Economics vs. Populism

I’m not interested in popular mis-beliefs. I am interested in elite mis-beliefs, mis-beliefs of the intellectual class, especially journalists.

After all, Arnold says that he is interested in education of the masses, but journalists are supposedly educated. They have less of an excuse.

So…

How about tax increases always increase revenue on a dollar per dollar (linear) basis. There are a lot of boat builders decimated by the luxury tax in the early ninetees that would like to take on that one!

I have one for you… Actually, this doesn’t even require an economist, just someone who doesn’t have their fingers in their ears while at the same time making “blah blah” noises with their mouth!

In California, now that we booted Gray Davis and fixed the economy, the new crisis is the grocery store strike. The workers have been told that the companies want to cut their health benefits 50%, so that (I am not making this up, I had someone parrot this to me at dinner tonight) if you go into the hospital for a $20K surgery, it will cost you $10K out of pocket under the latest management offer.

And so, these workers have been on strike for a week, and most are past the point where they would have any economic gain over the next several years versus accepting the latest management offer. If it’s a short strike, most workers won’t figure out that they lost money by walking out. If it’s a long one, most will blame management for trying to make them pay 1/2 their hospital bills.

Arnold, there are two little web widgets you could make to help this situation out. One is a “Contract FAQ” which would gather a historical list of egregious claims made by unions and management and offer a three sentence “pull your head out” dismissal of the claim. The other is a “cost of going on strike” calculator which would compute how many days of striking would negate potential gains from a strike.

It’s a really sad situation out here. The Jacksonians have run amock!

-Brad

“I am so enamored of our system of checks and balances, along with our Bill of Rights, that I distrust the Wilsonian project of bringing about international rule of law. I would be all for it if everyone were to adopt our system. However, compromising our elegant architecture for the sake of participating in a world architecture is repellent to me. Consequently, on foreign policy, and particularly after 9/11, I wind up a Jacksonian.”

This construal of the Wilsonian Model seems needlessly ideological. Hasn’t the Wilsonian Model, thus far, diffused power? If the UN might have a limiting effect on the action of some country, let us say the US, then hasn’t the system of American checks and balances been given an additional, international check / balance. Perhaps the Wilsonian model is so naive as to believe in the exchange of national for international power is necessarily complete; but, realistically, nations do not surrender all of their sovereignty when signing a treaty. They only surrender part. In the same way, if one can excuse the analogy, that the states of the Union surrendered part of their sovereignty in forming the United States. The error both in the Wilsonian view (at least as Mead and/or Kling construes it, perhaps that is the Wilsonian view, but perhaps I am a “Neo-Wilsonian”), and its critique, is misunderstanding that power and sovereignty is divisible. As proven by the elegant system of US Federalism. International governance needn’t be in lieau of National governance, but should be in addition to and focused on issues where International decision-making (whatever that means) is most efficient and appropriate.

First to Arnold:
International trade, except in the realm of raw materials and Ideas, is not really a sustainable economic function; it has a half-life of about forty years. This is because techonological development will always negate the advantages of Production from location, Profitability lost to the costs of Transportation.

A second popular belief among the Public and Economists lies in the Keynesian belief that Government deficits enhance economic performance, whether coming in the form of Liberal Welfare or Supply-Side Business support. Study of Economic history does not actually support either of these Keynesian approaches, when One checks the actual statistical data. Actual best economic performance has always come in periods of high taxation, where Government programs was most closely paid for from Tax revenues; and Business had to maximize Profits to provide Investment, in the face of high tax on those Profits.

A third popular belief among Economists comes in the thought Monetary policy can be utilized to maintain Consumption. It has shown to have an impact, yes; but never an impact sufficient to retard a Boom, or counter a Recession.

I am most certainly not a Jacksonian, and probably most aligned with the Jeffersonians; though none actually please me, or a significant number of Americans. We need a balanced Budget, without restrictive Trade agreements, with limitation of Tax credits to elements which promote actual domestic production. lgl

I thought of another journalist misconception: economic growth causes inflation. The 1990’s should have put that one to bed.

How about zero sum thinking in general? Journalist believe that if the rich are getting richer, the poor must be getting poorer, which explains their opposition to tax cuts “for the rich”.

Or how about gasoline prices?

We just had a little lesson in my hometown of Phoenix on the base nature of supply and demand. Seasoned financial professionals knew enough to invoke the argument of an inelastic demand justifying price controls but still couldn’t see what is so simple in truth. That it is better to have expensive gasoline than to have empty pumps and relatively low prices posted on the station’s sign.

Eric,

Your point is well taken but those people will never change their views, as a group anyway. Remember, many of them realize the fallacy of the dollar for dollar tax/revenue scheme but they justify themselves by the idea of limiting capitalism or curbing frivolous consumption.

However, when people, the common public, actually realize what is going on, we suddenly remember just accountable our public servants really are.

As the Phoenix gasoline shortage proved this summer, even supposedly educated people will always be susceptible to emotional thinking, but if the public can reach at least a minimum level of sophistication, the elites can be effectively checked.

“My town council, for one. They raised the sales tax .25% this year. They projected revenue on a linear basis. (i.e. we were making x revenue from y % tax, thus we will make x*(y+z)/y revenue if we increase the tax by z).)

“Too many people think linearly. That’s much too static.”

Considering that the increase in prices is small (probably within the normal variation of the market), using a linear basis of estimating the increased revenue was probably the most sensible approach.

“As for Boon’s burying his head in the sand attitude, every time a politician suggests a tax increase to improve the economy, they are asserting that an increase in taxes will not change the current consumption of the taxed item. Look at the various schemes to tax cigarettes to the moon, NYC in particular.”

This thread is a nice example of argument by strawman. Whatever the merits of NYC’s war on cigarettes (which I don’t like even though I’m a non-smoker), its not premised on the idea that taxes will not effect the amount of the good consumed. In fact, if you actually bothered to listen to the arguments put forth in support the supporters admit that it will decrease consumption since they cite deterring teens from taking up the habit and getting others to quite as positives.

Likewise, neither Howard Dean nor Eric’s local council asserted that tax increases raise money in a linear fashion. For a 0.25% increase the linear model is almost certainly the most realistic to use. We know the true amount raised by the increase will never be known because all the other variables (prices, income, tastes, etc.) will not stand still for us to do a before and after comparison.

Let’s take the following:

“How about zero sum thinking in general? Journalist believe that if the rich are getting richer, the poor must be getting poorer, which explains their opposition to tax cuts “for the rich”.”

Note the strawman here. There is no one who is actually arguing that the rich can only get richer at the poors expense. It’s simply assumed because that’s an easier argument to counter. How about opposition to tax cuts for the rich on the grounds that if there are resources available for tax releif it should be applied to the poor first? You can argue against this position but its not as silly as saying if Bill Gates gets another $100 then 5 poor single mothers must have been ripped off of $20.

I find it interesting that my critics are unable to really respond to my post; Who exactly is making these claims that they are so upset about?

I would first like to say I cannot find real proof that taxes automatically retard economic growth. It is like the proposition that Wealth redistribution efforts of the Government always lead to failure and again retard the economy. Then there is the argument that a Progressive Income tax actually slows Investment; another argument still to be shown. All of the Above may seem likely, but no One comes with positive proof.

Everyone here should know the linear Tax argument is flawed, but they automatically assume it worsens the economic position. This may not actually be automatic.

Everyone should also know positively that if All had to pay the real percentage of their Income (Personal, Capital Gains, and Corporate Income tax), as do the lowest actual paying segment of the Taxpayers; there would be no Government Deficit within a decade, though the impact on economic performance would have to be assessed from such a Program. It might not be as destructive to economic performance as commonly thought, but no models are being conducted to assess the impact. By the way, such a Tax would be easy to implement: simply pass tax legislation stating any superior Income class must pay an equal or higher real percentage of the Income, than does the lower Income class.

Many factors enter into economic performance, and they should be analyized carefully; not guessed at. The development of the 1950s in real capital aggregation terms, was probably higher than after the 1963 Tax Cut; without the real level of Inflation. The economic growth of the mid-1990s was higher than the Reagan era, without the increasing National Debt and Inflation; though the Taxes were higher. Realistic economic models should be outlined and run. lgl

B, just like real interest rates are more accurate than nominal ones, after tax incomes, profits, etc. are what motivate people. That’s all that supply side economics is saying.

As for the linearity of tax revenue, this really has nothing to do with supply side economics. It has to de with predicting revenue.

Mathematically, the equation for tax revenue has a positive first derivative, but a negative second derivative. Thus, on a marginal basis, each next unit of revenue is smaller than the one before, but the overall amount of revenue still increases.

As I told my town council at their open meeting, in the age of Amazon.com, the sales tax is obsolete. No increase in the sales tax, no matter how small, is going to generate ANYWHERE NEAR the tax revenue predicted by a linear model. The only revenue generated will be to internet retailers operating in states that have no sales tax.

>>Boonton writes: Yes yes, Dean is saying that repealing the tax cuts will raise revenue. I asked for an example of a person who thought that increased taxes would raise revenue on a linear basis. Even most supply siders concede that we *are not* at the point on the laffer curve where tax cuts will be offset with so much growth that revenue goes up.

“B, just like real interest rates are more accurate than nominal ones, after tax incomes, profits, etc. are what motivate people. That’s all that supply side economics is saying.

As for the linearity of tax revenue, this really has nothing to do with supply side economics. It has to de with predicting revenue.”

Actually that is not all that supply side economics is saying. Most visible supply siders that I’m aware of (at the moment the only economist I’m aware of is Kudlow, but like protectionism the theory is very popular among non-economists) argue that the tax relationship is so important in investment decisions that cuts (or increases) can have a shocking effect on economic growth.

If the relationship is not strong for the range that we are discussing then a linear model is probably the easiest and most accurate to use. There is no need to use Einstein’s equations if you are talking about objects moving under a few hundred miles per hour, if you are going 50% the speed of light or more then they become more relevant.

Unlike Einstein’s equations, there is no clear measure of how much non-linearity is associated with tax rate changes. I would imagine that your Town Council has very little econometric analysis of your local area so a linear estimate is probably the best model to use. Like I said, if a 0.25% increase represents a 5% increase in tax rates then no one expects actual revenue to increase by 5%. What will really happen is a function of so many variables that it will be almost impossible to tell how much change was due to the increase versus all the other factors. It’s quite possible that next year your Town Treasurer may report that revenue increased by 30%!

Dean’s situation is much the same, if he is estimating that Bush’s tax cut cost $400B then it is sensible that reversing it will raise $400B. If I had to guess he is probably taking these figures from the CBO which is charged with estimating such things. Looking forward they do use a linear model (last I heard) so its quite possible that Dean is using a linear model for his website. That *is not* what I asked for when I wanted to know a specific person who was asserting the strawman argument that Eric was complaining about. Using a linear model does not mean you think it is ‘the truth’. Unlike physics, everyone knows that economic models is like driving a car looking only at a compass and not the roads. They are better than being totally blind but not by that much.

Perhaps the person believes resources should be applied towards tax relief for the poor before the rich? Agree or disagree that doesn’t imply that the person believes tax cuts for the rich will *make* the poor poorer….only that the poor should be made less poor *before* the rich are made richer.

The straw man is that Bloomberg did not state that tobacco tax revenue would increase in a linear fashion, that no one would quite smoking or that no one would turn to the black market or buy out of state smokes. I don’t know if overall revenue has gone up or down since Bloomberg imposed additional taxes but that doesn’t effect Eric’s statement that relevant people are arguing a myth that tax increases work on a ‘dollar for dollar’ basis.

“Whenever a pol, candidate or sitting, suggests or passes an economic plan based on the idea of improving tax revenue via higher taxes, they are implying that higher taxes automatically increases revenue.”

No, they are implying that the tax increase they are proposing will increase revenue. That isn’t a trivial distinction. Someone proposing taking the tax rate from 33% to 35% to increase revenue is not saying that going from 33% to 87% will increase revenue all the more.

You’ve done a bit of a slide of hand here, changing the subject from a linear increase in revenue to any increase in revenue. Say tax rates go from 30% to 33%. That is an increase of 10%. If the ‘linear model’ is correct, then revenue will increase 10%. You are implying that not only is the linear model a ‘myth’ but the positive relationship is also a myth….that revenue may actually end up declining by 10%!

In either case no one has asserted that tax increases *always* increase revenue or that they increase revenue exactly in proportion to the increase. On the other hand there are people who argue the myth that protectionist policies *always* make the economy stronger or ‘more competitive’ or something along those lines.

Sleight of hand?

The hinge pin of your argument is that no one has spelled out a tax hike proposal that would increase tax revenues dollar for dollar on a linear scale. I’m unaware of anyone, Left or Right that has proposed anything that detailed for public consumption.

More to the point, and my sleight of hand I suppose, the core economic doctrine of the political Left is that higher taxes automatically increase tax revenue. This is of course false.

“In either case no one has asserted that tax increases *always* increase revenue”

But every proposal for tax increases is based on the erroneous assumption that higher taxes automatically produces higher revenue. If it didn’t, why would we need the tax to begin with.

And for Bloomberg, you are still woefully incorrect in your definition of “straw man.” Why did NYC increase the cigarette tax? To increase revenue of course. What has been the result; tax revenues per smoker have fallen and the black market for cigarettes has increased. NY has stated several times since the implementation that they are losing hundreds of millions of dollars in unrealized cigarette taxes because of the black market and internet sales (Indian reservations and such).

Again, to call this a straw man is egregiously dishonest or ignorant, take your pick.

Ray

“But every proposal for tax increases is based on the erroneous assumption that higher taxes automatically produces higher revenue. If it didn’t, why would we need the tax to begin with.”

Yes because policy makers are assuming that the rates in the status quo are below the Laffer hump. You can argue that this assumption may be incorrect but if it is correct then indeed increasing tax rates would increase revenue.

“And for Bloomberg, you are still woefully incorrect in your definition of “straw man.” Why did NYC increase the cigarette tax? To increase revenue of course. What has been the result; tax revenues per smoker have fallen and the black market for cigarettes has increased. NY has stated several times since the implementation that they are losing hundreds of millions of dollars in unrealized cigarette taxes because of the black market and internet sales (Indian reservations and such). ”

Again, to call this a straw man is egregiously dishonest or ignorant, take your pick. ”

Bloomberg never argued that tax increases automatically lead to increased revenue which is the strawman you are presenting. He argued that a limited set of tax increases could be expected to increase revenue. While I don’t doubt that NY is losing millions to internet sales & other forms of non-taxable cigarette purchases its not clear that NYC has actually lost revenue overall on the tax increase. Has anyone published figures on tobacco taxes raised before and after the increase?

While Bloomberg may have been wrong about his cigarette tax increase, it is a strawman to ascribe the position that tax increases always lead to revenue increases to him.

Boon,

You’re going to hurt yourself twisting and turning like that.

Bloomberg raised taxes on cigarettes to increase revenue. They have already admitted failure by publishing estimates as to the subsequent loss of cigarette tax revenue due to the black market and internet sales. There would be no black market if the current legal price had not exceeded the true market value i.e. the value assigned by consumers in a system based on voluntary exchange (black markets only occur to fill a gap – econ 101).

So Bloomberg’s assumption was that higher taxes would produce higher revenue, why else would he have implemented the tax. This is the example of our ruling classes working under the myth that higher taxes automatically produce more revenue. So NYC cigarette taxes increase which subsequently diminished cigarette tax revenue per smoker and now the City is trying to figure out ways to stamp out the black market and make people pay the higher, tax affected price.

“That doesn’t mean that a proposal to raise revenue by repealing a tax cut means that the supporter is an advocate of a ‘myth’ that tax increases *always* increase revenue.”

Repealing a tax cut is a tax increase euphemistically stated for campaign purposes. Dr. Dean asserts that our tax revenue will be increased by his euphemistically named tax hike. This means that Dr. Dean (among others) thinks that our government spending is already at a reasonably efficient level of spending and the only way to raise revenue is to raise taxes.

Like I said, twisting and turning like that is going throw your back out man.
“If by producing more revenue you mean more tax revenue then indeed we most certainly DO NOT know this. In fact, I’m pretty sure even most supply siders nowadays admit that Bush’s tax cuts *cost* revenue.”
A downturn in the business cycle has cost federal and state governments tax revenue. That means less business took place over the last 3 years because of a cyclical downturn. President Bush’s tax cuts came after the loss of tax revenue began and this is when the mythical economics of the political Left came to the forefront. “How can Bush cut taxes when the revenue is already dropping?”
President Bush cut taxes to increase the level of business currently taking place by freeing up both the consumer and the producer (see my above post). This, in short order, increases tax revenues by increasing overall business.
By your erroneous assertion, tax revenues did not begin to decline until Bush cut taxes and indeed the popular media reported declines in revenue as resulting from the tax cuts, even before the cuts took effect. The point being that the revenues were already at their nadir and they came out of that trough exactly because business began to increase as a result of Bush freeing up the economy through overall tax relief.

“Sadly higher taxes do *generally* produce more revenue. Tax relief for a ‘targeted group’ may or may not do anything regarding an economic boost.”
Sadly, you’re wrong, generally speaking. Keeping in mind the Laffer curve, there is a point that we can fall below in taxation where more revenue might be gained but anyone who proposes that our current level of taxation is below that point in the Laffer curve has to ignore mountains of evidence to the contrary.
“The bulk of taxes rates are set below the Laffer curve’s hump”
This entirely too broad of a statement to be taken seriously. We’re not being taxed enough? Really. Have you ever actually taken an economics course? Successfully?

Lacking substance, your argument has fallen to the hypothetical i.e. legitimate smoking falling by 45% and so on.

Smoking has not decreased one iota. NYC itself is proclaiming losses of unrealized tax revenues because of the black market and internet. This means they are acknowledging that smoking has not decreased but smokers are going outside of the legal market for their consumption. Thus NYC’s loss of tax revenue.

I realize now this is too recondite for you so let me explain.

NYC has 1 million smokers, the city passes a large tax on cigarettes. Before the tax, 1 million smokers were buying their cigarettes through legal channels, after the tax, only 800K are buying their cigarettes through legal channels. Thus the loss in revenue per smoker (per smoker has been my measure all along).

Your assertion is to say that the increase in taxes per pack will make up for the 200K gap but this is not only highly speculative but extremely difficult to quantify. Also, keeping in line with proven economic theory, the larger that tax, the larger the gap in legal/illegal purchases. Thus implementing such a tax, any tax that creates an admitted black market, has crossed the line of effective tax policy and is by definition restricting the economy, not to mention funneling millions of dollars to the criminal world.

I never made any assertions as to the iron fisted opinions of Mike Bloomberg. I gave an example of politicians operating under the myth that they can raise taxes to extreme levels diminishing revenue.

Your attempts at semantics of demanding to see one politician who proposed an linear dollar for dollar tax hike and the over magnification of Bloomberg are indeed straw men.

Bottom line being that one of the lingering economic myths is that higher taxes automatically produce higher revenues. The knee jerk reaction of the Left is to raise taxes. Why? Because they automatically assume this will produce more revenue. The automatic response of genuine free market conservatives is to cut spending. Why? Because they understand that a free market will produce more business, a higher standard of living and thus higher tax revenue per citizen.

President Bush’s tax cuts have not cost any revenue. Most economists of a free market stance have not conceded that these tax cuts have cost any revenue. The only way these cuts can be construed to have cost revenue is in a static, on paper model. When you find a real time economy that operates in a static mode, let us know. This is why we speak of leading and lagging indicators, nothing is static.

Non-free market types tend to measure the last drop in tax revenue and attribute it to tax cuts because of the leading/lagging nature of measuring an economy. This is why, if you remember, there was such a flap about the CBO possibly using a dynamic model to run their numbers a few months ago.

Where I believe you are getting confused is from the myriad news reports that began the day Bush even proposed a tax cut. From thereafter, all losses in revenue were attributed to Bush’s tax cuts, even before they were implemented.

Now, if you’ve been paying attention, Bush’s tax cuts are laddered, so to speak and so some have taken affect and some have not. Indeed, one of the things on the docket for the 04 campaign is that Bush wants to speed up his future cuts.

Also, in case you haven’t been reading the news, our economy is doing great. Most free market economists (while not entirely pleased with President Bush -steel tariffs, domestic spending problems etc) attribute this improvement to Bush’s tax cuts.

“Actually it’s rather easy. Unlike other economic activity, smoking is pretty steady.”

I would recommend that you actually take some economic courses. The reason this hypothetical 200K smoker gap cannot be accurately measured is because we are now talking about the black market. You cannot accurately measure the black market.

Though you would make a great PR hack for a politician. Simply assert that smoking has dropped 20% in your city since you implemented your anti-smoking measures. It’s a great way of saying that you’ve actually lost millions of dollars in revenue while simultaneously funneling that lost revenue to the criminal underworld.

Brilliant logic.

And I have not asserted that Bloomberg always believes anything. This is one of the real straw men that you have been vainly trying to construct.

I gave an example of a politician operating under the myth of higher taxes producing higher revenue, automatically.

Anyone watching the news on a fairly regular basis knows that NYC has been very upset about their lost revenue due to the increase in black market activity. They have declared of a kind of war against black market and internet cigarette sales to bring back this revenue.

Think of the indirect costs of fighting this war against black market cigarettes, even in the more indirect strengthening of the criminal world’s new source of income. Not to mention the loss of revenue to the store owners and their subsequent consumption. Anyone owning an actual smoke shop is on the verge of going out of business.

>>Like I said, though, cigarette taxes are unusual in that they were already pretty high.

Not in my experience. European cigarrette taxes are insanely high (but then, what European tax ISN’T?).

I just got back from England. At the pub, Marlboros were 5 POUNDS per pack from the vending machine (yes, they still have cigarrette vending machines over there too).

That’s insane.

Based on that standard, NYC cig taxes were low, at only $1.50 per pack before they went up.

Of course, the reservation that I frequent (Seneca, outside of Buffalo) has their own brand of cigs (Smokin’ Joes) for $1 per pack. AND they sell over the internet!

You can see NYC’s problem.

“Most economists do believe that Bush’s tax cuts have cost revenue.”

You’re simply lying now as well as changing your language. Now it’s “most economists.” Pretty hard number to quantify there and besides, are most economists right? I’m a broker with one of the larger retail firms and our two main economists are polar opposites. Take your pick, you’ve got a 50/50 chance of being right.

You’re erroneous assumptions rely upon static measuring; your alternative universe? You’re already there.

As for providing numbers, in discussions like these people generally try to stick to well known material i.e. current events. Anyone who has been following the news knows that NYC has bemoaned the loss in revenue while declaring a crackdown on black market cigarettes and proposing legislation aimed at restricting internet sales of tobacco. You’re either being dishonest or you actually are very poorly read. Assuming you are an honest person, simply go to Google and do a search.

While you’re there, find me the quantitative number on “most” economists’ opinions.

And back to the subject at hand; one of the most persistent and harmful economic myths that would be refuted by trained economists is the assumption that an increase in taxes automatically increases revenues.

Why does Dr. Dean propose that raising taxes (repealing tax cuts) will increase tax revenue instead of curtailing government spending? Because he believes that raising taxes as a matter of fact will raise revenues. Why did Bloomberg hoist cigarettes taxes to heretofore unheard of levels? Because he is completely ignorant of that fact that he is restricting the local economy and thus diverting tax revenue to the criminal world. This ignorance stems from the widely held myth that simply raising taxes will raise revenues.

B, I think that you are bing intrasigent when you ask for “proof” that people believe this stuff.

Second hit from google search: NYC cigarette taxes supply side

NYC Cigarette Taxes

• With many states now running their largest budget deficits ever, legislators are looking anew at raising cigarette taxes. Now, several new studies suggest that there are diminishing returns to higher cigarette taxes.

New York City is probably the best example of where cigarette taxes, which now total $3 per pack, are so high that a tax cut would probably raise revenue. A new report notes the city is getting less than half the revenue increase expected from last year’s tax hike from 8 cents to $1.50 per pack.

Because of higher cigarette taxes within the city, the State of New York claims 46 percent of the higher revenues collected. Thus, out of the $250 million, New York City was going to get only $107 million of additional revenue even if everything went as planned.

The report also found that cigarette sales from legal sources fell much more than expected: by 189 million packs. The loss of cigarette sales, ancillary product sales, and income to businesses and workers and the loss of about 10,000 jobs reduced New York City’s tax revenue by $64 million.

Thus the city’s net revenue from its $250 million tax increase turns out to be just $43 million.

Some of the lost sales undoubtedly resulted from reduced demand, people quitting smoking, or cutting back. However, it appears that smuggling, out-of-state purchases, and sales on Indian reservations are the main reason.

Reported by the National Center for Policy Analysis 3-17-2003.

More FINANCIAL journalist misconceptions (VERY INTERESTING!)

http://pages.stern.nyu.edu/~opportun/issues/2002-2003/issue06/05_opinion.htm

By the way Eric, your http://www.sp.uconn.edu/~wlott/EC214/Lec10.ppt reference is nicely illustrative. Look at figure 6.1; if you are in a world where tax rates are between t1 and t2, a linear model is a good approximation for estimating a tax increase.

In that case the linear model has some distinct advantages:

1. It’s easy.
2. It’s objective, not subject to self interested spin from those with a vested interest in arguing against a tax increase or vice versa.
3. It’s cheap, the cost if finding a model to close the little bit of space between the estimated revenue and the real revenue is probably expensive.

However, going from t2 to t3 it becomes clear that the difference between the linear estimate & the true value increases dramatically. Here it may make sense to consider discarding the linear model and trying to find a dynamic model if the gov’t feels it must push for the additional revenue.

The question is where are most tax rates in the US today? Are they between t1 and t2 or are they between t2 and t3?

I suspect that even next year the tax will continue to yield some revenue. I’ve noticed that many of the smokers I know seem to buy their packs every single day…at least my gf does! You would think a rational smoker would buy by the carton which is cheaper than by the pack….we aren’t even talking about the savings from buying off the Internet yet! I will agree that Bloomberg was dumb regarding not only the tax but the smoking ban (which was sold on public health reasons BTW).

I agree that technology can shift what used to be a t2 tax over to t3. Let’s not overstate it though, we are coming down from a period where people though the web was going to eliminate not only banks with tellers but even the need to buy candy from newsstands!

I’m not in the wagering mood, but if Dean did win the Presidancy then his policies would be very powerful. I don’t recall Bush not advocating tax cuts because he was afraid of the possibility of facing a Democratic Congress that would never pass them. It seems like a candidate should run on what they think are the best policies and let the chips fall where they may.

Well the logic carries its own momentum with it. If Dean is on record proposing a healthcare entitlement & he is on record bashing Bush for letting the deficit explode then the implication is that he must propose a reasonable way to fund his entitlement. Repealing the Bush tax cuts would probably be the most logical way to approach the matter because:

1. They are heavily centered on the wealthy.
2. They have only partially been phased in so repealing them would simply be maintaining the status quo in some respects.

Of course, someone could do a Jack Kemp & propose that an entitlement be funded through the tax revenue supposedly gained thru a supply side tax cut. That would be an interesting sight.

Eric,

How about we make a deal, you agree to pay me 2% of the income of, say, the average person in the top 5% while I’ll agree to pay you 5% of the of the income of the average person in the bottom 40%.

If you say something like ‘we are going to have tax relief of $400B’ then it is a zero sum game. If $300B is going for cutting the top bracket then only $100B is left for all other taxes. (Before anyone goes ballistic these values are estimates that come from a model all players agree on…whether it be linear or not).

If you want to say giving Bill Gates a $100 tax cut somehow translates into some poorer person being $100 less fortunate, then I’ll disagree.

No matter how you cut it the Bush tax cut placed heavy emphasis on the wealthy. I didn’t say anything about whether or not this was fair but it is a statement of fact.

Fairness is a dangerous idea, I’d be careful pulling it out in an economics forum. For example, consider who derives the most benefit from the protections of the US gov’t….there’s a good case to be made that the wealthy do. From that perspective dividing the tax bill evenly between everyone would hardly the the ‘ultimate in fairness’. It would be like a bar presenting everyone with the same bill whether they just had water or a full bottle of cognac.

I am in a wagering mood. I would wager that Dean’s plan would not raise anywhere near enough revenue to cover his proposed spending. Let’s look at what caused tax revenue to boom in the late 90’s:

1) Higher incomes of the rich. Progressive systems flourish if more income is subject to the higher brackets. If total income in year 1 subject to the highest rate (37%) is $1,000,000 then tax revenue is $370,000. If in year two the top rate goes to 39%, but income subject to it is now $949,000 (incomes on people earning $150K or > declined 5.1% in 2002 so I used that figure in the example) then revenue is $370,110 (that is a paltry increase in revenue despite a 5+% hike in top rate). If one has been paying attention the incomes of the rich have DECLINED over the past few years. If this trend continues or does not reverse then tax hikes may yield little.
2) Stock market capital gains. This contributed heavily to cap gains taxes, and pushing incomes into higher brackets. Capital gains as a percentage of income taxes were 6% in 1993, and 12% in 2000. Dean better do a bull market dance.
3) Clinton’s increase of the income subject to Medicare payroll tax to an unlimited amount. This is 2.9% on all income, no cap like the social security portion, and no deductions of any kind this was a nice revenue contributor, but it effects are in place already. So the effective top rate is 2.9% + top tax rate.
4) Increased corporate profits subject to taxation.

Dean is simply repealing the tax cuts. Unless several trends above reverse, then the repeal may fail to generate needed revenue. To boot the new spending could be a major problem.

From the CBO website:
“But changes in overall economic activity are not the only reason why projections of receipts change. Not all revenues are directly linked to the movement of overall economic activity. Some tax sources depend significantly on the behavior of asset prices. They also depend on the division of income between taxable and nontaxable forms. And they are influenced by how income growth is distributed. Hence, a fall in overall income need not yield a proportionate fall in receipts. Receipts can fall, or rise, much faster than overall economic activity does.”

In other words not linear.

More from CBO:
“The first likely factor is capital gains income. Realizations of capital gains are not part of national income or GDP. But they are taxable income to individuals and corporations. Consequently, they can grow more rapidly or fall more precipitously than national income, resulting in changes in revenue proportionately greater or smaller than changes in overall economic activity. CBO’s analysis indicates that rapid growth of capital gains realizations EXPLAINS about 30 percent of the growth in individual income tax receipts relative to GDP from 1995 to 1999, so they may be playing a major role in the decline in FY 2002 receipts.”

More:
“A second likely factor is the slower growth of very high incomes in comparison to that of overall income. Those incomes are taxed at the highest rates and produce a disproportionate amount of income tax revenues. From 1995 to 1999, very rapid growth in very high incomes accounted for about 16 percent of the growth in the revenues in excess of GDP. A reversal could very well reduce receipts by a significant amount.”

http://www.cbo.gov/showdoc.cfm?index=3662&sequence=0

B, the problem with your rationale is that it MAKES NO SENSE.

Look. I’m a middle class guy. I make a decent salary, higher than the national median. But my wife doesn’t work, I have two kids, I take advantage of the lifetime learning tax credit for my master’s degree, and I max out my 401(k).

I pay no federal income taxes.

And, of course, I am wicked happy about that.

But it is insane. No taxes? Come on, everyone should pay SOME taxes.

So your theory that the rich benefit more from being Americans than the poor do is suspect, because the poor generally don’t pay taxes. Even the middle class don’t pay taxes, if they have kids and a fully funded 401k.

Keep in mind what the government has done for me: 12 years of public schooling. 4 years at a public university. The tax subsidy of my masters degree. I wouldn’t make anywhere near what I make if it weren’t for the government. BUT I DON’T PAY INCOME TAXES!!!

Contrast this with a rich person, who may be a product of private schooling, and even send his offspring to private schools.

“Look. I’m a middle class guy. I make a decent salary, higher than the national median. But my wife doesn’t work, I have two kids, I take advantage of the lifetime learning tax credit for my master’s degree, and I max out my 401(k).

I pay no federal income taxes.

And, of course, I am wicked happy about that.

But it is insane. No taxes? Come on, everyone should pay SOME taxes.”

Over on http://www.econlib.org/MT/mt-comments.cgi?entry_id=275 we are debating whether or not the tax code really favors the saver. As you pointed out there if things go well you are going to end up paying a lot of taxes since you will eventually have to cash out a big 401K & if your Masters degree works you can expect higher income which means more taxes. Perhaps you patted yourself on the back too soon!

“So your theory that the rich benefit more from being Americans than the poor do is suspect, because the poor generally don’t pay taxes. Even the middle class don’t pay taxes, if they have kids and a fully funded 401k.”

This is irrelevant. If someone is willing to pay $40K for a luxury car then obviously they see some benefit in it when compared to the $15K economy car. The price for making a million dollars is the same for the poor man as it is for the rich man…just like the price of a $50K car is the same for me even though I brought a $16K Saturn. If you are willing to pay the price, then go ahead and do it. If you find a lower middle class income makes you as happy then you are foolish to try to kill yourself getting to CEO.

“Do the rich benefit more from being American?
The lifestyle of the rich is pretty much the same no matter what country they live in.”

The lifestyle is not the issue, the issue is whether the lifestyle is overpriced or not. The price to life the rich lifestyle in Saddam’s Iraq was probably pretty steep…having to stay in the Baath Party’s good graces all the time and such. I’d rather just pay the 37% bracket & be free to make fun of Bush.

>>If you find a lower middle class income makes you as happy then you are foolish to try to kill yourself getting to CEO.

You are missing the point, of which there are two:

1) EVERYONE benefits from living in America. You can argue that some people benefit more than others, but everyone benefits to one degree or another. Thus, everyone should pay at least SOME federal income tax.

2) There are many services that we recieve from government that should, at some level, be paid in relation to the level of service recieved. The poor recieve a lot more direct aid from the government. The rich recieve harder to measure benefits in certain cases (how do you measure the “benefit” of living in a country that has never nationalized an industry, for example).

So when you say that the rich recieve more benefits than the poor, and should therefore pay higher taxes, that’s an almost unprovable statement. Perhaps that is why progressive income taxes are not defended on that basis. Usually, the excuse for progressive income taxes is that is taxes those with the most ability to pay.

>>The poor do pay a portion of Federal taxes. They may not pay income taxes but most pay payroll taxes, plus other assorted taxes on products or services they may buy (phones, tobacco, alachol & other goods that have Federal taxes on em).

Standard liberal BS answer. Payroll taxes pay for BENEFITS, be they SS or Medicare. As such, they are user fees in a sense. Thus, they don’t count.

Excise taxes are similar. Essentially sin taxes, they are a way to pay for the CHAOS that these drugs cause our society (lung cancer, alcoholism, etc.) Again, they’re more akin to a user fee for services rendered, or services that WILL be rendered if you keep smoking!

>>Not like NYC had to incur thousands of police overtime hours controlling a rowdy smoking festivle in Central Park.

What??? That’s out of left field. Are you sure that they were smoking cigarrettes?

B, I’m just taking people at their word, okay. Go to the Socialist Insecurity website. From the way they speak, you would think that SS is a pension plan, not a ponzi scheme.

They keep track of how much of those “payroll taxes” you pay. The more you pay, the higher your benefit in retirement.

Are payments made into my company pension really taxes just because I get nothing if I die early?

As for cigarettes and alcohol, clearly there are costs to society because of their use. Sin taxes can address that. But you would have to convinve me that the costs to society are more than $1.50 per pack!

>>Income taxes are a ‘use tax’ on the benefit of being able to earn an income inside the sovereignity of the US. You are paying for the services provided by gov’t that allow you to earn this income

Pure sophistry. There is still no link between benefit and cost. More income doesn’t mean more government benefits. Thus, it cannot be considered a use tax.

BTW, just becuase Bloomberg is using sin taxes to close his deicit doesn’t make it right. Other states have lower sin taxes, and are probably more in line with the actual costs to society of the sin in question.

And we’re talking about the feds anyway. NYC isn’t relevenat. The poor and middle class (me especially) do not pay their fair share of the FEDERAL tax burden.

Well here’s an interesting way to test your theory Eric, if the ‘cost’ of things like the rule of law is too much then people will do business elsewhere. In other words, if making $100B costs too much for Bill Gates in the US then he has an incentive to find another country to relocate his citizenship to. I’m sure he would have little trouble, most countries would be happy to have Gates relocate his wealth and his company to their shores.

While there have been a few super rich people leaving the US, the trend clearly seems to be that the US is the best country to get rich in….not a country where the cost of being rich is too much. I’m not sure the same could be said about being lower middle class or poor. I have a feeling that it is probably easier to be those things in Europe or Canada…but then it isn’t as easy for the poor and lower middle class to make such dramatic relocations.

More income does automatically mean more benefits. If private property is protected in the US then more income by definition means more protection. That’s not even counting the fact that earning more income can be considered a ‘use’ of the US system.

Ever go to one of those farms where you can pick your own apples or pumpkins? At the end of the day you pay by how much you’ve picked….naturally the person who picked a lot is walking away with a greater benefit than the person who picked a little. Now maybe the person who picked a little just was lazy or maybe he has some type of physical handicap that prevented him from picking so little. That doesn’t change the fact that he gets charged a little at the cash register while the guy who picked a lot gets charged more. Think of the US as a country where you are allowed to ‘pick your income’ off the money trees & maybe this line of reasoning will make more sense to you 🙂 Now only if it was that easy lol…