue of corelation. Its an issue of the inherent loss in a tax.

If so, then what proves that lower taxes have significantly improved economic performance, as you are contending?

It depends on how much you lower a tax. If you significantly lower it then you will see a significant increase. That does not happen very often. However, lowering taxes does yield a positive economic benefit becasue you remove the deadweight loss. However, I would challenge you to find an economist who suggests that a tax does not have a negative economic impact. A simple tax. Not how exactly the tax is spent. That can be beneficial. Yes or no, if you raise taxes it will have a negative effect on the economy (either small or large)?

 

[Iriemon]

It would take a book's worth of writing for us to discuss how one controls for those many different factors and would detract from the overall debate.

And probably impossible, at that.

I'm not arguing against the common defense. I am arguing against other forms of government spending that are much more inefficient.

The common defense is probably the most ineffective part of Govt spending in terms of waste in the economy. Aside from the lard associated with military contractors, military products don't add much in terms of improving the infrastructure of the economy.

The basis is Microeconomics. Taxes inherently create a deadweight loss. deadweight loss: Information from Answers.com
Firstly, significant is different than having an impact. Every time you lower taxes the economy won't magically boom, but you will benefit the economy. If you significantly reduce them then there will most certainly be a boom.

I understand deadweight loss. It is not just a govt spending phenemon.

Where was this certain boom in the 80s? Where was this certain boom in the 00s?

I imagine you are referencing Neo-Conservatives. I am not a neo-conservative or even a conservative. I am a libertarian.

Supply side theory more accurately.

Largely because the same transformation can't occur again and again. The U.S. economy can't switch from manufacturing to service and then do it again. By default transformations mean you can't have the same transformation again unless the economy degresses to its older state.

So what was the transformation in the 50s 60s that you are speaking us that you are contending explains for the greater GDP growth despite the much higher taxes? Why was that less of a transformation than the one associated with computers?

Excuse me, regulation was one of the big factors in the recession. It wasn't the only factor, it was one of them.

Fair enough. I agree

Firstly, those sources are all liberal think tanks. Secondly, their main complaint about defceit spending. I am for cutting the spending in correspondance with cutting the tax rates. One of your sources even implies we raise government spending to increase employment. We are not debating fiscal policy. We are debating whether or not taxes have an effect on the economy.

I see. My sources are all "liberal think tanks" but the Wall Street Journal and the National Center for Policy Analysis are bastions of objectivity.

So rather than trading articles you can explain your own contentions.

Not immediately. However, when you do raise tax rates you will distort incentives and cause an inefficient use of resources. People will work less hours.

What is the basis for your statement. Did people work less hours in the 90s than in the 80s and 00s? Source?

The effect isn't necessarily immediate. It takes time for labor markets to react. But they do indeed react.

And I'd guess we can see this less effort in the labor market by looking at the unemployment rates during the 90s? Or is there some other data that supports your assertion?

You can't use correlational data to throw out modern economics. Our economy will grow in spite of taxes. I am not arguing that we will collapse because of our tax rates. But you're trying to argue that because there isn't some correlation there isn't causation. There are so many different variables that go into the economy that I could show a relationship and you could point to some other factor. Its not an issue of corelation. Its an issue of the inherent loss in a tax.

You are assuming there is a correlative effect without any proof of it other than your unsubstantiated assertions. In statistical analysis, if you cannot isolate the effect of a variable, the best you can do to test for the effect of a variable in a multivariable analysis is to see if there is a correlation over time. Because over time, the effect of the other variable balance out. If there is no correlation, it does not necessarily prove no cause and effect, but it suggests there is no cause or effect or that the effect is minimal.

You claim that a significant cut in taxes "certainly" causes a boom. What is the evidence for that? If it certainly causes a boom, we would certainly see the economy doing better during periods of low taxes and worse during periods of higher taxes. That is not born out empirically. The data does not support your hypothesis.

If there is an inherent deadweight loss in a tax, then the only conclusion to be made is that the relative loss (compared to the inherent deadweight loss in private spending) has been marginal or insignificant for the tax policies we've had in this country over the past 50 years.

It depends on how much you lower a tax. If you significantly lower it then you will see a significant increase. That does not happen very often.

In the 80s there was a significanly lower tax. There was not significant increase in GDP. Same in the 00s.

However, lowering taxes does yield a positive economic benefit becasue you remove the deadweight loss.

Apparently not in any significant way.

However, I would challenge you to find an economist who suggests that a tax does not have a negative economic impact. A simple tax. Not how exactly the tax is spent. That can be beneficial. Yes or no, if you raise taxes it will have a negative effect on the economy (either small or large)?

Read the numerous cites I posted above.

Your hypothetical is too vague to answer. If there is 0 tax, there will be a negative economic impact because the infrastructure that the economy depends upon. If there is a 100% tax I agree that effects the economy negatively as well because there is no incentive to work.

How the tax is spent is crucial. Govt spending on infrastructure can directly benefits the economy. Money spent on education if done effectively benefits the economy in the long term by developing a more productive work force.

If you want to talk about deadweight loss, the $200 billion a year on interest on the Republican debt the Govt has to spend each year is pure deadweight loss. That is money we taxpayers have to pony up each year to give to lenders like China, with no benefit to the US. That is the worst kind of deadweight loss, and the last 3 Republican administrations have been cranking up this kind of deadweight loss as much as possible.

 

[SFLRN]

The common defense is probably the most ineffective part of Govt spending in terms of waste in the economy. Aside from the lard associated with military contractors, military products don't add much in terms of improving the infrastructure of the economy.

You're right they don't. But I am not advocating completely gutting defense spending. That would be a debate for another day.

I understand deadweight loss. It is not just a govt spending phenemon.

Its not just government, but taxes are one of the things that cause it.

Where was this certain boom in the 80s? Where was this certain boom in the 00s?

The booms took awhile to come into play. However, the 80's boom came with the investment that bore fruit in the 90s. We've seen a rather sucessful stock market and that isn't entirely because of the tax cuts, but they did contribute.

So what was the transformation in the 50s 60s that you are speaking us that you are contending explains for the greater GDP growth despite the much higher taxes? Why was that less of a transformation than the one associated with computers?

"The postwar economic boom, mightily affected by the transforming hand of science, produced epic changes in American education, consumer culture, suburbanization, the return to domesticity for many women, the character of corporate life, and sexual and cultural mores--both of which involved startling changes in dress, speech, music, film and television, family structure, uses of leisure time, and more."
National Standards for United States History
More women were also employed which tends to increase GDP. http://www.jpr.org.au/upload/JPR22-1pp63-78.pdf
"Levels of productivity were high and wages rose." (Page 4)
Increased immigration also encouraged economic growth. The suburbanization of the 50's, the baby boom, could not possibly compare to the changes in the 00s and 80's. Also, 79% of economists agree that fiscal policy (like tax cuts) can provide a stimulus to a less than fully employed economy (Mankiw, Principles of Microeconomics). "Productivity declines as the tax rate increases, as people choose to work less. The higher the tax rate, the more time people spend evading taxes and the less time they spend on more productive activity. So the lower the tax rate, the higher the value of all the goods and services produced." The Effect of Income Taxes on Economic Growth
http://www.jpr.org.au/upload/JPR22-1pp63-78.pdf

So rather than trading articles you can explain your own contentions.

I am not arguing for spending more after tax cuts. I am arguing spending less. In that sense lowering taxes will not have a negative effect on the economy. (I am not advocating we cut money from infrastructure). It depends where you cut the spending. But if you cut the spending from more inefficient government services then the benefit will be positive.
"Cutting taxes and wasteful spending will help an economy because of the disincentive effect caused by taxation. Cutting taxes and useful programs may or may not benefit the economy."

What is the basis for your statement. Did people work less hours in the 90s than in the 80s and 00s? Source?

"Consumption is found to be excessively sensitive to the tax cuts, counter to the model. Liquidity constraints and other standard explanations do not appear to explain this excess sensitivity. The consumption response is larger than previously estimated for tax refunds and more concentrated in nondurables" SSRN-Consumer Response to the Reagan Tax Cuts by Nicholas Souleles
More consumption means more economic growth in the long run. Secondly, depending on the tax there can be gains outside of productivity. Investments can go up once one can keep more of their money. I can get more data at a later date.

And I'd guess we can see this less effort in the labor market by looking at the unemployment rates during the 90s? Or is there some other data that supports your assertion?

You're confusing unemployment and labor force participation. Participation refers to how many people are participating in labor force, they have or are actively seeking a job. Unemployment is the number of people searching for a job but cannot find one. Two very different things.

You are assuming there is a correlative effect without any proof of it other than your unsubstantiated assertions. In statistical analysis, if you cannot isolate the effect of a variable, the best you can do to test for the effect of a variable in a multivariable analysis is to see if there is a correlation over time. Because over time, the effect of the other variable balance out. If there is no correlation, it does not necessarily prove no cause and effect, but it suggests there is no cause or effect or that the effect is minimal.

I am asserting a causation effect. When you lower taxes there will be a gain to the economy because you lower the deadweight loss. This is microeconomics 101. It is not unsubstaniated unless you consider the work of current microeconomics to be that. The changes in tax policy would also prevent a multivariable analysis because tax policy has not been consistent over the years. If you find one actual source that suggest higher taxes versus lower taxes are more efficient in and of themselves then you can call yourself the winner of this debate.

You claim that a significant cut in taxes "certainly" causes a boom. What is the evidence for that? If it certainly causes a boom, we would certainly see the economy doing better during periods of low taxes and worse during periods of higher taxes. That is not born out empirically. The data does not support your hypothesis.

When did we significantly cut taxes for all Americans? (Not just the highest brackets).

If there is an inherent deadweight loss in a tax, then the only conclusion to be made is that the relative loss (compared to the inherent deadweight loss in private spending) has been marginal or insignificant for the tax policies we've had in this country over the past 50 years.

There is still the deadweight loss. That is the point, not how large the loss is, but the fact that raising a tax will increase it. This deadweight loss will decrease with lower taxes. It is thus reasonable to say that the higher the tax the more the net loss.

In the 80s there was a significanly lower tax. There was not significant increase in GDP. Same in the 00s.

There was not a significantly lower tax on the majority of Americans. We have yet to see massive tax cuts for the nation as a whole. There were increases in certain investments, because when you pump a good trillion or more dollars into the economy over the course of a couple of years it will create some activity.

Read the numerous cites I posted above

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They're addressing the spending aspect. I suggest you cut taxes and spending. I am not arguing for the policies they advocate against.

If you want to talk about deadweight loss, the $200 billion a year on interest on the Republican debt the Govt has to spend each year is pure deadweight loss. That is money we taxpayers have to pony up each year to give to lenders like China, with no benefit to the US. That is the worst kind of deadweight loss, and the last 3 Republican administrations have been cranking up this kind of deadweight loss as much as possible.

I'm not arguing for conservative policies. I am arguing for less taxes and less spending. The reason is simple, we the people are better able to determine where our money should go than the government. You are proposing that it is better or neutral if the government instead gets the money. This is assuming the government can manage money better than the people themselves. History proves this untrue in every sense of the word. If we expand your prescription that we not lower taxes then we ultimately prevent an expansion of the economic freedom of the people and prolong the government's ability to spend inefficiently. We could throw around the numbers all we want. The point is, that any way you cut it, private individuals spend money more efficiently than the government ever can up to a point ( that point being when you refer to things like court systems, police officers, defense, infrastructure, and education to a certain extent).