Tea Bagging - another view

[ecoli]

http://www.nytimes.com/2010/04/18/business/18view.html?ref=business

 

A very well reasoned argument from my favorite economist. Tyler Cowen is libertarianish but sometimes argues for paternalism and never for dogmatism.

 

Operating, on the assumption that we'll need to cut gov't spending soon, it turns out "socialist" nations of Sweden, Finland, Canada and Ireland are much better at it than we are.

 

Counterintuitively, the relatively strong Canadian trust in government may have paved the way for government spending cuts, a pattern that also appears in Scandinavia. Citizens were told by their government leadership that such cuts were necessary and, to some extent, they trusted the messenger.

 

Are Americans too cynical of our government's ability to get the job done? If we trusted politicians a bit more, would that empower them to make positive bargains when it's time to tighten the belt?

 

I see potential for the argument, and use the tea party as an example... Their platform is that we can't trust liberal politicians. The GOP is feeding off of this and refusing to make deals and bargains because they think it'll lead to political victory. The system will cycle (whether or not this strategy pays off) because of partisanship, and no spending cuts will get done.

 

I'm not sure that this inability to bargain is an inherent flaw in the american political system, but I think, if the tea partiers really want to cut spending (and I think they do) :

 

Forces like the Tea Party movement argue for fiscal conservatism, though it isn’t obvious that they are creating the conditions for success...

 

The issue of fiscal responsibility isn’t going away. So the question is now this: How deeply will we dig ourselves in before we create a more mature and more forward-looking political culture?

 

 

Say what you want about the Tea Party. I used to support them and I share there mistrust about politicians, but I think Tyler Cowen is saying something new and useful about them.

 

 

We have to consider.. will their protests change the nature of American politics to become more effective at governance? Even if you think their ideas are worthwhile, the mechanism by which you pursue them is very important. So even if you like what they're saying, you have to concede that the issue is too important and that their methods, in their divisiveness are ineffective.

 

 

Are the problems with the American political system a systematic feature, rather than a fixable bug?

 

Can we become a more forward looking populace in a way that has a positive affect on the political system? What incentives can we use to make it more advantageous to become "forward looking"?

[bascule]

Forces like the Tea Party movement argue for fiscal conservatism

 

Not to single this statement out, but this is something the Tea Party seems only to purport to argue for. They simultaneously argue that the government is taxing too much and that the deficit is out of control. Never mind that a huge part of that deficit spending (taking place as part of the Recovery Act, which they also disagree with) is to keep taxes artificially low, ostensibly to help stimulate the economy. Yet taxes seem to be perhaps the central thing they're there to complain about, and indeed the movement originally gained speed around the April 15th protests held last year.

 

I don't know how to get past this doublethink.

[padren]

Are Americans too cynical of our government's ability to get the job done? If we trusted politicians a bit more, would that empower them to make positive bargains when it's time to tighten the belt?

 

I think so, and to a degree with good reason: spending cuts always seem to be proposed as a means of ideological warfare - why not start by cutting the programs that are destroying America, and sending it down the road to Armageddon? One side sees a policy designed to turn us into a socialist state, and the other sees a bloated military industrial complex catering to religious initiatives and massive corporations that hide their profits off shore as the middle class spirals into extinction.

 

Everyone assumes the cuts proposed will be for the good of a party, not the country, and that political strong arming, not reason will win the day. Agencies don't believe their budgets will be reviewed in good faith, and circle the wagons immediately. Until liberals will work with conservatives to save conservative programs and conservatives will work with liberals to save liberal ones we really won't get anywhere on improving their effeciency.

 

 

 

The other problem is voters seem to only hate pork that goes to anyone else. What Senator Ben Nelson did for Nebraska in extorting the costs of the Medicaid expansion from the federal government during the health care negotiations is appalling, and just about everyone who can't vote for or against him is appalled.

Yet, it will undoubtedly boost his polls because no matter how dirty the deal is, it got something for his constituents, and ultimately they don't care if he had to rob a bank to do it - greed wins. We can't get rid of dirty money unless voters are willing to not accept it when their senator brings it home.

[ecoli]

Not to single this statement out, but this is something the Tea Party seems only to purport to argue for. They simultaneously argue that the government is taxing too much and that the deficit is out of control. Never mind that a huge part of that deficit spending (taking place as part of the Recovery Act, which they also disagree with) is to keep taxes artificially low, ostensibly to help stimulate the economy. Yet taxes seem to be perhaps the central thing they're there to complain about, and indeed the movement originally gained speed around the April 15th protests held last year.

 

I don't know how to get past this doublethink.

 

It's not doublethink. They want to cut spending AND taxes. To do that you need to (at least) cut spending more than taxes to have a balanced budget.

 

Countries far more "socialist" countries than us have done it. Why can't we? Cowen proposes its because people (read tea party) isn't thinking strategically about how to get what they want.

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Until liberals will work with conservatives to save conservative programs and conservatives will work with liberals to save liberal ones we really won't get anywhere on improving their effeciency.

The GOP blew a big chance to do this with the passage of the health care bill. No doubt liberals would have rewarded compromise with favors. In game theory terms, their "all or nothing" strategy was not optimal for immediate gains.

 

The other problem is voters seem to only hate pork that goes to anyone else.

 

How do other countries solve this problem, though? Surely this can't be endemic to only the US. We can think of pork as the cost of negotiating and still end up with net positives for the country, but if it's too systematic it will be bad.

 

How did Canada pass spending cuts without losing all gains to greasing the wheels?

[bascule]

It's not doublethink. They want to cut spending AND taxes. To do that you need to (at least) cut spending more than taxes to have a balanced budget.

 

If the deficit is the biggest concern, shouldn't we cut spending but keep taxes the same?

 

If taxes are the biggest concern, why are they also complaining about the deficit? Decreased taxes will be harmful to any solution to the deficit.

 

Decreased spending will help the deficit. Decreased spending doesn't give you an excuse to cut taxes. Revenue is nowhere close enough to cover costs.

 

It'd be like someone who is deep in debt and decides to quit smoking cigarettes and drinking in order to lower their monthly expenses. After accomplishing this, despite being deep in debt, they decide "I guess I'll go from full time to part time at my job since I lowered my expenses". That still doesn't change the fact they're deep in debt.

Edited April 19, 2010 by bascule

[ecoli]

If taxes are the biggest concern, why are they also complaining about the deficit? Decreased taxes will be harmful to any solution to the deficit.

 

from the article:

 

Higher income tax rates would discourage hard work and encourage tax avoidance, thereby defeating the purpose of the tax increases.

...

Higher levels of government spending and taxation would also soak up resources that might otherwise foster innovation and new businesses. And sentiment would most likely turn ever stronger against those immigrants who consume public services and make the deficit higher in the short run. Current residents might feel more secure in a larger welfare state, but over time the loss of commerce and innovation takes a toll.

...

A move toward a V.A.T., however, also brings price inflation, a big increase in the tax-collecting bureaucracy and the emergence of favored sectors with exemptions or lower rates. Though we may well end up with a V.A.T., it isn’t obviously the best option.

...

The macroeconomic evidence also suggests the wisdom of emphasizing spending cuts. In a recent paper, Alberto Alesina and Silvia Ardagna, economics professors at Harvard, found that in developed countries, spending cuts were the key to successful fiscal adjustments — and were generally better for the economy than tax increases. Their conclusion was based on data since 1970 from the Organization for Economic Cooperation and Development.

 

 

Decreased spending will help the deficit. Decreased spending doesn't give you an excuse to cut taxes. Revenue is nowhere close enough to cover costs.

 

See above... "tax cuts and fiscal adjustments are better for the economy than tax increases"

 

It'd be like someone who is deep in debt and decides to quit smoking cigarettes and drinking in order to lower their monthly expenses. After accomplishing this, despite being deep in debt, they decide "I guess I'll go from full time to part time at my job since I lowered my expenses". That still doesn't change the fact they're deep in debt.

 

This is a poor analogy, because lowering taxes doesn't mean the economy is going from a full time job to a part time job (just the government, perhaps).

 

If the government takes away all of my salary earning over part time employment, that's a strong disincentive to work full time. Individual marginal tax rates at 60% start to get into this disincentive territory.

 

There comes a point at which the marginal return on increasing taxes gets lower. We don't know if this is coming, but it seems as if developed economies do better when governments balance their deficits by cutting spending, rather than raising taxes.

 

Cutting spending without changing tax rates is fine by me, but this isn't happening (we're raising taxes). And if we're not raising enough taxes to pay for deficit spending, we're raising future taxes or creating inflation.

Edited April 19, 2010 by ecoli

[bascule]

See above... "tax cuts and fiscal adjustments are better for the economy than tax increases"

 

Yeah, the Laffer Curve argument... that approach worked so great for Reagan.

 

I'm sorry, I just don't buy the argument that cutting taxes will increase tax revenue. We've been down that road with Reagan, GHWB, and GWB... the three presidents who created pretty much the entirety of our national debt.

[Sisyphus]

As per my previous thread on The Economist poll, nobody actually wants to cut spending, either, except in the vague, abstract sense.

[Mr Skeptic]

I do agree that cutting spending is the solution to our deficit issues. Tax rate is just an illusion: we have to pay for what we spend, whether we do it now, later, or ahead of time. The Republicans say they're all about cutting taxes but they never do. This is obvious from looking at their spending -- they just borrow money from China and hope the Democrats pay it back for them, and as a bonus that means they can complain about the Democrat's high taxes.

[bascule]

The Republicans say they're all about cutting taxes but they never do. This is obvious from looking at their spending -- they just borrow money from China

 

Or to be more specific, the Republicans are successful at cutting taxes, however they have not been successful at cutting spending accordingly, but instead borrow money, then spend more! The result is our present national debt.

 

I found this chart rather interesting, showing the distribution of tax rates among various brackets and how they evolved over time. Ever since Reagan, the rich have payed substantially less:

 

[ecoli]

Yeah, the Laffer Curve argument... that approach worked so great for Reagan.

 

I'm sorry, I just don't buy the argument that cutting taxes will increase tax revenue. We've been down that road with Reagan, GHWB, and GWB... the three presidents who created pretty much the entirety of our national debt.

 

Not only are you highjacking the purpose of the thread, you are ignoring evidence posted in the article

 

read this (referenced in the article)

http://www.economics.harvard.edu/faculty/alesina/files/Large%2Bchanges%2Bin%2Bfiscal%2Bpolicy_October_2009.pdf

 

Also I wasn't necessarily talking about the (pretty much unsupported) Laffer curve, specifically... you'll notice that it's not mentioned in the above paper.

 

____

 

I find it interesting that in a thread where I've made it obvious that I want to talk about the tea party in a negative way (the politics - which I know you'd agree with) you'd prefer to change the conversation into one you know we'll disagree (economics). Why is this?

[bascule]

Not only are you highjacking the purpose of the thread, you are ignoring evidence posted in the article

 

read this (referenced in the article)

http://www.economics.harvard.edu/faculty/alesina/files/Large%2Bchanges%2Bin%2Bfiscal%2Bpolicy_October_2009.pdf

 

Also I wasn't necessarily talking about the (pretty much unsupported) Laffer curve, specifically... you'll notice that it's not mentioned in the above paper.

 

In that case, the argument you're presenting does not address my own. I was suggesting that we keep taxes where they are if we wish to work on the problem of the deficit. The evidence you presented to the "contrary" was against tax increases. Furthermore that's talking about other "developed countries", versus what has been tried and historically proven to fail in our own country.

 

Trying to combat the deficit while cutting taxes at the same time is silly. That's what the teabaggers want, but these two things work in direct opposition to each other.

[Mr Skeptic]

Or to be more specific, the Republicans are successful at cutting taxes, however they have not been successful at cutting spending accordingly, but instead borrow money, then spend more! The result is our present national debt.

 

And that borrowing must be repaid by tax money, plus interest. They are not lowering taxes, they are raising taxes by borrowing against future taxes. Spending = taxes.

[ecoli]

I'm sorry, I just don't buy the argument that cutting taxes will increase tax revenue.

 

Oh... and btw I wasn't making this argument (strawman??). I said that higher taxes have lower marginal returns for government.

 

That doesn't mean that cutting taxes increases revenue. It means that raising taxes will have positive returns, but at decreasing rates of return. At some point you approach the limit of usefulness on taxation (as people become disincentive to work extra or seek tax shelters).

 

This is not necessarily a parabolic Laffer curve, but perhaps an asymptotic one.

[bascule]

That doesn't mean that cutting taxes increases revenue. It means that raising taxes will have positive returns, but at decreasing rates of return. At some point you approach the limit of usefulness on taxation (as people become disincentive to work extra or seek tax shelters).

 

This is not necessarily a parabolic Laffer curve, but perhaps an asymptotic one.

 

I don't think it's ever been demonstrated that the relationship between tax rate and tax revenue is in any way linear.

 

If the tax rate is 100% most people probably aren't going to work (unless the government creates some other kind of incentive). If the tax rate is 0% obviously there will be no revenue. Besides that? Show me.

[ecoli]

In that case, the argument you're presenting does not address my own.

False. read the last sentence in this post: http://www.scienceforums.net/forum/showpost.php?p=559627&postcount=6

 

Furthermore that's talking about other "developed countries", versus what has been tried and historically proven to fail in our own country.

besides for partisan historical anecdote, what are you basing this claim on? And, do you truly believe that economic data from other countries cannot apply to our own? If this is the case, I suppose there's a whole lot of economic research out there that won't impress you.

 

Trying to combat the deficit while cutting taxes at the same time is silly. That's what the teabaggers want, but these two things work in direct opposition to each other.

Once again, this isn't true if you're keeping the budget balanced. You can reduce the deficit as long as you spend less than you take in (even if you assume that cutting taxes doesn't stimulate economic activity)

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I don't think it's ever been demonstrated that the relationship between tax rate and tax revenue is in any way linear.

 

Show me.

 

Why would I try to show you proof for an argument I did not make? When did I say the effect of taxes is linear?? I claimed that the maginal rate of return on taxes decreases as taxes increases. I didn't say it did so linearly.

 

And why are you continuing to post about this issue when I specifically asked you to address the point of the original post? (which was politics we both, I think, would agree on).

Edited April 19, 2010 by ecoli
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[bascule]

False. read the last sentence in this post: http://www.scienceforums.net/forum/showpost.php?p=559627&postcount=6

 

Rereading that, again, I hear the tired Laffer Curve supply-side trickle-down economics argument that by reducing the tax burden on various companies, they'll have more money to innovate and will therefore generate more taxable revenue.

 

Sure, this guy doesn't mention the Laffer Curve by name. But the argument is the same. Reducing tax burdens on businesses will increase revenue.

 

Three presidents have tried this. It failed. Miserably. The overwhelming majority of our national debt is owed to this philosophy.

 

besides for partisan historical anecdote, what are you basing this claim on?

 

"Those that fail to learn from history, are doomed to repeat it."

 

"Partisan historical anecdote"? We've had three Presidents try this, and those three Presidents created the overwhelming majority of our national debt. How many more times do we have to try it before we realize it doesn't work?

 

Do you think trickle down economics succeeded, or failed miserably?

 

Reagan cut taxes. Tax revenue dropped. The debt went up. GHWB continued this policy, cutting taxes. Again, the debt went up. GWB tried cutting taxes. The debt went up.

 

Clinton did the unthinkable... he *raised* taxes. Maybe there's some merit to that approach?

 

And, do you truly believe that economic data from other countries cannot apply to our own?

 

If you'd like to start a thread on that paper specifically I'd be happy to discuss it.

 

Once again, this isn't true if you're keeping the budget balanced. You can reduce the deficit as long as you spend less than you take in (even if you assume that cutting taxes doesn't stimulate economic activity)

 

Newsflash: our budget isn't anywhere close to balanced.

Edited April 19, 2010 by bascule

[ecoli]

 

Newsflash: our budget isn't anywhere close to balanced.

 

Note that magical word "IF." I was proposing a hypothetical.

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"Partisan historical anecdote"? We've had three Presidents try this, and those three Presidents created the overwhelming majority of our national debt. How many more times do we have to try it before we realize it doesn't work?

 

You're reducing a lot of economic agents into a short narrative... or are you suggesting that only US presidents affect the economy and then offer a sample size of n=3 to prove your point.

 

Can we please get back to the original point, so i don't have to close this thread??

Edited April 19, 2010 by ecoli
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[bascule]

Note that magical word "IF." I was proposing a hypothetical.

 

Well, I guess that's what's causing the confusion then, I'm talking about the present.

 

The economy is starting to recover and the deficit is huge. I think raising taxes (particularly raising taxes on the super-rich) would help generate additional revenue and reduce the deficit. I see absolutely no reason to cut taxes right now, unless you want the deficit to continue to increase.

 

And a point I really should touch on:

 

And, do you truly believe that economic data from other countries cannot apply to our own?

 

When it comes to tax rates versus revenue, which seems to be the point at hand, the relationship from country-to-country is very much nonlinear:

 

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You're reducing a lot of economic agents into a short narrative... or are you suggesting that only US presidents affect the economy and then offer a sample size of n=3 to prove your point.

 

Affect the economy, or the budget? The President has the first and final say on the budget.

 

Can we please get back to the original point, so i don't have to close this thread??

 

Can you tell me exactly how I'm off topic here? The article you linked talks specifically about how using increased taxes to help balance the budget is a bad idea. I'm merely addressing those claims.

Edited April 19, 2010 by bascule
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[ecoli]

 

Can you tell me exactly how I'm off topic here?

Thought you'd never ask.

 

I wanted to talk about political strategy to get the tea party movement to realize that they're better compromising and getting something than acting crazy and not getting anything.

[Mr Skeptic]

Rereading that, again, I hear the tired Laffer Curve supply-side trickle-down economics argument that by reducing the tax burden on various companies, they'll have more money to innovate and will therefore generate more taxable revenue.

 

Which is a much stronger statement than ecoli's statement about decreasing marginal revenue. In any case, both of these arguments are clearly true (that the marginal revenue decreases, and that it decreases to the point of becoming negative, with increasing tax rate). Obviously, that doesn't mean that decreasing the tax rate would increase revenue, unless we were already past the point of negative marginal returns. Since it would be pretty retarded to raise the tax rates into the area of decreasing marginal revenue, I'd like to think that we will never have to decrease tax rates to increase tax revenue.

 

Now can we get back to the topic?

[bascule]

I'm certainly not against decreasing spending. I'm strongly in favor of decreases in spending. However, I don't think it's realistic that either party will be able to significantly decrease spending any time in the near future.

[ecoli]

Affect the economy, or the budget? The President has the first and final say on the budget.

 

Part of creating a balanced budget is knowing how much tax revenue you're going to bring in. As your curve shows, US corporations are taxed at high rates (in 2004) but that didn't help tax revenue that year (perhaps lower rates would have... who knows??)

 

This works both ways you know. You can't insist that the laffer curve is full of it, and then insist that raising taxes will result in generating increased revenue.

 

Yeah, Clinton did it, but Clinton raised taxes during a tech bubble (which crashed on Bush's term). These had real effects on the economy which in turn affected tax-generated revenue.

 

Now that we're in a recession (or a recovery, hopefully) you can't just assume that raising taxes will lead to recovered revenue like it did for Clinton.

 

Now... I agree that leaving the tax structure alone, or letting the Bush cuts expire will probably be helpful to balancing the budget. But, as a long term strategy (which is what the article is talking about, I think) we have to think about what we want as a country. A large income tax? a VAT? or reducing spending and taxes??

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I'm certainly not against decreasing spending. I'm strongly in favor of decreases in spending. However, I don't think it's realistic that either party will be able to significantly decrease spending any time in the near future.

This is exactly the point I'm trying to get at...

 

Why can't we decrease spending? Canada did it. Ireland did it. Norway did it.

Edited April 20, 2010 by ecoli
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[bascule]

This works both ways you know. You can't insist that the laffer curve is full of it, and then insist that raising taxes will result in generating increased revenue.

 

The Laffer Curve argument is used to argue for something counterintuitive: decreasing tax rates will increase tax revenue. This doesn't make the opposite untrue. The idea that increasing tax rates increases tax revenue is intuitive, raise taxes and you'll get more money. The question is more how much can you raise taxes before your returns will diminish and companies/people will have less profit/income due to opportunities they couldn't pursue because of the increased taxes. I think from a historical perspective this question is difficult to answer.

 

Yeah, Clinton did it, but Clinton raised taxes during a tech bubble (which crashed on Bush's term)

 

Clinton raised taxes at the start of his term, using a party-line vote, and largely because of that lost the Democrats a lot of seats in Congress. How big of an effect this tax increase had on the balanced budget is debatable.

 

Sadly, I think what worked well for Clinton was having Republicans in control of Congress. The Republicans tried to spend money and Clinton vetoed it, so much that the Republicans tried to give him a line-item veto, and failed due to Constitutionality concerns.

 

My take-away from that is if you want to decreased spending (or at the very least curtail increased spending) your best bet is probably to have one party in control of the executive branch and a different party in control of Congress.

 

Now that we're in a recession (or a recovery, hopefully) you can't just assume that raising taxes will lead to recovered revenue like it did for Clinton.

 

Except Clinton raised taxes in the middle of a recession. It worked for him!

 

Now... I agree that leaving the tax structure alone, or letting the Bush cuts expire will probably be helpful to balancing the budget. But, as a long term strategy (which is what the article is talking about, I think) we have to think about what we want as a country. A large income tax? a VAT? or reducing spending and taxes??

 

I'd like to have a smaller national debt.

 

Why can't we decrease spending? Canada did it. Ireland did it. Norway did it.

 

Short answer: Politics. The things this country spends the most money on are the proverbial political "third rails".

 

I'd like to see a moratorium on social security. The program will be bankrupt before I ever see any benefits. I'm aware of this. I don't expect to see anything from it. I'm fairly certain most people my age don't expect to see anything from it. We should just codify that into law. Break apart the age groups and what their social security benefits will be and plan accordingly.

[john5746]

I'm not sure that this inability to bargain is an inherent flaw in the american political system, but I think, if the tea partiers really want to cut spending (and I think they do)

 

I think either side should compromise when first heading into the discussion, for example the tea party movement should stress cutting defense spending as a priority. This might show some on the other side that they are really serious about cutting spending. But, all I hear from both sides is to just stick it to the other side and get your way.

 

Looking forward requires compromise from the beginning, but Obama tried that and pissed off everyone.

 

 

 

Can we become a more forward looking populace in a way that has a positive affect on the political system? What incentives can we use to make it more advantageous to become "forward looking"?

 

I think most people realize we can't tax ourselves or grow ourselves out of this mess. Spending must be cut. Also, taxes may have to be raised, but I do think it can be restructered as well. I think we should encourage savings to a degree - maybe not tax the first 10000 for example. I think we should also encourage keeping domestic jobs - if that requires lowering corporate taxes, targeting endangered fields, then so be it. Raising rates on the very wealthy makes sense.

 

In regards to the laffer curve - it seems intuitive to me that there is a break point in regards to taxation and revenue. The problem as I see it is the trickle down has changed to trickle overseas. The middle class is shrinking, which will result in the rich paying more of the tax burden while the poor will grow in number. I don't think I am the only one who realizes that we are just getting our a** handed to us by people who are working harder, have more discipline and have more desire. They increase wealth, not by leveraging their future, but with sweat equity - working harder, studying harder and demanding more of their children.