Both sides are wrong

Robert Samuelson is an economics columnist who has tended to be sensible over the years.  (The Washington Post classifies its columnists online as either “tending left” or “tending right.”  Samuelson shows up on neither list.)  He makes the case that both liberals and conservatives are wrong on the economy:

Let’s banish the budget fictions of left and right.

The supercommittee — the 12 members of Congress charged with devising a plan to close mammoth deficits — cannot succeed without public support for its proposals. And public opinion won’t come along if it embraces fairy tales.

The conservatives’ fiction is: We can reduce deficits and cut taxes by eliminating “wasteful spending.”

The liberals’ fiction is: We can subdue deficits and raise social spending by taxing “the rich” and shrinking the bloated Pentagon.

You will notice one similarity. Both suggest that reducing deficits involves little real pain. No one, after all, favors “wasteful spending.” Similarly, taxing “the rich” doesn’t threaten most people who aren’t rich. Liberals and conservatives alike can reconcile all good things: fiscal rectitude (for both), tax cuts (for conservatives) and high social spending (for liberals). I wish it were so.

It isn’t.

Before explaining why, here’s a caveat. Liberal and conservative budget experts generally don’t endorse these myths. No one who studies the budget could. Still, politicians and partisan propagandists popularize them.

Start with conservatives. Where exactly is all the waste?

True, many government programs deserve the ax. I’ve railed against some for years: farm subsidies (food would be produced without them); Amtrak (it is non-essential transportation); public broadcasting and culture subsidies (these are unaffordable frills); community development block grants (they generally don’t enrich poor communities).

Entitlements — mainly Social Security and Medicare — should be trimmed. I’ve also made that a crusade. We need higher eligibility ages to reflect longer life expectancies. Wealthier retirees should receive less Social Security and pay more for Medicare.

But plausible savings don’t match conservative rhetoric. All the suspect “discretionary” programs come to tens of billions, not hundreds of billions. Culture subsidies total about $1 billion annually; community block grants in 2010 were $4 billion. Meanwhile, total federal spending was $3.5 trillion. Do conservatives really want to eliminate the national parks? The FBI? Highways? Food inspections?

Social Security and Medicare savings could be greater. In 2010, these programs cost $1.2 trillion. But there’s a catch. Savings from lower individual benefits will be offset by more beneficiaries: retiring baby boomers. By 2025, Medicare and Social Security enrollment will rise 50 percent from 2010.

Next, the liberal fiction. Contrary to liberal dogma, the rich already pay plenty of taxes. Indeed, they pay for government. In 2007, the richest 1 percent of Americans paid 28 percent of all federal taxes; the richest 10 percent (including the 1 percent) paid 55 percent.

For most millionaires, federal tax rates — the share of income taxed — exceed 30 percent. Some rich have lower rates. Raising these rates is justified but wouldn’t balance the budget. The plan by Senate Majority Leader Harry Reid for a 5.6 percentage point surtax on incomes exceeding $1 million would raise an estimated $453 billion over 10 years. Deficits over the decade are realistically projected at $8.5 trillion.

As for the Pentagon, the military was cut sharply after the Cold War. Combat forces are half to two-thirds of 1990 levels. Defense spending as a share of national income is headed toward its lowest level since 1940.

What liberals don’t say is this: Unless Social Security and Medicare benefits — the bulk of the budget — are reduced, we face three dismal choices. Huge, unsustainable deficits. Massive tax increases on the middle class, as high as 50 percent over 10 to 15 years. Or draconian cuts in the discretionary programs that liberals accuse conservatives of wanting to gut.

Since 1971, federal spending has averaged 21 percent of national income (gross domestic product). Even with aggressive cuts, spending may never again fall this low. The reason: the surge in retirees. Meanwhile, taxes averaged 18 percent of GDP over those years, leaving average annual deficits of 3 percent. The take-away for both liberals and conservatives is repugnant: They need to identify the most justifiable spending cuts — lots of them — and the least damaging tax increases, which will still be sizable.

They need to come clean with reality. For years, they’ve exuded self-serving platitudes. Conservatives should acknowledge that Big Government is a permanent part of the social fabric and that much of what it does is popular. It needs to be financed. Liberals should concede that Big Government can become so big that its crushing taxes weaken the middle class and economic growth. Government then promotes conflict and degrades social justice.

via Busting the budget myths – The Washington Post.

What if he is right?  Would a program of cutting government AND raising taxes be politically possible?   If not and assuming he is right, what does that mean for our capacity to solve our problems through self-government?

About Gene Veith

Professor of Literature at Patrick Henry College, the Director of the Cranach Institute at Concordia Theological Seminary, a columnist for World Magazine and TableTalk, and the author of 18 books on different facets of Christianity & Culture.

  • James Sarver

    The truth is ugly and most people will avoid it at all costs. Politicians understand this. If one wants to be/stay in power telling the truth is not a good strategy. I can’t find it this morning in my copy of “The Prince” but Machiavelli advised something to the effect of “never employ the truth where an attractive lie will suffice”.

    Expect that to continue.

  • James Sarver

    The truth is ugly and most people will avoid it at all costs. Politicians understand this. If one wants to be/stay in power telling the truth is not a good strategy. I can’t find it this morning in my copy of “The Prince” but Machiavelli advised something to the effect of “never employ the truth where an attractive lie will suffice”.

    Expect that to continue.

  • Random Lutheran

    The only sane way out is to admit the truth: all of these numbers are fictions. Once we do this, we can zero out the deficit, declare all debts, public and private, to be void, and put in a constitutional amendment which would keep federal deficits within certain bounds (interesting piece on Planet Money recently on Clinton-era fears about what would happen if there were no federal debt; we very well may want to carry something of one). We’ve boxed ourselves into a corner with the sheer size of the debt, and no one is willing to do what it would take to make things actually work.

    Would doing this be right or just? Probably (even assuredly) not. But it would cut the Gordian knot we’ve been fruitlessly worrying at for some time now, while making the outcome nice and uncertain for those in power, which is how things ought to be. Their desperate attempts to maintain the status quo have much to do with the mess we’re in.

  • Random Lutheran

    The only sane way out is to admit the truth: all of these numbers are fictions. Once we do this, we can zero out the deficit, declare all debts, public and private, to be void, and put in a constitutional amendment which would keep federal deficits within certain bounds (interesting piece on Planet Money recently on Clinton-era fears about what would happen if there were no federal debt; we very well may want to carry something of one). We’ve boxed ourselves into a corner with the sheer size of the debt, and no one is willing to do what it would take to make things actually work.

    Would doing this be right or just? Probably (even assuredly) not. But it would cut the Gordian knot we’ve been fruitlessly worrying at for some time now, while making the outcome nice and uncertain for those in power, which is how things ought to be. Their desperate attempts to maintain the status quo have much to do with the mess we’re in.

  • larry

    You know he has some fire to all that. For example as a society we have to decide on “how early should we expect to retire” which affects payout cost in SS and such programs. As a society we retire our folks at very young ages, or at least that’s the goal, the mantra of “early retirement”. But most folks in history die working.

    And then against the conservative side of this, business in the last several decades is not very kind to aged wisdom in the work force. In its constant marketing scheme of “newer is better” it eschews wise old leadership as well, at any level blue collar or white collar, for “fresh blood”.

    The work force suffers because of this, it forces, “get your early retirement together or else you might starve to death”. Some of my most depressing working moments have been when a certain leader (manager, teacher, supervisor, etc…) with years of experience and wisdom retires (and I’m not talking late in life like upper 70s or 80s), one feels a loss of that experience, wisdom and strong leadership to lean upon. With it goes decades of institutional knowledge, wisdom and strength.

    The elder workforce is an untapped treasure that we are loosing more and more, especially as those heading in that direction realize, “I better find another way to eat”, and so they run for 401K or SS cover as soon as they can. If that workforce where “re” tapped, and that means it becomes a noble pursuit and thing to have, promoted and such, then in turn fewer retirees would tap the system (that we need) so soon. And get out of the mindset of “if I don’t retire at the mandatory age I’ll loose all that SS money I put in”. Wouldn’t most folks rather die with purpose and fulfillment rather than, “I better tap these funds and get them before the grave gets me”? A few generations back, about the time of my grandparents, it was considered noble to leave an inheritance (personal or social not having used unnecessarily even SS). Now days it’s considered correct to basically “grab all you can before your six feet under”.

    Dr. RC Sproul a few years back made a comment on a bumper sticker he saw saying something like, “I’m Using Up My Kids Inheritance On This Vacation” (something like that, I can’t recall exactly). He said that is the most selfish, irresponsible and negligent thing he’d ever read. And he was serious.

  • larry

    You know he has some fire to all that. For example as a society we have to decide on “how early should we expect to retire” which affects payout cost in SS and such programs. As a society we retire our folks at very young ages, or at least that’s the goal, the mantra of “early retirement”. But most folks in history die working.

    And then against the conservative side of this, business in the last several decades is not very kind to aged wisdom in the work force. In its constant marketing scheme of “newer is better” it eschews wise old leadership as well, at any level blue collar or white collar, for “fresh blood”.

    The work force suffers because of this, it forces, “get your early retirement together or else you might starve to death”. Some of my most depressing working moments have been when a certain leader (manager, teacher, supervisor, etc…) with years of experience and wisdom retires (and I’m not talking late in life like upper 70s or 80s), one feels a loss of that experience, wisdom and strong leadership to lean upon. With it goes decades of institutional knowledge, wisdom and strength.

    The elder workforce is an untapped treasure that we are loosing more and more, especially as those heading in that direction realize, “I better find another way to eat”, and so they run for 401K or SS cover as soon as they can. If that workforce where “re” tapped, and that means it becomes a noble pursuit and thing to have, promoted and such, then in turn fewer retirees would tap the system (that we need) so soon. And get out of the mindset of “if I don’t retire at the mandatory age I’ll loose all that SS money I put in”. Wouldn’t most folks rather die with purpose and fulfillment rather than, “I better tap these funds and get them before the grave gets me”? A few generations back, about the time of my grandparents, it was considered noble to leave an inheritance (personal or social not having used unnecessarily even SS). Now days it’s considered correct to basically “grab all you can before your six feet under”.

    Dr. RC Sproul a few years back made a comment on a bumper sticker he saw saying something like, “I’m Using Up My Kids Inheritance On This Vacation” (something like that, I can’t recall exactly). He said that is the most selfish, irresponsible and negligent thing he’d ever read. And he was serious.

  • SAL

    #3 “The elder workforce is an untapped treasure that we are loosing more and more,”

    Did you mean to write “losing” or are you saying that the elderly are being let loose?

  • SAL

    #3 “The elder workforce is an untapped treasure that we are loosing more and more,”

    Did you mean to write “losing” or are you saying that the elderly are being let loose?

  • larry

    SAL,

    I meant both and was thinking both so I should have said “losing/loosing”.

    Thanks for pointing that out it helps make the point better than I wrote it.

  • larry

    SAL,

    I meant both and was thinking both so I should have said “losing/loosing”.

    Thanks for pointing that out it helps make the point better than I wrote it.

  • Suzanne

    Absolutely, Larry. I’m in my mid-50′s, laid off a few years ago, and have struggled ever since to find a permanent job. I know plenty others in my situation. I’d be happy to forestall retirement as long as possible, but at this point, I figure I’ll never retire but just fade away into oblivion with no healthcare, retirement, etc. It seems like a cruel joke when politicians talk of raising the retirement age; raise it all you want, I say! It’s a moot point for those of us who can’t find work. I am seriously beginning to think that many in power truly want us baby boomers to just die off so they don’t have to deal with us.

  • Suzanne

    Absolutely, Larry. I’m in my mid-50′s, laid off a few years ago, and have struggled ever since to find a permanent job. I know plenty others in my situation. I’d be happy to forestall retirement as long as possible, but at this point, I figure I’ll never retire but just fade away into oblivion with no healthcare, retirement, etc. It seems like a cruel joke when politicians talk of raising the retirement age; raise it all you want, I say! It’s a moot point for those of us who can’t find work. I am seriously beginning to think that many in power truly want us baby boomers to just die off so they don’t have to deal with us.

  • L. H. Kevil

    I’m tired of these self-proclaimed middle-of-the-road realists claiming everyone else is bound to myths. The truth IMO is that there are irreconcilable differences about the size and scope of government. Compromise between these two positions is not possible or desirable.

    And conservatives do not claim that the feds’ problems can be solved by eliminating waste. That is what you hear from liberals. Conservatives correctly point out that entitlement spending is the main problem and that it is NOT a minor problem.

  • L. H. Kevil

    I’m tired of these self-proclaimed middle-of-the-road realists claiming everyone else is bound to myths. The truth IMO is that there are irreconcilable differences about the size and scope of government. Compromise between these two positions is not possible or desirable.

    And conservatives do not claim that the feds’ problems can be solved by eliminating waste. That is what you hear from liberals. Conservatives correctly point out that entitlement spending is the main problem and that it is NOT a minor problem.

  • DonS

    Samuelson IS right. There will be much pain, and the longer we defer it, the worse (and less manageable) it will ultimately be.

    The idea of future entitlements, beyond the current budget year, is what has gotten us into this mess. Congress should never have pre-allocated the funds of future taxpayers, by making promises they could not keep with the funds at their own budgetary discretion. That MUST change. Future promises (entitlements) must either be pre-funded, as private and local pension funds must be, or eliminated. Qualification levels for welfare programs should be established by each Congress, each year, based on available funds, rather than established in law as an entitlement for all time. Social Security must be severely curtailed, by increasing the eligibility age, eliminating automatic COLA’s, and means testing benefits, until it is in a status where it is fully funded by payroll taxes, using the same kinds of actuarial formulas as are used to maintain private defined benefit pension funds. Medicare must be re-formulated to require large deductibles and return the power of pricing to the beneficiaries, with accompanying freedom of choice. Deductibles can be subsidized for low-income seniors. The current approach of ratcheting down payment schedules for providers, thereby restricting supply as doctors drop out of the program, has the cruel practical effect of rationing care through scarcity, while pretending that benefits are available.

    If these kinds of responsible measures are taken, taxpayers will be willing to pay more in taxes to make the system work. But they will want to see these kinds of real spending cuts, which have never before been tried, first. Tax increases should be in the context of real tax reform, simplifying tax schedules, lowering overall rate schedules, and eliminating deductions and credits. The tax compliance advantages of such simplification would fairly compensate the taxpayer for the higher tax payments.

  • DonS

    Samuelson IS right. There will be much pain, and the longer we defer it, the worse (and less manageable) it will ultimately be.

    The idea of future entitlements, beyond the current budget year, is what has gotten us into this mess. Congress should never have pre-allocated the funds of future taxpayers, by making promises they could not keep with the funds at their own budgetary discretion. That MUST change. Future promises (entitlements) must either be pre-funded, as private and local pension funds must be, or eliminated. Qualification levels for welfare programs should be established by each Congress, each year, based on available funds, rather than established in law as an entitlement for all time. Social Security must be severely curtailed, by increasing the eligibility age, eliminating automatic COLA’s, and means testing benefits, until it is in a status where it is fully funded by payroll taxes, using the same kinds of actuarial formulas as are used to maintain private defined benefit pension funds. Medicare must be re-formulated to require large deductibles and return the power of pricing to the beneficiaries, with accompanying freedom of choice. Deductibles can be subsidized for low-income seniors. The current approach of ratcheting down payment schedules for providers, thereby restricting supply as doctors drop out of the program, has the cruel practical effect of rationing care through scarcity, while pretending that benefits are available.

    If these kinds of responsible measures are taken, taxpayers will be willing to pay more in taxes to make the system work. But they will want to see these kinds of real spending cuts, which have never before been tried, first. Tax increases should be in the context of real tax reform, simplifying tax schedules, lowering overall rate schedules, and eliminating deductions and credits. The tax compliance advantages of such simplification would fairly compensate the taxpayer for the higher tax payments.

  • kerner

    One of the things (and there are many) that irks me about our current situation is that Social Security would be a lot closer to being pre-funded if the contributions we baby boomers made were still in the system somewhere. Instead, the government has created SSI and other programs for people whio never paid in at all, and of course, they used our contributions not needed for current social security payments to pay for general fund expendatures. They all knew this day would eventually arrive, but did that stop them?

    But, that ship having sailed, I agree with Don that the retirement age has to be raised. But don’t you wonder how people are going to go about working into their 70′s? Do younger ambitiouss people really want to have to wait for the postponed retirement of all us baby boomers before they can begin running things? Will all us baby boomers expect our wages to increase every year we work, even when we are in our late 60′s? Will we cry “Age Discrimination” if we are forced out of our powerfu/lucretive positions to make room for some younger (but more productive, or just plain cheaper) competitor? This all sounds great in theory, but I bet a lot of us won’t like it as much when it finally happens.

    Personally, I do expect to semi-retire eventually. Practicing law on a part time basis can keep a 60-something person very comfortable when the kids are grown and gone; I’ve seen it done. And I know some academics who have gone on “emeritus” status and enjoyed it. But I don’t know if most people have thought about what working till you’re 72 means for them.

    But I don’t agree that I would rather pay more taxes in exchange for lower compliance stress. I’m perfectly happy to exert the effort to find the loopholes that save me money.

  • kerner

    One of the things (and there are many) that irks me about our current situation is that Social Security would be a lot closer to being pre-funded if the contributions we baby boomers made were still in the system somewhere. Instead, the government has created SSI and other programs for people whio never paid in at all, and of course, they used our contributions not needed for current social security payments to pay for general fund expendatures. They all knew this day would eventually arrive, but did that stop them?

    But, that ship having sailed, I agree with Don that the retirement age has to be raised. But don’t you wonder how people are going to go about working into their 70′s? Do younger ambitiouss people really want to have to wait for the postponed retirement of all us baby boomers before they can begin running things? Will all us baby boomers expect our wages to increase every year we work, even when we are in our late 60′s? Will we cry “Age Discrimination” if we are forced out of our powerfu/lucretive positions to make room for some younger (but more productive, or just plain cheaper) competitor? This all sounds great in theory, but I bet a lot of us won’t like it as much when it finally happens.

    Personally, I do expect to semi-retire eventually. Practicing law on a part time basis can keep a 60-something person very comfortable when the kids are grown and gone; I’ve seen it done. And I know some academics who have gone on “emeritus” status and enjoyed it. But I don’t know if most people have thought about what working till you’re 72 means for them.

    But I don’t agree that I would rather pay more taxes in exchange for lower compliance stress. I’m perfectly happy to exert the effort to find the loopholes that save me money.

  • http://www.toddstadler.com/ tODD

    L.H. said (@7):

    Conservatives do not claim that the feds’ problems can be solved by eliminating waste. That is what you hear from liberals. Conservatives correctly point out that entitlement spending is the main problem and that it is NOT a minor problem.

    Perhaps this is so, for a certain definition of “conservative”. But of course, the problem is that that word is notoriously slippery.

    Plenty of Republicans are not at all serious about tackling entitlement spending. You may recall that, the last time Republicans were in charge of Congress and the White House — which, yes, was while entitlement spending was still a very troubling contribution to the deficit — they increased entitlement spending. Namely, Medicare.

    A cynical person might conclude that Republicans only talk about slashing spending when they are out of power, and that they rarely do anything of the sort when they’re in power.

    I gave a glance at the websites of the current GOP frontrunners and guess what? I couldn’t find any concrete plans to slash entitlement spending. Oh sure, everyone talks a good game about it, in the abstract. But no one seems to want to cut benefits to current beneficiaries.

    From Romney’s site:

    While reforms are needed, Mitt also believes that these changes should not reduce benefits for current seniors or break the promises they have relied upon for their economic security in retirement.

    Riddle me this: For whom, then, can we break such promises? If you don’t have the will to start paying less now, then I doubt you have the will to try to take away benefits from those ten years or less away from retiring. Or those twenty years away from retiring, who’ve also been paying into the system and also likely relied on promises from the government in planning their retirement.

    So then what? If we only tell people just entering the workforce not to expect benefits most people typically see in their old age, then our system will be incurring even more debt for many more decades.

  • http://www.toddstadler.com/ tODD

    L.H. said (@7):

    Conservatives do not claim that the feds’ problems can be solved by eliminating waste. That is what you hear from liberals. Conservatives correctly point out that entitlement spending is the main problem and that it is NOT a minor problem.

    Perhaps this is so, for a certain definition of “conservative”. But of course, the problem is that that word is notoriously slippery.

    Plenty of Republicans are not at all serious about tackling entitlement spending. You may recall that, the last time Republicans were in charge of Congress and the White House — which, yes, was while entitlement spending was still a very troubling contribution to the deficit — they increased entitlement spending. Namely, Medicare.

    A cynical person might conclude that Republicans only talk about slashing spending when they are out of power, and that they rarely do anything of the sort when they’re in power.

    I gave a glance at the websites of the current GOP frontrunners and guess what? I couldn’t find any concrete plans to slash entitlement spending. Oh sure, everyone talks a good game about it, in the abstract. But no one seems to want to cut benefits to current beneficiaries.

    From Romney’s site:

    While reforms are needed, Mitt also believes that these changes should not reduce benefits for current seniors or break the promises they have relied upon for their economic security in retirement.

    Riddle me this: For whom, then, can we break such promises? If you don’t have the will to start paying less now, then I doubt you have the will to try to take away benefits from those ten years or less away from retiring. Or those twenty years away from retiring, who’ve also been paying into the system and also likely relied on promises from the government in planning their retirement.

    So then what? If we only tell people just entering the workforce not to expect benefits most people typically see in their old age, then our system will be incurring even more debt for many more decades.

  • Donegal Misfortune

    Like I have said before, well maybe not here, the Greatest Generation was actually one of the worst of generations when it comes to everything but WWII. If a wise man leaves an inheritance to his children’s, children…then we of all generations are lacking these wise men.

  • Donegal Misfortune

    Like I have said before, well maybe not here, the Greatest Generation was actually one of the worst of generations when it comes to everything but WWII. If a wise man leaves an inheritance to his children’s, children…then we of all generations are lacking these wise men.

  • WisdomLover

    It is absolutely true that we need to enhance our tax revenues. What the center and everyone to the left of center seems to always forget is that you can’t do that by raising tax rates. Not unless Americans are already undertaxed, which we aren’t

    If the tax rates are 0%, you will collect $0 in tax revenue.

    If the tax rates are 100%, you will collect $0 in tax revenue.

    From these two facts, it follows that somewhere between the 0% and the 100% tax rate, there is a percentage that will give the maximum tax revenues.

    If you decrease or increase the tax rate from there, you will decrease tax revenues.

    At that optimal rate, it is as if you are on the peak of a hill with two paths available to you, one leading north, one leading south. But both leading down.

    We are on the high-tax slopes of that hill, still not anywhere near that peak. How do I know? Because people still take costly measures to avoid paying. They still consider tax accountants and lawyers to be good investments. We still need to decrease our tax rates in order to increase our tax revenues.

    I think Newt has it about right…zero out capital gains, 12.5% corporate tax, 15% individual flat tax, no death tax, no sales tax. Perry’s also pretty close.

  • WisdomLover

    It is absolutely true that we need to enhance our tax revenues. What the center and everyone to the left of center seems to always forget is that you can’t do that by raising tax rates. Not unless Americans are already undertaxed, which we aren’t

    If the tax rates are 0%, you will collect $0 in tax revenue.

    If the tax rates are 100%, you will collect $0 in tax revenue.

    From these two facts, it follows that somewhere between the 0% and the 100% tax rate, there is a percentage that will give the maximum tax revenues.

    If you decrease or increase the tax rate from there, you will decrease tax revenues.

    At that optimal rate, it is as if you are on the peak of a hill with two paths available to you, one leading north, one leading south. But both leading down.

    We are on the high-tax slopes of that hill, still not anywhere near that peak. How do I know? Because people still take costly measures to avoid paying. They still consider tax accountants and lawyers to be good investments. We still need to decrease our tax rates in order to increase our tax revenues.

    I think Newt has it about right…zero out capital gains, 12.5% corporate tax, 15% individual flat tax, no death tax, no sales tax. Perry’s also pretty close.

  • larry

    WisdomLover is getting at the reality in mathematical terms. There is that calculus optimization whereby maximum tax rate = maximum tax revenues. The “trick” is that that ‘optimized’ value is not a physical law that can be found but rather related to the subjective mood/reality of persons in general as a society and in particular. Therein lay the trick.

    If persons are happy about their incomes they really don’t mind their tax rate all that much. People by fallen nature may always ‘want more’ but there is that ‘happy ground’ whereby they are happy about how much work they are putting forth and their return in terms of income and by extension fine with their given tax rate. That “happy optimum” is where the government takes in a large revenue and most don’t really mind that much their tax rate.

    What has precipitated the tax debate (and always has) at the present is the sudden onslaught of “now unhappy” about “my” work to income (in some cases no income). 10 years ago, other than perennial lower tax groups (mostly small during the “happy times”), talk of massive or significant tax over-haul or such was pretty much yawned at. The unhappiness has been precipitated by the larger economy where job loss is everywhere (no happiness at all when there’s zero income and thus zero taxes) or only low paying jobs (yea anyone of us would take what we could get if we had too but its not necessarily a “happy situation” – any degree holder that has managed some modicum of success whatever level it may be would CRINGE at the thought of ‘flipping hamburgers’ to just make it). The accumulated debt by all entities is what is causing the sour atmosphere. It’s the common note sounded in some form or another from the Tea Party to the Occupy ______ to left Vs. right.

    Thus, hypothetically WisdomLover’s point about an optimum number is true. But more specifically, it’s not the “number”, the number or percentage is really a DEPENDENT variable and it is dependent upon an independent variable. That independent variable is the “happy situation”. In fact the present tax system (simplification aside and purely looking at “how much tax %” only) would be satisfactory to all (meaning most) if everyone was happy with their work to income to tax situation. It’s kind of like table chalked over-flowingly full of lavish food and five folks are sitting at it from different walks of life (each representing say “big business”, “small business”, “the working (blue collar/white collar/professional) man/woman”, “government” (local/state/fed), etc… While the tables full Bob the blue collar guy doesn’t mind so much if Gary the government guy keeps refilling his plate and vice versa. Neither do others like Sam the small business guy or Patty the professional and so forth with Rick the retiree or Carl the college grad. Now when the table gets down to the last slice of steak all their faces change continence and now we have a table of snarling dogs each growling bearing their teeth daring anyone of the others to grab that last slice of steak.

  • larry

    WisdomLover is getting at the reality in mathematical terms. There is that calculus optimization whereby maximum tax rate = maximum tax revenues. The “trick” is that that ‘optimized’ value is not a physical law that can be found but rather related to the subjective mood/reality of persons in general as a society and in particular. Therein lay the trick.

    If persons are happy about their incomes they really don’t mind their tax rate all that much. People by fallen nature may always ‘want more’ but there is that ‘happy ground’ whereby they are happy about how much work they are putting forth and their return in terms of income and by extension fine with their given tax rate. That “happy optimum” is where the government takes in a large revenue and most don’t really mind that much their tax rate.

    What has precipitated the tax debate (and always has) at the present is the sudden onslaught of “now unhappy” about “my” work to income (in some cases no income). 10 years ago, other than perennial lower tax groups (mostly small during the “happy times”), talk of massive or significant tax over-haul or such was pretty much yawned at. The unhappiness has been precipitated by the larger economy where job loss is everywhere (no happiness at all when there’s zero income and thus zero taxes) or only low paying jobs (yea anyone of us would take what we could get if we had too but its not necessarily a “happy situation” – any degree holder that has managed some modicum of success whatever level it may be would CRINGE at the thought of ‘flipping hamburgers’ to just make it). The accumulated debt by all entities is what is causing the sour atmosphere. It’s the common note sounded in some form or another from the Tea Party to the Occupy ______ to left Vs. right.

    Thus, hypothetically WisdomLover’s point about an optimum number is true. But more specifically, it’s not the “number”, the number or percentage is really a DEPENDENT variable and it is dependent upon an independent variable. That independent variable is the “happy situation”. In fact the present tax system (simplification aside and purely looking at “how much tax %” only) would be satisfactory to all (meaning most) if everyone was happy with their work to income to tax situation. It’s kind of like table chalked over-flowingly full of lavish food and five folks are sitting at it from different walks of life (each representing say “big business”, “small business”, “the working (blue collar/white collar/professional) man/woman”, “government” (local/state/fed), etc… While the tables full Bob the blue collar guy doesn’t mind so much if Gary the government guy keeps refilling his plate and vice versa. Neither do others like Sam the small business guy or Patty the professional and so forth with Rick the retiree or Carl the college grad. Now when the table gets down to the last slice of steak all their faces change continence and now we have a table of snarling dogs each growling bearing their teeth daring anyone of the others to grab that last slice of steak.

  • http://www.toddstadler.com/ tODD

    Ah, the “Laffer Curve” (@12). Pure conjecture masquerading as math.

    In my observations, the Laffer Curve is only ever used to argue against raising taxes. That is, I argue, its sole purpose, even though it could just as easily be employed to argue that raising taxes would obviously generate more revenue.

    The whole argument behind the curve relies on our “knowing” two end points (one of which I could quibble with, if I really felt like it). Fine, let’s take those as a given.

    The problem is that the rest of it — you know, the important part on which the whole argument hangs — is almost always a complete unknown. It is, of course, always asserted that we are to the right of the curve’s peak, because, again, the whole point of employing the curve is to argue against raising taxes.

    But what does the curve look like? What informs it? What are the inputs? Where is the peak located, and how do we know? Is there only one peak? Why? Are the left-hand and right-hand sides of the curve equivalent? Why?

    Yes, there is some data at hand. Namely, our current tax rates and our current income. Of course, it’s impossible to boil down the entire current system to one number so that we could plot it on a Cartesian plane — even though that’s what the Laffer curve requires us to do.

    But our system is constantly in flux. The national economy changes. The world economy changes. Tax rates change. As such, it should be difficult to compare the tax rate/revenue point from this year with a similar datum from ten years ago — because it is likely the curve has changed. How has it changed? Well, knowing that would require us to know how to plot the curve based on its inputs. But no one knows what those are.

    In summary, the whole thing is a math-esque farce intended to convince people we really shouldn’t raise taxes, and to pretend that this argument is based on hard data. It isn’t.

  • http://www.toddstadler.com/ tODD

    Ah, the “Laffer Curve” (@12). Pure conjecture masquerading as math.

    In my observations, the Laffer Curve is only ever used to argue against raising taxes. That is, I argue, its sole purpose, even though it could just as easily be employed to argue that raising taxes would obviously generate more revenue.

    The whole argument behind the curve relies on our “knowing” two end points (one of which I could quibble with, if I really felt like it). Fine, let’s take those as a given.

    The problem is that the rest of it — you know, the important part on which the whole argument hangs — is almost always a complete unknown. It is, of course, always asserted that we are to the right of the curve’s peak, because, again, the whole point of employing the curve is to argue against raising taxes.

    But what does the curve look like? What informs it? What are the inputs? Where is the peak located, and how do we know? Is there only one peak? Why? Are the left-hand and right-hand sides of the curve equivalent? Why?

    Yes, there is some data at hand. Namely, our current tax rates and our current income. Of course, it’s impossible to boil down the entire current system to one number so that we could plot it on a Cartesian plane — even though that’s what the Laffer curve requires us to do.

    But our system is constantly in flux. The national economy changes. The world economy changes. Tax rates change. As such, it should be difficult to compare the tax rate/revenue point from this year with a similar datum from ten years ago — because it is likely the curve has changed. How has it changed? Well, knowing that would require us to know how to plot the curve based on its inputs. But no one knows what those are.

    In summary, the whole thing is a math-esque farce intended to convince people we really shouldn’t raise taxes, and to pretend that this argument is based on hard data. It isn’t.

  • WisdomLover

    Todd-

    I assume you think you could quibble about the 100% tax case. The tax rate in question is the total effective rate. If that’s at 100%, people just won’t work in any way that would result in the govt recognizing the product of their labor as income. And so the govt gets nothing.

    So we’re not talking about absurdities like they used to have in some of the Scandinavian countries (perhaps they still do), where individuals could be taxed at 100% and higher rates, but still managed to make a living because there were various write-offs and shelters that they could avail themselves of. In the end, each individual paid some percentage of their marginal increase in wealth, and that percentage was less than 100%. And if they couldn’t mange that, they left the country (and again, the govt got nothing.) I seem to recall Ingmar Bergman having a story like that.

    There may indeed be multiple local maxima along the curve. The fact that we know the two endpoints does not preclude that.

    However, the fact that we know the two endpoints is a logical guarantee that there is at least one global maximum (which would also be a local maximum). And if you are at that maximum, the only way you can go is down. furthermore, if you are at any local maximum, the only way you can go for any small change is down.

    Your point about it being difficult to tell which slope we are on is fair enough. Note that the analysis applies just as well, if not better, to individuals as it does to whole societies. That is, there is an optimum rate for each individual where the govt can get the most money out of that individual. And it is possible for some individuals to be on the too-low slope of the Laffer curve while other individuals are on the too-high slope.

    One indicator that a given individual is taxed at too high a rate is his willingness to pay expensive fees to consultants to avoid the tax. since that happens with just about everyone with a significant tax bill, I conclude the rates are too high…at least for those people.

    Historically, lowering tax rates has brought on economic expansion followed by increased tax revenues. Increasing rates have only been followed by increased revenues during times of existing economic expansion.

    The time to try increasing rates is during a boom.

  • WisdomLover

    Todd-

    I assume you think you could quibble about the 100% tax case. The tax rate in question is the total effective rate. If that’s at 100%, people just won’t work in any way that would result in the govt recognizing the product of their labor as income. And so the govt gets nothing.

    So we’re not talking about absurdities like they used to have in some of the Scandinavian countries (perhaps they still do), where individuals could be taxed at 100% and higher rates, but still managed to make a living because there were various write-offs and shelters that they could avail themselves of. In the end, each individual paid some percentage of their marginal increase in wealth, and that percentage was less than 100%. And if they couldn’t mange that, they left the country (and again, the govt got nothing.) I seem to recall Ingmar Bergman having a story like that.

    There may indeed be multiple local maxima along the curve. The fact that we know the two endpoints does not preclude that.

    However, the fact that we know the two endpoints is a logical guarantee that there is at least one global maximum (which would also be a local maximum). And if you are at that maximum, the only way you can go is down. furthermore, if you are at any local maximum, the only way you can go for any small change is down.

    Your point about it being difficult to tell which slope we are on is fair enough. Note that the analysis applies just as well, if not better, to individuals as it does to whole societies. That is, there is an optimum rate for each individual where the govt can get the most money out of that individual. And it is possible for some individuals to be on the too-low slope of the Laffer curve while other individuals are on the too-high slope.

    One indicator that a given individual is taxed at too high a rate is his willingness to pay expensive fees to consultants to avoid the tax. since that happens with just about everyone with a significant tax bill, I conclude the rates are too high…at least for those people.

    Historically, lowering tax rates has brought on economic expansion followed by increased tax revenues. Increasing rates have only been followed by increased revenues during times of existing economic expansion.

    The time to try increasing rates is during a boom.

  • http://www.toddstadler.com/ tODD

    WisdomLover (@15), a 100% effective tax rate is, of course, absurdly hypothetical, but do keep in mind that, as far as I know, all taxes are enforced with legal penalties. And that, presumably, this hypothetical society has gotten to this place because the government provides literally everything that its citizens need in life. Both of these points are frequently ignored by proponents of the Laffer Curve.

    That is to say, if we can imagine that such a society exists with a 100% effective tax rate, we can also imagine that at least some of the people are content with this deal, and will actually pay their taxes so that they get the promised benefits that they presumably want. Conversely, we can also imagine that at least some of the citizens will fear the legal repercussions of simply failing to pay their taxes, and so will at least pay something to the government. Not everyone’s rich enough to leave or find fancy tax shelters.

    The people who argue for the Laffer Curve, of course, are almost always arch-”free market” types, so they typically find it difficult to imagine people willingly engaging in a completely socialized country, and they chafe at the notion of a tax that carries legally punitive repercussions for not paying. So, I guess, they just assume that the “govt gets nothing” in a 100% effective tax situation. I’m not convinced.

    Not that I think it matters, as that is one of the least of my concerns of the math behind this would-be curve.

    Historically, lowering tax rates has brought on economic expansion followed by increased tax revenues.

    Two responses to that. First, correlation is not causation and all that. Every time the economy goes up or down, by some metric, everyone’s clamoring to take credit or lay blame. You’re unlikely to convince me that any single input was responsible for any single shift in the economy. Second, your statement above is only useful if you can assert that these were all points on the same curve — that is, that the curve itself did not change shapes over the period you’re considering. But until we know the inputs into the function that gives us the curve, how can we say? This is my entire complaint: it’s all conjecture, with the sole point being that we shouldn’t raise taxes. And no real data behind it.

    One indicator that a given individual is taxed at too high a rate is his willingness to pay expensive fees to consultants to avoid the tax.

    This requires me to believe that the wealthy are not greedy. Which is a bit hard to swallow. Sure, some wealthy people are quite generous with their money and are happy to pay taxes. But they’re quite likely wealthy because they know how to manage their money, which means they pay good accountants good money so they can continue to be wealthy. Still, I’m pretty certain that not a few multi-millionaires would complain about a 10% (or smaller!) effective tax rate, or at least “pay expensive fees to consultants to avoid the tax”.

  • http://www.toddstadler.com/ tODD

    WisdomLover (@15), a 100% effective tax rate is, of course, absurdly hypothetical, but do keep in mind that, as far as I know, all taxes are enforced with legal penalties. And that, presumably, this hypothetical society has gotten to this place because the government provides literally everything that its citizens need in life. Both of these points are frequently ignored by proponents of the Laffer Curve.

    That is to say, if we can imagine that such a society exists with a 100% effective tax rate, we can also imagine that at least some of the people are content with this deal, and will actually pay their taxes so that they get the promised benefits that they presumably want. Conversely, we can also imagine that at least some of the citizens will fear the legal repercussions of simply failing to pay their taxes, and so will at least pay something to the government. Not everyone’s rich enough to leave or find fancy tax shelters.

    The people who argue for the Laffer Curve, of course, are almost always arch-”free market” types, so they typically find it difficult to imagine people willingly engaging in a completely socialized country, and they chafe at the notion of a tax that carries legally punitive repercussions for not paying. So, I guess, they just assume that the “govt gets nothing” in a 100% effective tax situation. I’m not convinced.

    Not that I think it matters, as that is one of the least of my concerns of the math behind this would-be curve.

    Historically, lowering tax rates has brought on economic expansion followed by increased tax revenues.

    Two responses to that. First, correlation is not causation and all that. Every time the economy goes up or down, by some metric, everyone’s clamoring to take credit or lay blame. You’re unlikely to convince me that any single input was responsible for any single shift in the economy. Second, your statement above is only useful if you can assert that these were all points on the same curve — that is, that the curve itself did not change shapes over the period you’re considering. But until we know the inputs into the function that gives us the curve, how can we say? This is my entire complaint: it’s all conjecture, with the sole point being that we shouldn’t raise taxes. And no real data behind it.

    One indicator that a given individual is taxed at too high a rate is his willingness to pay expensive fees to consultants to avoid the tax.

    This requires me to believe that the wealthy are not greedy. Which is a bit hard to swallow. Sure, some wealthy people are quite generous with their money and are happy to pay taxes. But they’re quite likely wealthy because they know how to manage their money, which means they pay good accountants good money so they can continue to be wealthy. Still, I’m pretty certain that not a few multi-millionaires would complain about a 10% (or smaller!) effective tax rate, or at least “pay expensive fees to consultants to avoid the tax”.

  • WisdomLover

    The Laffer curve is premised on a market economy, not a command economy. So the case you give of 100% taxation is irrelevant to the theory.

    Of course correlation isn’t causation. But it is correlation. You don’t even have that with alternative fiscal policies. And, btw, while correlation isn’t causation, it is some evidence for causation. What do you think is happening instead? Do you think that economic growth causes lower taxes? Or is it that there is some common cause that always causes the two together? If so, what is this mysterious cause? Or is it just a series of lucky chances? Or what?

    The point about the consultants is that if the tax were lower, it wouldn’t be worth it to hire the consultants. It is premised on the greediness of individuals, not contrary to it.

    Suppose I have a $100 tax bill, and I pay you $20 to help me with it. I’d only do that if I was reasonably sure that you could get me a final tax bill of less than $80. Why? Because I’m greedy. Let’s say you get my bill down to $75. So my total cost is $95 rather than $100. Now, if the govt lowers the tax rates so that my tax bill the next year is $85, I’m liable to just pay the bill rather than risk that, for your $20 fee, you’ll be able to get the bill down to $65. Why? Because I’m greedy. If I do so, the govt has now collected $10 more, and I’ve paid $10 less.

  • WisdomLover

    The Laffer curve is premised on a market economy, not a command economy. So the case you give of 100% taxation is irrelevant to the theory.

    Of course correlation isn’t causation. But it is correlation. You don’t even have that with alternative fiscal policies. And, btw, while correlation isn’t causation, it is some evidence for causation. What do you think is happening instead? Do you think that economic growth causes lower taxes? Or is it that there is some common cause that always causes the two together? If so, what is this mysterious cause? Or is it just a series of lucky chances? Or what?

    The point about the consultants is that if the tax were lower, it wouldn’t be worth it to hire the consultants. It is premised on the greediness of individuals, not contrary to it.

    Suppose I have a $100 tax bill, and I pay you $20 to help me with it. I’d only do that if I was reasonably sure that you could get me a final tax bill of less than $80. Why? Because I’m greedy. Let’s say you get my bill down to $75. So my total cost is $95 rather than $100. Now, if the govt lowers the tax rates so that my tax bill the next year is $85, I’m liable to just pay the bill rather than risk that, for your $20 fee, you’ll be able to get the bill down to $65. Why? Because I’m greedy. If I do so, the govt has now collected $10 more, and I’ve paid $10 less.

  • http://www.toddstadler.com/ tODD

    WisdomLover (@17), you said:

    So the case you give of 100% taxation is irrelevant to the theory.

    This is a curious statement, given that it was you (@12) who first brought up the case in which there was 100% taxation, and you made it one of the “two facts” on which you based your assertion of the Laffer Curve. So … ?

    Of course correlation isn’t causation. … And, btw, while correlation isn’t causation, it is some evidence for causation.

    No, it’s not “evidence” for causation. Are you serious?

    As to your claim about tax consultants, my own experience proves it false, which is yet another reason I’m not taking it too seriously.

    Every year I spend some relatively small amount of money on tax preparation software. In theory, according to the ad copy for the software, it could save me vast amounts of money. In practice, I don’t think it ever does — I doubt it even lessens my tax burden by the cost of the software. I could probably do all my taxes by hand and save the cash. But it’s more convenient to use the software, and I trust it well enough, so I use it every year.

    By your reasoning, however, my use of this software is, apparently, a sign that my tax rate is too high. Even though, were you to ask me, I would not say that I feel overly taxed. So I’m not terribly convinced by this point of yours.

  • http://www.toddstadler.com/ tODD

    WisdomLover (@17), you said:

    So the case you give of 100% taxation is irrelevant to the theory.

    This is a curious statement, given that it was you (@12) who first brought up the case in which there was 100% taxation, and you made it one of the “two facts” on which you based your assertion of the Laffer Curve. So … ?

    Of course correlation isn’t causation. … And, btw, while correlation isn’t causation, it is some evidence for causation.

    No, it’s not “evidence” for causation. Are you serious?

    As to your claim about tax consultants, my own experience proves it false, which is yet another reason I’m not taking it too seriously.

    Every year I spend some relatively small amount of money on tax preparation software. In theory, according to the ad copy for the software, it could save me vast amounts of money. In practice, I don’t think it ever does — I doubt it even lessens my tax burden by the cost of the software. I could probably do all my taxes by hand and save the cash. But it’s more convenient to use the software, and I trust it well enough, so I use it every year.

    By your reasoning, however, my use of this software is, apparently, a sign that my tax rate is too high. Even though, were you to ask me, I would not say that I feel overly taxed. So I’m not terribly convinced by this point of yours.

  • WisdomLover

    The point is that Laffer’s assertion is that in a market economy, if you have 100% taxation, you get $0 in taxes.

    So your claim that in a command economy you could collect taxes at 100% is irrelevant to the claim.

    “No, it’s not “evidence” for causation. Are you serious?”

    Of course I’m serious. Are you? Are you telling me that you can prove causation without correlation? Please provide one instance of a causal relation where cause and effect are not correlated.

    Causation is proven when you have correlation and when other reasons for the correlation can be eliminated.

    “By your reasoning, however, my use of this software is, apparently, a sign that my tax rate is too high.”

    Actually, your case provides no evidence that you are overtaxed. And I would not have said it does. Since it has none of the qualities that I said would count as evidence of a too high rate. (Though it does provide some evidence that tax forms are too complicated…you are saving on the opportunity costs of filling out the forms.)

    You said yourself, that the software cost is not great. It saves you a little time, it probably doesn’t save you much money. Perhaps the govt is getting almost as much out of you as they can get. You don’t even feel overtaxed. It doesn’t sound to me like you are being significantly diverted from productive, taxable, effort. Good for you.

    Let’s say you make $100k a year, and taxes go up by 5%. Now you are $5000 poorer. Is that a matter of blase indifference to you? Or are you going to start thinking about getting a tax accountant, forming a corporation to shield your income or doing any of the many things people spend a lot of time on to avoid taxes. If it’s the former, then you might even be undertaxed. If you’ll just accept a $5000 pay cut without feeling the need to do more than yawn, then we weren’t taxing you enough.

    Now, of course, the govt can’t create tailor made tax rates to hit the ‘sweet spot’ for every tax payer. It has to work at a more macro level. And the principal evidence it can have for the effect of its fiscal policies is the subsequent tax revenues.

  • WisdomLover

    The point is that Laffer’s assertion is that in a market economy, if you have 100% taxation, you get $0 in taxes.

    So your claim that in a command economy you could collect taxes at 100% is irrelevant to the claim.

    “No, it’s not “evidence” for causation. Are you serious?”

    Of course I’m serious. Are you? Are you telling me that you can prove causation without correlation? Please provide one instance of a causal relation where cause and effect are not correlated.

    Causation is proven when you have correlation and when other reasons for the correlation can be eliminated.

    “By your reasoning, however, my use of this software is, apparently, a sign that my tax rate is too high.”

    Actually, your case provides no evidence that you are overtaxed. And I would not have said it does. Since it has none of the qualities that I said would count as evidence of a too high rate. (Though it does provide some evidence that tax forms are too complicated…you are saving on the opportunity costs of filling out the forms.)

    You said yourself, that the software cost is not great. It saves you a little time, it probably doesn’t save you much money. Perhaps the govt is getting almost as much out of you as they can get. You don’t even feel overtaxed. It doesn’t sound to me like you are being significantly diverted from productive, taxable, effort. Good for you.

    Let’s say you make $100k a year, and taxes go up by 5%. Now you are $5000 poorer. Is that a matter of blase indifference to you? Or are you going to start thinking about getting a tax accountant, forming a corporation to shield your income or doing any of the many things people spend a lot of time on to avoid taxes. If it’s the former, then you might even be undertaxed. If you’ll just accept a $5000 pay cut without feeling the need to do more than yawn, then we weren’t taxing you enough.

    Now, of course, the govt can’t create tailor made tax rates to hit the ‘sweet spot’ for every tax payer. It has to work at a more macro level. And the principal evidence it can have for the effect of its fiscal policies is the subsequent tax revenues.

  • JunkerGeorg

    “All the perplexities, confusion and distresses in America arise not from defects in the constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation.”

    John Adams, in a letter to Thomas Jefferson

  • JunkerGeorg

    “All the perplexities, confusion and distresses in America arise not from defects in the constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation.”

    John Adams, in a letter to Thomas Jefferson


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