The Wall Street Journal this morning is enough to send you back to bed. Oil prices are spiking on low supply, consumer confidence is at the lowest level since the 70’s, Home prices have fallen 11% in the last year, the Clear Channel buyout is crashing and worst of all–we have just lived through a decade where the stock market has not made any gains. The Journal is kind enough to point out that we have been through this nightmare before from 1929-1942 and 1966-1982, but this is cold comfort.
Supply-side economists like Larry Kudlow will say they have just the solution, cut capital gains taxes on the rich and they will work harder and produce more wealth for the society. But I know a lot of very well off people and I never saw them go on strike when taxes were higher in the 90’s. Louis Uchitelle shows the big lie of the Supply-siders, who claim that if you just cut taxes on the rich, tax revenues will grow because the benighted billionaires will work much harder. The problem is the evidence doesn’t support their claims.
In the 1980s, though, during the initial era of supply-side tax cuts, per capita revenue from personal income taxes, adjusted for inflation, rose an average of just 0.7 percent annually throughout the Reagan presidency, according to the White House Office of Management and Budget.
That was far below what turned out to be an average annual increase of 6.5 percent in the eight years of the Clinton administration, when tax rates at the high end of the income ladder were raised.
This of course hasn’t stopped John McCain, who once mocked the tax cuts of George Bush, into surrounding him self with “Voodoo Economists” (Bush Sr’s term).
“What really happens is that the economy grows more vigorously when you lower tax rates,” said Kevin Hassett, an adviser to the presumptive Republican nominee, John McCain, and the director for economic policy studies at the conservative American Enterprise Institute. “It is beyond the reach of economic science to explain precisely why that happens, but it does.”
Even with a growing economy, however, the promised boon in tax revenue never materialized. Arthur B. Laffer, the renowned proponent of supply-side economics, still holds that tax revenues “rise dramatically” when tax rates are cut.
Don’t you just love it when “rational actors” like Mr. Hassett say that even though their theory “is beyond the reach of economic science”, you just have to trust them that it’s true. Faith-based economics.
16 responses so far ↓
Dan // March 26, 2008 at 8:22 am
The difference, I suspect, is that this time, the market will stay flat for 25 years. Or more. I’m an ignoramus on macroeconomics. But then I’m an ignoramus on engineering too. Yet if I see a Katrina-style hurricane wash over a New Orleans-style city, I feel pretty confident in saying, “It’s going to be a long time before that mess gets cleaned up. Even under the best of circumstances.”
The war, the debt, the deficit, the latest financial scandal(s), the spike in oil prices, Medicare, Social Security: all convince me that we’re still a lot closer to the entrance of the tunnel than the exit. In fact we may be moving backwards.
Morgan Warstler // March 26, 2008 at 8:33 am
Jon, as a guy with a history of start-ups behind you, the answer is pretty easy, pension funds and billionaires a like have more capital to risk (the gravy not in blue chips), when taxes are lower.
Technology solves. It takes private investment. It tends to drive the economy forward in new ways, mostly unpredictable ways - even you have that faith, right?
The real issue the next president is going to face is a fed saying, to stave off inflation, choose between:
1) higher interest rates.
2) balance the budget.
One last thing on taxes, I really wish, you’d actually say what the top tax rate should be for the guys making $50M, $10M, $500K.
So far you have said $250K = 34%
Zhirem // March 26, 2008 at 9:18 am
Morgan, I will issue the challenge again, since you have repeatedly been so *keen* on getting those numbers:
Put yours out there. Put ‘em down man. Let’s see what you think is fair. Frankly, I have not given too much thought about it, other than to say: make it equitable for all. But if you do that, make *NO* loopholes. None.
From each according to their abilities, to each according to their needs.
And yes, the Fed is going to have to take back towards the sane path, and I think the only way to do that is to keep higher interest rates. Let’s be frank: money is cheap. Not meaning the dollar should change the denomination soon to the Penny, but rather that it is cheap right now, and has been for some time, to borrow money. Making cheap money even cheaper is not the way. Then again, I am hardly an economist, and far from anyone with a reasonable background to navigate the morass that is macro-economics and high finance.
- Zhirem
p.s. Oh, and make Social Security solvent in perpetuity by removing the cap.
Morgan Warstler // March 26, 2008 at 10:33 am
20% sales tax on everything - collected by the states. The federal government runs the military and the federal infrastructure, with a radically different approach to entitlements (see below).
States determine for themselves what tax programs and benefits they will provide.
Entitlements are based on this phrase, “We will take care of you until you are 85, after that sayonara!”
Retirement is pushed back until 75.
Zhirem // March 26, 2008 at 11:02 am
Awesome, thanks Morgan.
20% on food items as well?
The states idea is an interesting one. That would radically shake up the population mix I would think, and get intra-state competition clipping along at higher levels than they are now.
A curious question: Why 85? Because of diminishing returns? Meaning that the more geriatric the individual, the more likely the health care and/or benefits are to have diminishing returns on the individual’s contribution to society at large?
Do you think that Florida would step up and say they would take care of the 85+ crowd? Many seem to gravitate towards that state from others as it is, once they reach a certain age…
Pushing back retirement is also something that I see as inevitable. Probably past 75 at some point.
Now, minus the outlays for the war, do you have any figures or even good guesstimates that 20% tax on everything would float the national boat?
Thanks,
- Zhirem
Patrick Freeman // March 26, 2008 at 11:09 am
“States determine for themselves what tax programs and benefits they will provide.” So, let’s say, California offers primo benefits for all its millions. New Mexico, a poor state wrestling with Mississippi for the bottom rung, offers much less. Then it’s logical that New Mexicans and Mississippians alike head west to grab their share of the goodies. How do libertarians keep them out? With poor people flooding into California, how does California continue to afford all those benefits?
Of course, with a 20% sales tax on “everything,” including, I suppose food, medicine, and health care, lots of poor people will just die off. Which seems to be the preferred libertarian solution.
Morgan Warstler // March 26, 2008 at 11:56 am
No, infact I think Florida, would specifically not provide for people over 85.
And California, would likely also offer primo benefits, for the same reason.
Why the age cut off? So everyone can be given a more fair effective dispersement of limited resources.
After 85, charity takes over. Also an important step, for it admits there are real limits to what the state can do.
I’ll look for some stats on sales tax. There are clear easy ways to make sales tax non-progressive.
Morgan Warstler // March 26, 2008 at 11:58 am
-er CA would not likely offer primo benefits.
dc // March 26, 2008 at 12:43 pm
Why would you want to make a sales tax regressive? Frankly, given that poorer people tend to spend a much larger portion of their income on items for which sales tax applies, it’s already regressive.
Although I just recalled that you said it would apply to everything. Including food? Including services? Including stocks and bonds? Including rentals?
Morgan Warstler // March 26, 2008 at 12:54 pm
Consumption, not savings.
Fentex // March 26, 2008 at 1:04 pm
I’ve little experience of federal systems, but it seems to me federal government ought be funded by payments made by member states and not self funded by federal taxation so it remains clear where authority lies - if the intent is for states to free of excessive federal rule.
The regressive sales tax spoken of I presmue is something like the GST we employ in New Zealand. Which is not unlike the VAT of the UK.
Except it has one very special feature as employed here - a single rate applied to everything (which only a few very clear exceptions - bank fees, non-buisness property purchases where it does not apply at all).
A single rate makes administraton trivial and application very broad generating substantial revenue with minimal market distortions.
I believe there’s a group in the U.S called the ‘Fair Tax’ movement that agitates for something like this.
Given we’d all rather that, all things being equal, there was no taxation, or when inescapable what there is be as slight and fair as possible, a flat consumption tax is useful as long as it is not the sole source of government revenue.
If the government has substantial expenditures a flat consumption tax (if its sole income) has to be set at a height where its regressive nature begins to bite.
So I’ve always thought a tidy-ish solution for a federal system might be something like sales tax for the Feds, income tax for the States. Keep them separate issues for separate elections.
Jon Taplin // March 26, 2008 at 1:42 pm
Morgan- You know there is no lack of venture capital in the U.S.. In fact during the late 90’s when taxes on the rich were higher, there was so much venture capital that we caused the tech bubble.
Fentex-The NZ taxation ideas seem very simple any easy to apply. I also like your notion that the Sales tax goes to the Feds and the States have the only income tax.
thegiantsnail // March 26, 2008 at 5:29 pm
Even more dispiriting, it appears as if the cycle of collapse is even longer this time…
http://finance.yahoo.com/q/bc?s=%5EDJI&t=my&l=on&z=m&q=l&c=
Or is it quicker? Depends on which wave you think we’re expressing now…
Josh C // March 26, 2008 at 9:45 pm
I seriously don’t get it. The super rich are mostly workaholic, money-making machines. They’ll complain to the end of the world about higher taxes but just like when all my friends claim to be “broke,” they’ll still go out to the movie that they really can’t afford. The rich will absolutely still invest if taxes are a little higher. As John has pointed out, they have in the past.
Josh C // March 26, 2008 at 9:46 pm
BTW: Buy Gold!
hughvic // March 27, 2008 at 4:29 pm
Buy Oil!
That’s a seriously scary overview of the economy, Jon, but thanks for being the good messenger of bad news.
Leave a Comment