Unfortunately, the presidential election season is in full swing a full 18 months before election day. If any season is going to start early and run longer than normal, I wish it were duck season, but I digress. Since the president has started giving stump speeches masked as policy speeches, republicans have started their predictable implosions, and the three networks have hit high gear backing their man, I suspect there is going to be a lot of commentary about taxes and tax policy. The blather is likely to be intolerable grandstanding. Here are some simple truths to keep in mind to cut through the electioneering coming over the next 18 months:
Tax rates matter less than tax revenues. The optimal tax rates are the rates that generate the most tax revenue. The tax rates that generate the most tax revenue are the rates that generate the most economic activity and the highest sustained rate of growth.
The reality is, no one knows what the optimal tax rate is. There is lots of theoretical discussion and spirited debate, but finding the optimal rate is part art, part science. However, we know a few things for certain:
The highest revenue take in US history occurred in 2007 at $ 2.56T. To give a little perspective on tax revenue growth as well as spending growth, 20 years earlier, tax receipts were $ .854T...yet we are in a spiral of debt spending. The top marginal rate in the 3 largest tax revenue years (2005-2007) in history was 35%. Is that cause and effect? Nope. However, one could easily argue that a lower rate could have generated a larger, more sustained economic growth, generating even higher revenues. The dopes who make comments to the effect that "The 2003 tax cuts were tax cuts we couldn't afford" and "were not paid for" are simply denying the truth of history as tax receipts were never higher than during the Bush years. The Bush tax rates generated a flood of tax revenues. The problem was the government spent every last dollar plus about 15 cents for each dollar collected. The Obama crew has upped the debt spending ante to spending $ 1.40 for every dollar we collect in tax revenue. When the wave of the economic cycle turned in 2008 as is always does, tax revenue declined, yet spending went through the roof, hence our $ 14T in debt.
Tax rates should optimize economic activity. Finding and selling the optimal rate is a difficult act. However, it is part of the historical record that the largest takes in tax revenue history were collected with the current marginal rates. If we had not topped our record collections with record spending, we may not be in the ditch we are in today. Tax policy is important for driving economic growth. Spending policy is important to avoid killing it.
Speaking of seasons...we have a full duck season, almost 2 full baseball seasons, and two 4th of July's to go before we cast votes in the next election. That is not a rosey forecaast.
6 comments:
I aggree wholeheartedly w/your last paragraph !
I made a longer comment, but it seems to have disappeared, so I'll just says this:
Until supply siders explain to me why the annual growth rates in both RGDP and employment were so much higher from 1993-2001 (following the Clinton tax hike) than from 2001-2007 (following the Bush tax cuts,) I can't take their philosophy seriously. Not to mention the stagnation of median household income in the 2000s.
Also, almost all of the (small) expansion in government spending since 2008 has been through automatic stabilizers such as unemployment insurance and Medicaid - the obvious result of there being so many unemployed people. The "Obama has massively increased government spending" narrative is a myth.
Mason, it's time to wake up and smell the coffee:) Simulus was a massive one time spending (really payoffs to union democrat voters) that was 100% debt spending. I think you are trying to obfuscate the issue. Tax revenues are what matter. The tax rates that maximize revenue are the correct rates. The largest tax collection years ever were under the 35% marginal rate. We don't collect too little, we spend too much. If you want to do some math, why not compare the inflation rate with the rate of federal spending over the past 20 years. I don't have to do the math b/c I know what the answer will be...too much spending.
Thanks for commenting Rebecca! Much appreciated. I hope I get some free spenders to at least reconsider their position.
Well, I think we just disagree on what the government should be doing, and on taxes. My view is that successful people benefit the most from the institutions of government that are necessary for wealth creation (enforcement of contracts, property rights, provision of public goods, etc.) and thus should pay more to support those institutions.
P.S. I'm meeting with John Wyatt tomorrow, thanks for setting that up! I will refrain from bleeding heart lefty rants when talking to him...
All good. Good luck tomorrow. John is one of the nicest guys you will ever meet. I saw him yesterday. I think you can help them. Let me know how it goes.
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