Up or down?

Up or down?

Submitted by Simon on Wed, 02/24/2010 - 1:22pm

The West Wing Report tells us that President Obama remarked that the federal government "can't afford to extend Bush tax cuts on investment income." The President says that the de facto tax increase entailed is "not meant to be punitive - we just can't afford it."

This argument makes no sense unless the tax cuts at issue are net revenue drains. As Pat noted four years ago, however, and as the Washington Times reminded us less than a month ago, the Bush tax cuts increased tax revenues. So to the extent Obama meant to analyze what has gone before, his statement parses out to an improbable claim that we can't afford more revenue.

To the extent that the President meant to put misread fiscal history behind him, and oriented his remarks toward future policy, he is making the classic and pervasive blunder of assuming that you can change one aspect of fiscal policy with all else held equal. But it doesn't work that way. You can't just change the tax rate on a given activity and expect that activity to continue unaffected. To the extent there's elasticity in the market and actors' options, when it's cheaper to do it because it's taxed less, people will do more of it, and if it's more expensive because it's taxed more, they'll do less of it. And the more/less a taxed activity happens, the higher/lower the resulting tax revenues. I realize that this sounds obvious to the point of platitude, but if we credit him with honesty, our President doesn't seem to understand this.

When a politician tells you that the government should accept lower tax revenues to increase the taxes on a given activity, you'd better believe that it's ideologically-driven and punitive rather than about economics or sound public policy.

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I do have two questions that

Submitted by Jim M on Wed, 02/24/2010 - 5:37pm.

I do have two questions that I do not know if they can be answered:
Is the causation of the increase in revenue a fact of the tax cuts or the nature of the way the market went between 2003 and 2007?
What was the revenue from these tax cuts in the last two years and, assuming a decrease, does the decrease fall below what it was before?

I am not saying that getting rid of the tax cuts is a good thing. I am just not sure correlation=causation in this case. The economy exploded in the bubble between 2003-2007. It just seems more complex in this case that taxes were cut causing revenue to go up in this case. However, now is not the time to let the cuts expire. One could also ask if the tax cuts actually helped in fueling the bubble in some way.

Good questions. I'd like to know as well...

Submitted by Generation Patriot on Wed, 02/24/2010 - 6:40pm.

But as for your question about if the tax cuts help fuel the bubble, that can be answered with a "little to none". The bubble was fueled primarily by easy credit due to disgustingly low Fed rates. The main procedural culprits were no down payments, no credit checks and artificially low interest rates that jumped to market rates after two years. There's very little evidence tax cuts had any impact on the housing sector.

While that is true on the

Submitted by Jim M on Wed, 02/24/2010 - 11:17pm.

While that is true on the front side, on the back side was the trade of credit default swaps where a lot of investment dollars were churned. The loans ended up be traded. The back side interest was about as well thought out as the front side. It was actually the poorly thought out backside that was far more dangerous than the tiny percentage of sub prime loans. Plus, there was abuse in the sub prime system by the flippers. It was an all sides mess. I lived in ground zero of the collapse. There were people who should never have gotten mortgages. That was still a very small percent. There are too many people who discount the inflation in food and fuel prices that begin in 2006 and ran through 2008. Ultimately, that was the trigger that started to send a lot of people into default. Once the bottom of the mortgage market fell out, it was inevitable that it would drag down more of the traditional market that had been driven up by speculation in the worst hit places like Florida and Nevada.

I think a lot of factors went into fueling the bubble and the collapse. Any of a hundred different places where something could have been done differently. Heck, I think you can go back to 9/11 where the decision was made to push spending and not sacrifice in the face of war. The amount of blame to go around on the cause of the economic crash is virtually limitless.

Another good point...

Submitted by Generation Patriot on Thu, 02/25/2010 - 5:45pm.

it would be a interesting read if someone could find if tax cuts could of fueled the boom from the back end. Doubt that's really possible, but interesting none the less.

Laffer Curve

Submitted by Torque (not verified) on Thu, 02/25/2010 - 7:45am.

Ideology is always going to pull one way or the other away from the highest revenue point (i.e., optimal rate?) on the Laffer curve. This is true for myself if I was president, but my ideological pull would tend to flow in the opposite direction of President Obama. I bet I'd still end up with more revenue.

tax cuts scam

Submitted by Marcuss (not verified) on Sat, 03/06/2010 - 12:28pm.

We tried it with Reagan and we got this result:
massive tax cuts, massive government spending, massive, massive debt increase.

Being the nationally mentally ill idiots that we are we did the insane again in 2001-2009

Here's the problem with all this talk about how tax cuts helped the economy.

They were accompanied by massive increases in government spending including this time the "off the books" spending on the Iraq and Afghanistan wars. When you pop another hundred billion to Lockheed, Raytheon and other defense contractors of course you are going to get increased tax revenue. When you combine that with other spending that increased the national debt by half a trillion dollars each year during the Bush era you are going to get increased tax receipts because the money goes to people who theoretically ... pay taxes on the billions of federal dollars

Very prescient discussion regarding the tax cuts and jobs.

http://www.epi.org/publications/entry/webfeatures_viewpoints_jobs_growth_testimony/

The short of it. the tax cuts failed.
Tax cuts for investments produce little if any short term effect on job growth and tax cuts for corporations and wealthy individuals did not result in massive increases in jobs. The pathetic amount of job creation during the Bush administration 5 million ( about 50,000 to 70,000 fewer jobs per month than needed to accommodate population growth)indicates the failure of tax cuts. The wages for those jobs failed to keep up with inflation.
What we ended up with is more debt we in the middle class have to pay off.
The tax cuts weren't about jobs, it was about doing the bidding of wealthy donors and how Theodore Roosevelt's nightmare of the aristocracy of wealth has captured the American political process.

Remember the ultimate result was a massive trillion plus dollar transfer of wealth from the middle class to the very wealthy. We are so f##ked

http://www.rollingstone.com/politics/story/12699486/paul_krugman_on_the_great_wealth_transfer

finally, I have to note, where do we get off taxing someone who works more than someone who invests? Especially when the latter is not necessarily a jobs creator but a paper investor?

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I do have two questions that

Good questions. I'd like to know as well...

While that is true on the

Another good point...

Laffer Curve

tax cuts scam

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