Supply side economics is working in Kansas!

[realibrad]

Further evidence that tax cuts do not increase revenues:
http://www.nber.org/digest/jul12/w17860.html

I have to say that the literature on this issue is pretty overwhelming on the side of tax cuts not paying for themselves or even coming close.

Now I'm even more confused after reading this.

http://www.nber.org/papers/w13264.pdf

In terms of consequences, our results indicate that tax changes have very large effects on output. Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent.

That too me would mean in the long run, there would be a revenue increase. Did I miss something?

 

[realibrad]

Keep in mind that you have a massive credit/debt bubble in motion on this chart. And with all that credit comes inflated revenues which can and will affect your reasoning potentially leading to a catastrophically incorrect conclusion. This is a complex topic with very complex data sets, almost impossible to analyze under a fiat money system undergoing collapse.

Which is why I was interested to see what would happen in Kansas if this were to last longer. I feel like the side I'm taking is logical, but logical does not mean correct.

 

[Engineer]

Looking at the limit as tax rates approaches zero, the amount of revenue brought in goes to infinity.

Everyone know this. (TFP).

(known as the 'laugher' (not Laffer) curve).

Somebody insert the old "We told them that the wealth would trickle down" image...seems appropriate right now.

 

[fskimospy]

Now I'm even more confused after reading this.

http://www.nber.org/papers/w13264.pdf

That too me would mean in the long run, there would be a revenue increase. Did I miss something?

Yes. First, their paper is an outlier and has come under some significant criticism for their choice of classifications.

Second, and for the purposes of our discussion more importantly, they are talking about GDP and not revenues. Even when you factor in GDP growth you're still talking about less revenue.

For example (assuming their 1:3 ratio):
Condition 1:
Tax rate of 9% with a GDP of $100 = $9 in tax revenues.

You then increase taxes by 1% of GDP. Let's assume that you would have grown at 3% during this time. That means tax increase GDP stays at $100 and no-tax increase goes up to $103.

With tax increase: .10 * $100 = $10 of tax.
Without tax increase: .9 * $103 = $9.27 of tax.

The inverse would obviously also be true. So again in this case as with others, tax cuts are decreasing revenues.

 

[realibrad]

Yes. First, their paper is an outlier and has come under some significant criticism for their choice of classifications.

Second, and for the purposes of our discussion more importantly, they are talking about GDP and not revenues. Even when you factor in GDP growth you're still talking about less revenue.

For example (assuming their 1:3 ratio):
Condition 1:
Tax rate of 9% with a GDP of $100 = $9 in tax revenues.

You then increase taxes by 1% of GDP. Let's assume that you would have grown at 3% during this time. That means tax increase GDP stays at $100 and no-tax increase goes up to $103.

With tax increase: .10 * $100 = $10 of tax.
Without tax increase: .9 * $103 = $9.27 of tax.

The inverse would obviously also be true. So again in this case as with others, tax cuts are decreasing revenues.

So same people, but why would I choose 1 paper to be right, and not the other?

 

[fskimospy]

So same people, but why would I choose 1 paper to be right, and not the other?

Presumably we've all done good work in our lives and less good work in our lives.

More importantly though, I think the thought experiment I showed below that clearly indicates that tax cuts lead to lost revenues even under this paper's assumptions.

 

[HumblePie]

Tax cuts would only increase revenue if that is enough incentive for the affected population to use those cuts to bring in more people to the area that would add to the net revenue generation.

The problem with big tax cuts, is that revenue from that as an incentive takes a LONG time to materialize. It's not an overnight process. What is an overnight process is the immediate drop in tax revenue due to the cut.

Also, it's very hard to measure of the long term how much net revenue and immigration to the taxed area that a tax cut actually generated as an incentive. As many others factors can impact the mobility of people.

Of course tax increases over time will also cause mobility outwards once the burden gets too much to bear for those living with the increased taxes. Increased taxes of course drive up revenue for the short term, but over the long term may eventually lead to a net decrease if the tax burden gets so great it drives out people. This is especially true if the mobility is due to large companies that move.

 

[realibrad]

Presumably we've all done good work in our lives and less good work in our lives.

More importantly though, I think the thought experiment I showed below that clearly indicates that tax cuts lead to lost revenues even under this paper's assumptions.

That is all short run though.

If you compound that growth of 3% over say 10-20 years you would be far better off now.

yes, the first year you would see less revenue no doubt there. Its the long run that counts here.

 

[fskimospy]

That is all short run though.

If you compound that growth of 3% over say 10-20 years you would be far better off now.

yes, the first year you would see less revenue no doubt there. Its the long run that counts here.

But their results don't say that would be the case. In fact if anything they show that such a decline bottoms out around Q10 and is flat thereafter. (see figures 4 and 5)

 

[CLite]

Supply side works to a certain extent. For instance our corporate taxes are the highest in the world thus leading to business flight and tax havens galore. I'm not claiming tax havens would go away if we lowered our corporate taxes to be more in-line with the rest of the world, but I think it would help a bit.

With regards to personal income taxes, we have an extremely reasonable system that is inline with the rest of the world. Substantially lowering those taxes won't accomplish much except underfund essential infrastructure projects which if done locally will lead to flight as people want decent local services. Sure some people with mansions will have their private communities and think everything is peachy but the rest of the middle class will flee with terrible local services.

 

[BoberFett]

Tax cuts just for the sake of tax cuts with the hope that new business development will happen organically is foolish, if your goal is increasing tax revenue. If the goal in KS was lower taxes, it sounds like it worked.

If the goal was increased tax revenues, targeted tax cuts with a solid plan for attracting new capital can work.

 

[realibrad]

But their results don't say that would be the case. In fact if anything they show that such a decline bottoms out around Q10 and is flat thereafter. (see figures 4 and 5)

I think I am understanding the graphs differently. I took it to mean that GDP was 3% lower than it would have normally been with out the tax increase. That compounded over time would leave a smaller base to tax from. So the estimate means every quarter past the 10th will see 3% less growth. That compounded over every quarter after that would mean a decreased base right?

Did I misunderstand the data?

 

[fskimospy]

I think I am understanding the graphs differently. I took it to mean that GDP was 3% lower than it would have normally been with out the tax increase. That compounded over time would leave a smaller base to tax from. So the estimate means every quarter past the 10th will see 3% less growth. That compounded over every quarter after that would mean a decreased base right?

Did I misunderstand the data?

Yes it is the cumulative total, not the rate.

3% less growth every quarter would be INSANE. That would basically mean that a 1% of GDP tax increase would plunge every developed economy on earth into an endless recession.

 

[realibrad]

Yes it is the cumulative total, not the rate.

3% less growth every quarter would be INSANE. That would basically mean that a 1% of GDP tax increase would plunge every developed economy on earth into an endless recession.

Not that it would make GDP shrink 3% each quarter. I thought it was saying that if the growth was 1% that after the tax change, it would grow at .97% every quarter.

 

[fskimospy]

Not that it would make GDP shrink 3% each quarter. I thought it was saying that if the growth was 1% that after the tax change, it would grow at .97% every quarter.

It's definitely showing cumulative effects on GDP.

 

[senseamp]

I hope Brownback gets reelected and gets to live with the economic mess he created instead of passing it to a Democrat like Bush did. This could discredit Republican economic policies in Kansas and be an example to others, especially if he doubles down on the tax cuts as he has been planning to.

 

[realibrad]

It's definitely showing cumulative effects on GDP.

It says this

The estimated cumulative impact shown in Figure 4 suggests that in response to a tax increase of one percent of GDP, over the next three years output is on average 1.8 percent lower than it otherwise would have been.

That to me says that if there was 1% growth per quarter before the tax change, it would turn into .97% or 3% subtracted from 1% growth. The effect levels off after the 10th quarter, but it will always drag down what ever the gdp was by 3%.

 

[fskimospy]

It says this

That to me says that if there was 1% growth per quarter before the tax change, it would turn into .97% or 3% subtracted from 1% growth. The effect levels off after the 10th quarter, but it will always drag down what ever the gdp was by 3%.

I'm sorry but I just don't think that's what the paper is saying. My interpretation of their results is echoed by these two individuals as well:

http://econbrowser.com/archives/2007/04/new_estimates_o

http://streetlightblog.blogspot.com/2007/04/macroeconomic-effects-of-tax-changes.html

Additionally, you'll find some overall criticisms of the paper in there.

 

[Anarchist420]

Supply side works to a certain extent. For instance our corporate taxes are the highest in the world thus leading to business flight and tax havens galore. I'm not claiming tax havens would go away if we lowered our corporate taxes to be more in-line with the rest of the world, but I think it would help a bit.

i agree with that. it is not an all or nothing thing as so many like neo-Republicans who support them believe and so many "progressives" like eskimospy believe. i think that reducing the top marginal income tax rate results in a negligible revenue reduction. in fact, i think rothbard said something like per-PPR tax revenues under were ~97% of what they were under jimmy carter [link].

fwiw, reducing the 10% and 15% brackets to 5% and keeping everything else the same would result in much less revenue than only cutting the top 2 brackets by 8%age points each

 

[sandorski]

Clearly the Tax Cuts were not deep enough!

 

[AyashiKaibutsu]

If we just cut taxes to zero and let corporations run everything we'd live in a true utopia!

 

[brycejones]

If we just cut taxes to zero and let corporations run everything we'd live in a true utopia!

Well then come to Kansas!

 

[AyashiKaibutsu]

Well then come to Kansas!

They haven't gone far enough. Once they take it all the way it'll flip over and become paradise.

 

[Engineer]

Relevant article: http://finance.yahoo.com/news/why-state-tax-cuts-aren-094500071.html

Why state tax cuts aren't driving job growth.

 

[BurnItDwn]

Trickle down is bullshit. Everything grows from the ground up.