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Bush Should End This Tax Cut Myth


Fred Jones

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Don't Feed the Beast

Bush Should End This Tax Cut Myth

By Sebastian Mallaby

http://www.washingtonpost.com/wp-dyn/content/article/2006/05/07/AR2006050700924.html

George W. Bush is not the sort of president who reads journals such as the Atlantic Monthly. But at least someone at the White House should check out the piece in the new issue by Jonathan Rauch. For honest believers in tax cuts, it's devastating.

It's been a long time since honest believers argued that tax cuts pay for themselves. When you have extremely high rates of taxation -- say, 70 percent-plus -- there may be something to this claim: When rates are that high, the rich go to extraordinary lengths to evade taxes and aren't motivated to earn more, so it's not crazy to argue that tax cuts might boost tax receipts. But you have to go back to the 1970s to find tax rates that high. When the top income tax bracket is in the 30 to 40 percent range, nobody serious believes that tax cuts change behavior enough to pay for themselves.

Instead, tax cutters have clung to a separate faith: that tax cuts will force matching cuts in spending by the government. It's a faith that Rauch traces to the presidential debates of 1980. "John tells us that first we've got to reduce spending before we can reduce taxes," Ronald Reagan declared in reply to the independent candidate, John Anderson. "Well, if you've got a kid that's extravagant, you can lecture him all you want to about his extravagance. Or you can cut his allowance and achieve the same end much quicker."

Ever since that debate, the "starve the beast" argument has been a favorite of Republicans. It's an expedient argument, of course, since it justifies the tax cuts that voters are assumed to love. But even the most nakedly cynical politicians need policy fig leaves. "Starve the beast" has allowed tax cutters to feel decent.

Or at least half decent. Everybody knows that the Reagan tax cuts did not actually cause spending to come down in the 1980s; most people have surely noticed that the Bush I and Clinton tax hikes were followed by spending constraint in the 1990s; and the Bush II tax cuts certainly have not stopped Congress from spending like a drunken sailor recently. But then the plural of anecdote is not data, and until the starve-the-beast theory is conclusively discredited, tax cutters won't stop hiding behind it.

Well, now it has been discredited. Rauch cites William Niskanen, an economist who worked in the Reagan White House and now chairs the Cato Institute. Niskanen has crunched the numbers between 1981 and 2005, testing for a relationship between tax cuts and government spending, and controlling for levels of unemployment, since these affect spending and taxes independently. Niskanen's result punctures his own party's dogma. Tax cuts are associated with increases in government spending. The best strategy for forcing cuts in government is actually to raise taxes.

Rest of article at above link.

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This is a great editorial. I think it goes a little bit too far in saying that the best strategy for forcing cuts in government is to raise taxes.

I think long-term spending is actually dissociated from tax cuts or tax increases. The cutting off your kids' allowance analogy only works until your kid gets a credit card. When people need to buy things they will spend, and the US government has the best credit in the world. Neither raising taxes nor lowering taxes should have any effect on government spending unless we're talking about a really big change in taxes.

I think the reason spending tends to go up after a tax cut is that revenue actually tends to go up after a tax cut. When you cut taxes, people that have been deferring income or waiting to cash in on capital gains will all of a sudden start paying their taxes. This is a short-term gain, but it is a real gain that will encourage more spending. Unfortunately, this short-term boost to revenue will disappear in a year or two, and you will already be spending more, creating bigger deficits.

I can't understand why tax increases would decrease spending though, except that people dislike tax hikes so much that they will tend to vote for the other party, creating gridlock that actually does tend to decrease spending. Whatever it is, the bottom line is that the only way to decrease spending is to decrease spending ... tax cuts are part of the problem, not the solution.

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Well, now it has been discredited. Rauch cites William Niskanen, an economist who worked in the Reagan White House and now chairs the Cato Institute.

Well, considering the source lends an order of magnitude greater credibility to these findings than if they came from, say, Howard Dean's camp. Expect George Will to pull rank on Charles Krauthammer for the rights to rebuttal.

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I can't understand why tax increases would decrease spending though, except that people dislike tax hikes so much that they will tend to vote for the other party, creating gridlock that actually does tend to decrease spending.

That's an interesting observation, and pretty easy to research/verify/refute. Let us know what you find out. :)

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Much like the argument that promising abstinence doesnt work, you must ACTUALLY DO IT, not just say it will happen.

Tax Cuts will reduce spending if lawmakers actually reduce spending.

But Tax Cuts and Spending are seperate issues.

The argument shouldnt be that cutting taxes will lead to less spending. The argument should be Less spending will make it easier to cut taxes.

And while the GOP has failed to cut spending. They did lower taxes. Whereas the Dems in the 90s did neither.

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The problem is when Bush refers to "The American People" when he says Tax Cuts, but who he is really intending to give them to are multinational global corporations and those about as wealthy as them.

Also I am wonder how economic numbers are being skewed these because of how many people live off credit cards and are in debt thousands of dollars and hardly pay bills with real money anymore. So if you are just punching numbers it seems like the person is doing well in the system because they have a house & car etc....but if you just dig a little deeper you see they are severely in debt.

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An economist I am not, but somewhere you have to balance the budget. Irregardless of whether you believe in Iraq or any of the other polices the administration has conducted the one thing that really makes me mad is the careless disregard for the budget. Continuously running up the federal deficit is not the answer. We are just passing the buck onto future generations. If the government is going to reduce the taxes it has to reduce spending. Since the government does not know how to reduce spending they have to stop providing tax breaks. In fact, since spending is increasing the government needs to continue to raise taxes. That way it will bring home the reality of the actions of the administration and Congress. Maybe that way someone will be held politically liable for their financial decisions. Bush is just blowing smoke and giving tax breaks to his friends. The Democrats are no better. They didn’t lower taxes, but they kept spending and spending.

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(I've just read the first few paragraphs, but):

The best way I've seen to phrase the author's point (so far) is: Some author (Krauthammer?) pointed out that Kennedy may well have proven that if you reduce taxes from 70% to 50%, revenues will go up.

But that does not prove that if you reduce them from 35% to 20%, they will go up.

And it's guaranteed that if you reduce them from 10% to zero (as the GOP keeps proposing for Capital Gains), that revenues will be zero.

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And I'd have a problem with the referenced piece's "proof" that raising taxes causes spending cuts.

To me, there are lots of activities where it may be theoretiaclly possible to prove a statistical linkage, that's not the same as proof of cause and effect.

Example: It's been well documented that smokers disproportionatly have cancer. But that, IMO doesn't prove cause and effect. (It's theoretically possible, for example, that smokers statistically drink less orange juice, and OJ prevents cancer. Or that smokers spend more time outdoors, and UV causes cancer. Or that there's a gene that predisposes people towards smoking, and also increases cancer risk.)

Now, to me, a statistical linkage is "good enough" for proof if there's also some logic behind the theory. (Somkers tend to get a lot of lung cancer. Gee, do you suppose it might be because of all the (doodoo) they inhale into their lungs for 40 years?)

The assertion that raising taxes causes spending cuts doesn't pass the logic test.

Now, I might tend to believe, though, that having Congress and the White House hate each other tends to produce both tax increases and spending cuts.

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here's the logic for you Larry.

Tell the people that you get what you pay for. Raise taxes to the point that we have no deficit and watch how many people start talking about cutting spending to get these god forsaken taxes down.

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here's the logic for you Larry.

Tell the people that you get what you pay for. Raise taxes to the point that we have no deficit and watch how many people start talking about cutting spending to get these god forsaken taxes down.

Won't happen. I'm 36 years old. In my lifetime, the Federal budget spending has never went down. It ALWAYS increases.

Both parties,Dems and Repubs, have no interest in reducing spending.

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I think the reason spending tends to go up after a tax cut is that revenue actually tends to go up after a tax cut.

Of course! Anyone that works in the government - military, civilian, or contractor - knows this. Spend all that you can, or your budget may very well be decreased the following year. And money equals power and influence, so there's every incentive to maintain or increase budgets.

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The next President will have no choice but to raise taxes just like Bush Sr. after Reagan...only this time we have a trillion dollar war to pay for.

That depends. There IS another option. A BETTER option. An option that actually brings up back MUCH CLOSER to the country out Founding Fathers envisioned.... ELIMINATE all the line items in the Federal Budget that do not have a Constitutional mandate. Boy, we'd have plenty of extra money at that point and we would be able to reduce the national debt. Once the debt was gone, we'd be able to reduce the tax rates again. Pretty simple solution to the problem.

Personally, I'm for a total change to the tax system. I believe we should go to a top-to-bottom flat tax with NO DEDUCTIONS. However, only wage/employment income would be taxed.

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Much like the argument that promising abstinence doesnt work, you must ACTUALLY DO IT, not just say it will happen.

Tax Cuts will reduce spending if lawmakers actually reduce spending.

But Tax Cuts and Spending are seperate issues.

The argument shouldnt be that cutting taxes will lead to less spending. The argument should be Less spending will make it easier to cut taxes.

And while the GOP has failed to cut spending. They did lower taxes. Whereas the Dems in the 90s did neither.

Kilmer, you talk about this like reducing taxes should be an end in itself. However, aren't both reduced spending and lowering taxes both means to an end? Isn't the ultimate goal to reduce the size of the government?

On a personal level, everyone of course wants the extra dollar in their pocket they get from tax cuts, but on a poilcy level, does cutting taxes actually accomplish anything if there are no corresponding spending cuts?

After all, if spending grows while tax revenue falls, the government is merely getting money from us a different way: they are borrowing from our future taxes. If the goal is long-term reduction in the size of government, isn't that actually worse?

Of course! Anyone that works in the government - military, civilian, or contractor - knows this. Spend all that you can, or your budget may very well be decreased the following year. And money equals power and influence, so there's every incentive to maintain or increase budgets.

This is a structural problem that will generally make it impossible, as people have said, to actually reduce nominal spending. However, the GDP of the United States grows every year, and it is possible to reduce real spending by simply limiting spending growth.

The rate of taxation is really almost unrelated to all of this. If you want to win elections, you talke about taxes, but if you want to affect public policy, the focus needs to be on spending

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Everybody knows that the Reagan tax cuts did not actually cause spending to come down in the 1980s; most people have surely noticed that the Bush I and Clinton tax hikes were followed by spending constraint in the 1990s;

He loses a LOT of credibility with this sentence. The biggest increase in spending during the Reagan era occurred after he signed Bob Dole's TEFRA tax bill at the beginning of his presidency. Adjusted for inflation, Reagan actually signed the LARGEST tax increase in dollar amounts in US History. The result - for every dollar in additional revenue, spending went up $1.58 and the US had its worst deficits since WWII. Then in Reagan's 2nd term, he passed Bill Bradley's sponsored 1986 tax reform bill, which lowered the top tax rate to its lowest post-war levels. This, coupled with spending restraints imposed by the Gramm-Rudman bill significantly lowered the deficit in Reagan's 2nd term. George H Bush completely reversed this trend by abandoning Warren Rudman, and proposing a spending budget in 89 that was based on meeting targets by projecting higher revenues through an 8 percent inflation rate. He predictably missed the Gramm Rudman targets as everyone knew he would, and suddenly declared Congress was "forcing" him to break his promise and raise taxes. The result: Spending increased more than 2 dollars for every projected dollar in increased revenue, while tax revenues fell well below every projection. National debt as a percentage of GDP skyrocketed during Bush I's 4 years. Clinton's tax hikes, though not nearly as severe as his GOP predecessors, nevertheless had projected 200 billion a year deficits for the next ten years. Then the Republican Congress pushed for fiscal constraint and cut the capital gains tax. Inflation adjusted spending per capita actually decreased under Clinton for the first time since the Eisenhower administration - but this was AFTER Congress enacted a number of tax cuts.

The fault of the deficit now lies squarely on reckless spending of the GOP-led congress and its complicit castrated Spender in Chief, who is the only post-war president who has NEVER vetoes even ONE spending bill.

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It sounds nice in theory: being able to cut taxes and in turn receive greater revenues from taxpayers. Too bad any real economist will tell you that there is no free lunch. As the writer mentions, it only works at the extremes. If you could get something for nothing, wouldn't every government do it? A real economist will also tell you that what cannot go on forever has a tendency to stop. The deficit cannot increase more and more each year without something bad happening. Our government has made it perfectly clear that they will wait until something bad happens that will force them to stop spending. What grand leadership we have in our times.

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He loses a LOT of credibility with this sentence.

Perhaps, but it's important to differentiate Mallaby's editorial, which comes from the op/ed page of the Washington Post, from Niskanen's research, which comes from the Cato Institute, and about which we hear precious little.

Guess we'll have to buy that issue of Atlantic Monthly to get the whole story. Assuming any of us can afford a magazine, what with taxes being as high as they are. :)

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here's the logic for you Larry.

Tell the people that you get what you pay for. Raise taxes to the point that we have no deficit and watch how many people start talking about cutting spending to get these god forsaken taxes down.

Cutting spending is political suicide, if given the choice the American people will choose raising taxes over cutting spending.

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Cutting spending is political suicide, if given the choice the American people will choose raising taxes over cutting spending.

In public opinion polls, the voters say they'll pick raising taxes.

But anybody who actually votes for it better have his retirement plan paid up.

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