How do tax cuts help?

January 6, 2006 5:16 PM

What's the economic reasoning for the idea that tax cuts stimulate the economy?

Bush gave a speech on the economy today. He said the economy is getting better, thanks to his tax cuts. I've heard the arguement that reducing taxes for the middle and upper class gives them more money to spend and invest, which means the economy grows. But wouldn't spending by the government do the same thing? Or be possibly better, since the government probably spends more on domestic rather than imported goods, services and labor? And the government doesn't save, which people might tend to do in a recession.

I'm not looking to understand the claims, not start a debate. Examples that include local economies or other countries are welcome.

posted by hydrophonic to law & government (47 comments total)

both arguments make sense. this is why people argue about economics.
posted by andrew cooke at 5:17 PM on January 6, 2006

Supply-side economics, aka "voodoo economics" (as Bush Sr called it) at Wikipedia.
posted by knave at 5:27 PM on January 6, 2006

The Laffer Curve is an important concept used to justify tax cuts. It claims that there is a tax rate the results in the maximum tax revenue - and, surprise, this rate is usually thought to be lower than the current rate! What I don't understand is the rhetoric of "less government" used by supply-siders when this theory actually seeks to maximize tax revenue.
posted by mullacc at 5:42 PM on January 6, 2006

When the government takes a large percentage of your income, people tend to do conservative things with the crumbs the tax collectors leave. In California, this manifests itself in large 401k plans and interest-only home loans (both of which are handy tax dodges).

If the government were taking a smaller share of your salary, you might be more inclined to join a start-up, or invest in stocks, or buy a shiny new car.

The concept behind the Laffer curve is that at some point, high taxes break the economy; the government collects a larger share of a smaller pie. Supply-siders and Libertarians like the idea behind the Laffer curve because it's based on something everyone instictively understands: it's not worth taking risks when the government takes 99% of your reward.
posted by jwadhams at 6:12 PM on January 6, 2006

In really simple terms, here's the reasoning behind the idea that tax cuts simulate [sic] the economy:

1. Give really, really rich people tax cuts, so they don't have to pay taxes at the same rate as everyone else. Thus, a guy making a Brazillion dollars a year only pays ten dollars of taxes, instead of the 30 percent everyone else pays.

Guy making a Brazillion dollars a year now makes a little less than a Brazillion dollars a year, rather than Billions of dollars a year.

2. Count on said Brazillionaire to use that money he "saved" to "create new jobs". Whether or not this happens is the source of the debate.

3. Proletariat gets job due to altruism of job-creating Brazillionaire, who's so flush with money that he has nothing else to do but create new jobs, because why would he put it in the stock market and sit on it?

4. Money trickles down to proletariats, who then use money to buy many goods at Wal-Mart.

5. Profit.
posted by interrobang at 6:34 PM on January 6, 2006

Note that an important part of the equation is supposed to be cutting spending while cutting taxes. Right now we're increasing spending while cutting taxes. This is bad on many, many levels.
posted by Justinian at 6:36 PM on January 6, 2006

3. Proletariat gets job due to altruism of job-creating Brazillionaire, who's so flush with money that he has nothing else to do but create new jobs, because why would he put it in the stock market and sit on it?

I think part of the idea is that putting the money into the stock market is one of several kinds of investments in industry that does in fact stimulate growth and therefore jobs.

I'm pretty sure that direct investment does this. I'm not sure how much I buy that stock trading has the same effect, but that's part of the argument.
posted by weston at 6:55 PM on January 6, 2006

Examples that include local economies or other countries are welcome.

The obvious example is America after Reagan's tax cuts, in which revenue fell.

both arguments make sense. this is why people argue about economics.

...and why they sometimes use historical data to buttress their arguments.
posted by Aknaton at 7:04 PM on January 6, 2006

?! - The really, really rich people don't have to pay taxes anyway.

The idea is to get more money into the hands of the people to let them do what they will. The alternative is to give it to the government, where much of it will be absorbed into the beaurocracy.

I got into a long debate with an econ professor once. She postulated that tax revenue would increase as long as the tax rate went up. I asked her if that would hold true even with a tax rate of 100%. She said that it would. Needless to say, I dropped that class very quickly. You don't have to believe the Laffer curve to realize that socialism isn't profitable.
posted by bh at 7:06 PM on January 6, 2006

jwadhams has it right. Any method of circulating more money stimulates the economy. However, the thought is that if the stimulation comes from the private sector they will make more money which will increase, or at least not decrease, tax revenues. I am sure there is some truth to it, but the theory has never really been proven, at least not the full blown "Laugher" curve part. That, I believe, is just optimistic thinking on the part of rich people who want lower taxes. Although, I do think that private industry uses the money more efficiently and is more likely to create new tax paying jobs with it than the feds would.

The problem with the Bush tax cuts is that they came at a time when we had excess capacity in many industries. Rather than stimulate investment, we needed to just stimulate spending. Giving money to people at the lower end of the economic spectrum is more likely to stimulate spending because they have unmet needs (and wants). Bush gave the money to the wrong people.
posted by caddis at 7:12 PM on January 6, 2006

1. In a functioning market, an individual is more likely to put a dollar to efficient use -- i.e., maximize that individual's value -- than the government, so keeping those dollars in the hands of individuals, rather than government, helps the economy.

2. Most taxes create incentives for tax avoidance, which create distortions in the economy, so that where a person might have actually received more value renting a residence -- all things being equal -- tax incentives might lead the individual to purchase a home even though it is not the most efficient, value-maximizing use of his or her money.

3. This really does not having to do with trickle-down or the proletariat or helping fat cats or whatever. While we can all disagree about how and how much the government should spend, I doubt that many people will dispute that taxes are a necessary evil at best (except when they serve a regulatory purpose to prevent market failure).

Read The Way the World Works. No matter what one things about Wanniski, the book sets forth some basics of economics in clear and readable terms. (And it is not true that revenues declined under Reagan after the tax cuts, but you are not looking for argument, so I'll leave it at that.)
posted by esquire at 7:20 PM on January 6, 2006

j k galbraith is a readable antidote to wanniski.
posted by andrew cooke at 7:28 PM on January 6, 2006

Time to play more SimCity.

When the taxes are too high, people (and smart ones with financial resources in particular) move the fuck out.
posted by trevyn at 7:34 PM on January 6, 2006

weston writes "I'm pretty sure that direct investment does this. I'm not sure how much I buy that stock trading has the same effect, but that's part of the argument."

Well, the more volume and activity there is in the stock market, the more likely a firm will be to go to the stock market to raise new funds. Only a small handful of investors have the opportunity to purchase shares when they are newly issued, but those investors will be more likely to do so when there is an active secondary market.
posted by mullacc at 7:54 PM on January 6, 2006

The basic idea of the Laffer Curve--that beyond a certain point, higher taxes will so discourage productivity that revenues will decrease--is obviously true. Would you get up and go to work if your taxes were 100%? 90%? How about 70%?

The problem is that there is no obvious way to tell where we are on the curve. If tax rate are discouraging productivity, then tax cuts will both stimulate the economy and produce more revenue. If we are on the low side of the curve, however, tax cuts will equal less revenue.

America after Reagan's tax cuts, in which revenue fell.

No, revenues increased, but spending increased more quickly and produced larger deficits.
posted by LarryC at 8:52 PM on January 6, 2006

The supply side economists have delivered the largest genuinely free lunch that I have seen in 25 years in this business, and I believe that we would have a better society if we followed their advice.

-- Nobelist Robert Lucas In Supply Side Economics: An Analytical Review, Oxford Economic Papers, 42:293.
posted by Kwantsar at 9:06 PM on January 6, 2006

Hydrophonic, the argument goes something like this: if you cut a rich guy's taxes by $1 million/year, he'll probably hire a gardener for $15,000/year, stimulating the economy. This used to be called trickle-down economics - rain money on the rich, and some of their piss will trickle down to everyone else.

The obvious counterpoint, that the government could spend the money directly and hire 60 gardeners for 60 times the benefit, is always ignored.

Hydrophonic, please understand that the claims here are based in truth on one side, and based in a religious-like belief on the other. On the second side, you have "free market" people, who start from the dogma that government can do no right and "the market" can do no wrong. They argue - against the evidence - that trickledown economics carries some economic benefit, because their religion requires minimizing the role of government, reducing taxes on the rich, and increasing taxes on the poor.

On the other side are honest economists. They understand that economics is a science that can be analyzed, and it contains laws can be determined from studying past cause and effect. On this particular debate, they uniformly believe that trickledown economics provides less economic stimulation per dollar spent by the government than other policies.

(Which is not to say that dumping money on the rich provides no economic benefit, just that it's a minimal one compared to other ways the government could spend the money.)

The reason it may not make sense at first glance is that it is essentially a religious debate.
posted by jellicle at 9:10 PM on January 6, 2006

they uniformly believe that trickledown economics provides less economic stimulation per dollar spent by the government than other policies.

So, how is this logically possible? Under this reading of the trickle-down theory, how does a dollar fail to enter into the economy where it would otherwise with government spending?

I f'n hate tax-and-spend Republicans just as much as tax-and-spend Dems. But can someone please explain how free markets don't work?
posted by frogan at 9:56 PM on January 6, 2006

Everyone agrees there is a tax rate so high that people will not engage in wealth-creating activities and simply conserve because of it. That is to say, there is a tax rate which is high enough to cause the economy to be stangant and even contract. Because there is what's called the multiplying factor, it's going to be the case that the percentage of the increase in revenue by that high tax rate is more than offset by the amount of taxation lost due to excessive taxation.

The argument that tax-cutting results in a) economic growth; and b) tax revenue growth is the inverse of the above. That is, there's a level of taxation below which economic activity is encouraged (not discouraged or neutral), and there's a level of taxation even below that which will result in an increase in taxation revenue due to increased wealth creation that is greater than the revenue lost from the decrease in the tax rate.

Every economist believes in this simple structure. What is in dispute is where those lines are drawn. Those who favor low taxation tend to, obviously, drawn the "discourages economic activity strongly" line low (moving from lower to higher) and the "encourages economic activity strongly" line low (moving from higher to lower) while, conversely, liberal economists drawn the discourage line high (moving from lower to higher) and the encourage line low (moving from higher to lower). The revenue increase or decrease lines are set at even greater extremes by the same interaction and the rates claimed also according to such ideologies.

Bush and the supply-siders, in their tax-rate cuts, have been asserting both that the previous level of taxation discouraged a substantial amount of economic activity and that this discouragement is great enough that a reduction from this rate will spur enough economic activity that the loss of revenue because of low taxation is more than made up by the increase in revenue because of the total amount of economic activity which is being taxed has sufficiently increased.

Empirical analysis shows that both assertions are false.

With regard to where the lines are drawn and the US's rate of taxation in relation to those lines, it is the case that by the standards of advanced ecnomies the US's rate is abnormally low. If the supply-side arguments are correct, and the US is substantially limiting economic activity because of a too-high rate, then much more dramatic insults to the economy should occur where the tax rates are much higher. Specfically, the tax rates of the Scandinavian countries was so high in the 70s that in order for their results and the US's result to conform to the same rule, their economies would not have been merely stagnant, they'd have been in steep contraction. That was not the case.

Furthermore, if a decrease in US taxation rates will have a very substantial positive impact on the economy, then similarly the economies of the Scandinavian countries in the late 80s and 90s as the rates were significantly reduced should have expanded at very high rates. They did not. They did notably expand, however.

And, in fact, a good number of economists are willing to grant that those taxation rates—which were very, very high—are on the "bad" side of this curve we're talking about. But few economists agree that the current US tax rate is on the bad side of this curve.

That's in principle. Let's look at what our experience has shown:

Well, the Bush administration claimed that we were enough on the bad side of the curve that their tax cuts would necessarily pay for themselves after a short period. They did not claim that this short period would be 10 years, or even 5, they initally claimed this would occur within 3 or more and have been saying "any day now" ever since. It's been 5 and there's no indication this will happen and, in fact, given that our economy has been growing at a pretty healthy rate anyway, a rate of increase that would actually generate a positive revenue flow relative to pre-tax cuts is extremely unlikely.

In other words, essentially, there is a tax rate so high that you will say, "screw it, I'm not gonna work because it's not worth it". The Bush admin claims that for a large number of people, this rate is below where the US was before the tax cuts. Most economists place that threshhold for large numbers of people to be much higher than the rate of taxation seen in the US. And there's every indication that this is the case. Those who argue that it's not are disregarding the data either willfully and ignorantly. They may be disregarding the data because their interests are very narrow and thus their interests are furthered independently from what is healthiest for the economy as a whole and most Americans and they realize that a "taxation is too high and reducing it necessarily the best thing" appeals to the sensibilities of most Americans. Others may ignorantly believe this because they've been indoctrinated, or have willed themselves into a form of indoctrination for some reason or another.
posted by Ethereal Bligh at 10:42 PM on January 6, 2006

Here's what Edward Prescott had to say. It's a lot easier to link to Nobel-winning economists than it is to try to tear down all the straw men in this thread. But you shouldn't take them seriously. I'm sure that Prescott (like Lucas, Hayek, Friedman, and every other kool-aid drinking free-market Nobel Economist) is an ignorant victim of indoctrination
posted by Kwantsar at 10:53 PM on January 6, 2006

"But can someone please explain how free markets don't work?"

There are a great number of examples of where "free" markets don't work. Most of those examples are cases in which the market is not really "free" even though it may be free of government intervention. Those so inclined will almost never factor market restrictions that are not governmental when making claims about the necessity of "free markets". A open-air farmer's market is not "free" if one vendor has an armed gang forcing people to buy from him. In that case, the vendors might band together and institute some protections preventing such actions. That will require some investment. That investment, if done properly, will pay for itself because it is sufficiently ensuring that the market words reasonably free of coersion.

Here, again, we find an example of where some conservatives, certain this adminstration, act and support policies that are contrary to this view. The best example of this is the phenomena of "regulatory capture". That's a case in which the big players in some market are effectively in control of the regulatory agency that exists to limit them, not enable them. In almost every instand the Bush administration of many or most conservative interests have favored policies that result in regulatory capture—a result which is effectively the same as that unscrupulous vendore willing to resort to force to further his interests being in charge of the apparatus intended to limit his ability to do so.

This type of thing is where the "rubber meets the road", so to speak, and it's where you can differentiate a true believer in the effeciency of markets from those who merely hide the furtherance of their own particular interests by giving lip service to free markets. The Bush administration fails spectacularly in these terms and it cannot be said to support free market economics in any way. From this perspective, it also begins to explain the Bush adminsitration's support of free-market policies with regard to international trade. The Bush administration is squarely behind the interests of a few, not the many.

On preview: don't believe what kwantsar says, take a look at surveys of what actual, working economists believe. The appeal to authority by referrrence to a particular work by a particular respected ecnomist is exactly the same as the creationist's appeal to the authority of a particular scientist making a particular argument that the layperson is in no way prepared to evaluate. It's misdirection.
posted by Ethereal Bligh at 10:58 PM on January 6, 2006

And whatever you do, don't read Wanniski. For one thing, he's not an economist. For another, almost everyone who once thought he had something valuable to say has now deserted him and recognizes that he's a nutball.
posted by Ethereal Bligh at 10:59 PM on January 6, 2006

Incidentally, the claim that during the Reagan years there would have been an increase in revenue due to a sufficient increase in economic activity were it not to be hidden by the spending increase, is false. It's actually a spectacularly brazen lie. Why? Because the the amount of total revenues is entirely independent of spending. Were supply-side economics applied to Reagan's tax cuts such that they would have paid for themselves and more, then revenues would have had to increase...spending is irrelevant. Did any increase in revenues at any point exceed the revenues lost had the tax rate not been reduced? The answer is "no".
posted by Ethereal Bligh at 11:05 PM on January 6, 2006

Three comments of mine previous, the penultimate sentence of the penultimate paragraph should read "it also begins to explain the Bush adminsitration's failure to support".
posted by Ethereal Bligh at 11:12 PM on January 6, 2006

Well, I have to say that this thread turned on a dime from knee-jerk socialism to some very thought-provoking reading. Bravo.
posted by frogan at 11:27 PM on January 6, 2006

"But can someone please explain how free markets don't work?"

Paul Krugman does a good job of explaining why free markets don't work for health care here.

Basically, because of adverse selection, insurance companies spend most of their time trying not to insure sick people and trying to insure and collect premiums from people who are not sick. This is contrary to the free market goal of spreading the risk of being sick over the largest number of people. The result is that those most needing insurance are left to public welfare.

The US has twice the per capita spending on health care than other industrialized nations but has worse health outcomes on almost every measure including infant mortality and life expectancy.
posted by JackFlash at 11:32 PM on January 6, 2006

Would you get up and go to work if your taxes were 100%? 90%? How about 70%?

What matters to people, I've come to believe, is not their theoretical income before tax, but their actual spendable income after tax. This is a major point modern libertarians miss (Because, I believe, too many of them spend too much time living in mom's basement drinking Mountain Dew and playing Counter Strike instead of actually earning and spending in the real world. Someone gave the wrong idea that a $40,000/a job actually pays $40,000/a). Income in the real world is what you have to spend after tax, and this is the income around which your lifestyle choices should be planned.

As a wise man once said, shit expands to fill the space provided. The government deciding to decrease your income tax by 1% may mean fuck all in reality - it will probably mean the company can hold off a wage increase for another year and keep the savings for themselves, leaving you earning the same, in real terms, as before. Your market value. For a system that claims to hate regulation, the market does an astoundingly good job at absorbing it - people will always find a way to make money. Similarly, ideas that decreasing company taxes will encourage businesses to hire more staff can be countered by the common observation that, in a typical business not aiming to expand and take over the known universe, tax savings will go into profits when they know they're operating quite happily with the staff they presently have.
posted by Jimbob at 3:54 AM on January 7, 2006

how does a dollar fail to enter into the economy where it would otherwise with government spending

What happens to that dollar? Did it get spent and circulated? If the government spent it building a bridge then yes. If a private person put it into the bank then no. Now the dollar in the bank might get used for investing in more capacity. Sometimes that is what we need, sometimes not. When we need a quick pick-me-up in the economy usually we just need to circulate more dollars or circulate them faster as we just contracted and have more than sufficient capacity. In such a situation a dollar into savings buys the economy less than a dollar spent.
posted by caddis at 5:52 AM on January 7, 2006

how does a dollar fail to enter into the economy where it would otherwise with government spending

Rich guy gets a tax savings of $50k. Takes that money and invests in in "Globocorporation" - all good so far right? Globocorporation then invests that money in their business by moving their plant in Buttfuck, TX to Indonesia. America loses jobs, Globocorporation realizes 2% more in profits (which they realize through their headquarters in the Cayman Islands thus avoiding having to pay any corporate taxes to the U.S.), economy grows, George Bush has a press conference beating his chest on how his tax cuts are working. Fat cats laugh themselves silly.
posted by any major dude at 7:14 AM on January 7, 2006

if you cut a rich guy's taxes by $1 million/year, he'll probably hire a gardener for $15,000/year, stimulating the economy. This used to be called trickle-down economics - rain money on the rich, and some of their piss will trickle down to everyone else. ... The obvious counterpoint, that the government could spend the money directly and hire 60 gardeners for 60 times the benefit, is always ignored.

The rich guy's going to put the bulk of that million dollars either into the bank, in which case it increases the available amount of loanable funds and drives down interest rates, which is a significant economy booster, or else he invests it, in which case his purchase of stock drives the price up for other investors (many of whom are now middle-class workers who have retirement plans), thereby benefiting them, or else he puts it into a new venture, thereby creating jobs. It's not just that he personally hires a gardener and puts the other $985,000 under a mattress. Rich people don't get rich by hoarding their cash.
posted by kindall at 9:19 AM on January 7, 2006

caddis said

>What happens to that dollar? Did it get spent and circulated? If the government spent it building a bridge then yes. If a private person put it into the bank then no.

What do you think money in the bank is used for? Does the bank carefully put the dollar on a satin pillow and leave it there until the customer asks for it?

The bank takes that dollar and lends it out, with other dollars, to someone who wants to use it to buy a house, a car.

Every dollar put into the bank is put to work.
posted by megatherium at 9:22 AM on January 7, 2006

Yes, they are put to work, but not necessarily in a way that increases the speed or quantity of money today. Long term yes. However, when we are experiencing a dip in the economy and a tax cut is provided as stimulus you want those dollars to get spent right away. Give it to someone who needs food, a new coat or a new car, not someone who just adds to their savings. (Of course you can add moral arguments about how someone who needs food or a new coat that they are having a hard time paying for is more deserving of the dollar than someone with a closet full of coats and a larder full of food.)
posted by caddis at 10:11 AM on January 7, 2006

What's the name of the logical fallacy that kindall just used, or supply siders in general? The one where you say something to the effect of "If we do X, then Y and Z happen (which are opposite effects), then it's all good!"- without addressing the mathematics of whether Y and Z may not be proportionate.

For example jerry kindall, who has to his dubious credit encouraging psychofascists like Dean Esmay to start blogging how they'd like to exterminate the "cockroaches" of the left (Hotel Rwanda, anyone), just now made a specious claim that "Rich guy takes million dollars, puts it in the bank which lowers interest rates which stimulates the economy, or he invests it which drives up stock price for other investors like middle-class families, or puts it into a new place creating jobs."

What he never mentions is why we should believe that rich guy saving that money in a bank/stock portfolio, and having it trickle out in investment, has the same total benefit as the government funding programs like schools or medicare which benefit people as well, or even just directly spending it on projects that also create jobs, etc, etc. What is the total benefit to society of that million dollars in gov't revenue spent on projects or funding programs, vs. giving it rich guy to allegedly invest in projects? Is it accurate to say that million dollars in rich guys hands will give a net benefit to society worth 1 million dollars?

It's the same fallacy that says $100m in tax breaks to Intel to create 1,500 jobs in the area that pay an average of $70k/yr. The government has spent $100m to get back x% of $100m, where x% is some small percentage of $100m that won't even break even for many years, much less actually increase gov't revenue to support existing or new programs. For some reason, these people seem to think the government should act irrationally and in ways that are net money losers.

As jimbob notes, why give a perfectly profitable company big tax breaks, thinking they will hire more jobs they don't need? Markets work because said company will hire more people if it needs them to make more money than they will be paid as a cost of business; they'll raise the funds through loans or through stock sales, in the belief that spending X million more dollars in new employees and infrastructure will pay off by generating N million dollars in revenue, where N > X. GM is not going to get an $800m tax refund and then hire 10,000 people at 80,000 out of the goodness of their heart, if it has no place for those people to work!


There's got to be a name for that fallacy, where people say things like that- like "We have fast growing traffic, but we're also buying new servers, so we're okay"- when clearly the most important thing unsaid is how much of each. Supply siders seem to avoid those actual numbers, how the trickling actually plays out, and appeal to soft, fuzzy notions of "Well, investment creates jobs, which is good!" What is the term- false equivalency?
posted by hincandenza at 10:12 AM on January 7, 2006

i think it's called innumeracy.
posted by andrew cooke at 10:57 AM on January 7, 2006

To clarify, I was elaborating on the "trickle-down" theory -- not necessarily advocating it. (Though I am in general a free-marketer, I am thirty-seven years old, so you can safely assume I'm well aware that unfettered capitalism is hardly a cure-all.) However, the fact does remain that tax revenues increased after Reagan's tax cuts.

For example jerry kindall, who has to his dubious credit

... posting dozens, nay even hundreds, of useful answers to Ask MetaFilter? Is that what you meant? I'm sure that must have been what you meant.
posted by kindall at 11:04 AM on January 7, 2006

It is also important to distinguish the type of tax cut for its stimulus on the economy. The supply siders insist that cutting taxes for the rich always trickles down to the middle class. But the tax cuts in 2001 are the perfect counter example. 2001 was the result of the dot com crash. There was an excess of supply with factories running at only 70% of capacity. So giving billions in tax cuts to the rich in order to build more factories accomplished nothing. They just put it in their pockets because no one was foolish enough to build more factories when there were too many already.

What was needed instead was stimulus on the demand side so that people would buy more factory products. Remember that piddly $300 refund you got while the rich got millions? It accomplished almost nothing toward solving the problem of excess supply. Instead what was needed were tax cuts directed to the middle class so that they would spend it and soak up the excess supply. So what we got was a windfall for the rich, a huge deficit which will cripple the future economy, and little of the stimulus that was actually needed. And even worse, such a tax stimulus should be temporary in order to correct an imbalance. Making it permanent makes no sense.
posted by JackFlash at 11:05 AM on January 7, 2006

Kindall, of course tax revenues increased because they almost always increase, because in every year except during recessions the GDP increases. It doesn't matter if you raise taxes or lower taxes. You may as well say that the sun rose because the cock crowed. The real question is did the increase in revenue make up for the decrease due to tax cuts and in Reagan's case they certainly did not. Clinton raised taxes and it resulted in the greatest revenue increase since WWII.
posted by JackFlash at 11:14 AM on January 7, 2006

socialism isn't profitable

neither is masturbating. what's your point?
posted by poweredbybeard at 11:33 AM on January 7, 2006

tax revenues increased because they almost always increase, because in every year except during recessions the GDP increases. It doesn't matter if you raise taxes or lower taxes.

I dare say if you lowered them enough you'd see a decrease in tax revenues if the GDP wasn't growing fast enough. I'm not an economist and I haven't looked for any data about whether revenues rose more or less than would be expected from the rise in GDP; that would be an interesting follow-up for someone who knows more about the topic than I.
posted by kindall at 11:48 AM on January 7, 2006

I dare say if you lowered them enough you'd see a decrease in tax revenues.

You are absolutely right. And that is exactly what happened in 2001. Taxes as a percentage of GDP are now at the lowest level in 50 years leading to record deficits. It is difficult to exactly quantify, but there seems to be some agreement that generally the stimulus to the economy from a tax cut leads to a recovery of about 60% of the revenue due to the cut. In other words, the tax rate goes down, but the stimulus to the economy creates a greater tax base. Still, the net effect is negative.

This link shows some interesting numbers. In the tables, the first column, labeled current dollars, shows the revenues for each year in actual dollars and indeed they go up each year. These are the numbers you often hear about when supply-siders say that Reagan doubled revenues. But the second column, labeled constant dollars, shows the revenue when corrected for inflation, what is known a real dollars. Remember that we were experiencing double digit inflation during the 80s. In terms of real dollars revenues did not increase nearly that much during the 80s. The table also compares the revenues that were actually collected over the 8-year period compared to just multiplying the 1981 pre-tax-cut revenues by 8. The real revenues were less than if there were no tax cut.
posted by JackFlash at 12:45 PM on January 7, 2006

How a tax cut will affect tax revenues depends on where we are on the Laffer Curve. If we are already taxing past the break-even point, a tax cut will stmulate the economy and produce more revenue. A smaller percentage of a larger pie can still be more pie.

If, however, we are on the other side of the curve, a tax cut will produce moderate economic gains at best, while decreasing revenue. The current conservative mantra that tax cuts always spur the economy and pay for themselves is nonsense.
posted by LarryC at 1:04 PM on January 7, 2006

Rich guy gets a tax savings of $50k. Takes that money and invests in in "Globocorporation"

And how is that worse than, say, the government spending that $50K on ... oh, I don't know ... agricultural subsidies to encourage people NOT to grow corn?

Sure, it would be nice if all government did was spend money on useful infrastructure like schools and highways and parks and such. But it doesn't. Government doesn't have the same kind of clear profit motives as businesses. Governments start wars and curtail civil liberties. Wal-Mart just wants to make money.

Government is best kept on a short leash. Which means low taxes and less overall interference.

What do you think money in the bank is used for? Does the bank carefully put the dollar on a satin pillow and leave it there until the customer asks for it? The bank takes that dollar and lends it out, with other dollars, to someone who wants to use it to buy a house, a car.

So nicely stated, I wish I thought of it.
posted by frogan at 2:07 PM on January 7, 2006

Every dollar put into the bank is put to work.

that's not quite true - by law banks have to maintain a certain amount on the "satin pillow" to provide some kind of guarantee to depositors that they will be able to withdraw money.

second, the same applies equally to taxes (in fact, more so). the government has even less use for a satin pillow.
posted by andrew cooke at 2:50 PM on January 7, 2006

The government wastes a good portion of every dollar. Of course there's no real thing as "waste," just too many employes doing too little work, generals paying hundreds of dollars for toilet seats, etc. But it's not like that money doesn't have an effect on the economy once spent, it's just that it could be put to more productive use. From a standpoint of "boosting the economy" it may not matter who gets the money. After all, no matter who you give it to it's still only a couple of transactions away from the banks, or the rich, or the government, or the middle class, or whoever you want to say is the main engine driving the economy.
posted by kindall at 5:40 PM on January 7, 2006

Jeez, why do I even bother to proofread before I post?

"arguement" ===> "argument" (Would you believe I looked that one up and forgot to correct it?)

"I'm not looking to understand the claims..." ===> "I am looking to understand the claims..."

Thanks for all the responses. (Especially to Ethereal Bligh for his expansive comments.) I'm not going to mark a best answer since I wanted comments from all sides.
posted by hydrophonic at 9:01 PM on January 8, 2006

But wouldn't spending by the government do the same thing? Or be possibly better, since the government probably spends more on domestic rather than imported goods, services and labor? And the government doesn't save, which people might tend to do in a recession.

You asked for examples; the famous counterexamples to the above are Lenin's first two original "Five-Year Plans" in which the use of all land, labor and capital were directed by a central agency. The ills of the free-market were to be eliminated by allocating resources according to a specific ideology.

The result was catastrophic: massive surpluses of things such as machine parts that no machines needed; and widespread famines, owing to a lack of food (and poor distribution of the food that was produced.)

Modern-day economists explain that this is because the free market has, as a side-effect, the efficient matching of supplies and demands; central (government) spending has no such self-regulatory mechanism.
posted by ikkyu2 at 8:42 AM on January 9, 2006

there's an enormous difference between a planned economy (lenin) in which the government decides what everyone will do, and the way a modern govertment in the usa will spend money to help promote economic activity.

at the same time, modern day economists are increasingly worried that the free market is not all-knowing and all-powerful. information is limited and greed is not the main motivation for many economic activities.

as i said at the beginning of this thread, you can pretty much choose your argments as you want. if you want more exact answers you need to look at very specific circumstances, and even then there will be little consensus. you'll also find that people often claim to follow one doctrine but implement another when it suits their private interests.

having said all that, it amazes me that the usa has managed to convince "common people" that they are better off if the rich receive money rather than themselves. that's pretty impressive social engineering.
posted by andrew cooke at 11:22 AM on January 9, 2006