Economics Questions

Re: Extending Tax Cuts

Merlin — Sat, 04 Dec 2010 23:35:43 GMT

Excellent point. I suppose you're right, except I still don't see any evidence that we're capable of gaining higher federal income tax revenues (as % of GDP) through tax cuts. It didn't happen under Reagan or Bush 43. My suspicion is Ricardian equivalence. Huge deficits=higher taxes and/or inflation in the future, so tax cuts don't necessarily make for a tax haven. Not for long, anyway. And even if taxes don't go up, there will still be a faultering economy due to the debt problem caused if income increases don't make up for revenue losses (because we can't count on spending cuts.)

Doesn’t Ricardian equivalence kind of fall to the ground in a regime with very high capital mobility? Who cares whether the US is going to raise taxes 5 years from now, if by than I can move my investment elsewhere? Enjoy the moment. Act latter.

Now, Reagan failed in mending the deficit, so it’s patently clear that playing Laffer is not an exact science, and quite far from it. Still, one must take into consideration the rest of the world. Back than, US tax rates were quite low by global standards, so not much capital was gained by further lowering taxes. Nowadays even Europe has lower rates than the US, so the benefits from lower rates would be more palpable. But again, this is no exact science.

Re: Extending Tax Cuts

resist272727 — Sat, 04 Dec 2010 22:19:41 GMT

Merlin:
The Laffer curve is important because, if you’re above it maximum, it’s way easier to convince people to go under. From the maximum downward, that is the real tricky part.

And it wouldn’t take 50 years for revenue to increase due to tax cuts: in the extremely globalized world we live in, a good choice gives results in a few years top. Capital is mobile, and low US rates would attract back capital that has fled for greener pastures. The problem is that the democratic system allows for no coherent decision-making. The king could sit down with his advisors and weigh the pros and cons of tax cuts. Parliaments can’t do that. Every single deputy has been elected by folks who want something, irrespective of the situation. He has no choice to make, all is set.

In this sense, I agree that the Laffer effect should not be overplayed, not because it is irrelevant, but because a democracy does not even tell its own benefit, and would not see higher revenue if it hit it in the face.

Excellent point. I suppose you're right, except I still don't see any evidence that we're capable of gaining higher federal income tax revenues (as % of GDP) through tax cuts. It didn't happen under Reagan or Bush 43. My suspicion is Ricardian equivalence. Huge deficits=higher taxes and/or inflation in the future, so tax cuts don't necessarily make for a tax haven. Not for long, anyway. And even if taxes don't go up, there will still be a faultering economy due to the debt problem caused if income increases don't make up for revenue losses (because we can't count on spending cuts.)

Re: Extending Tax Cuts

shazam — Sat, 04 Dec 2010 17:53:39 GMT

Does anyone here subscribe to the Molyneux view that short term "tax cuts" are actually a negative for liberty in the long run since they allow the state to obtain more revenue?

Re: Extending Tax Cuts

Merlin — Sat, 04 Dec 2010 13:44:47 GMT

The Laffer curve is important because, if you’re above it maximum, it’s way easier to convince people to go under. From the maximum downward, that is the real tricky part.

And it wouldn’t take 50 years for revenue to increase due to tax cuts: in the extremely globalized world we live in, a good choice gives results in a few years top. Capital is mobile, and low US rates would attract back capital that has fled for greener pastures. The problem is that the democratic system allows for no coherent decision-making. The king could sit down with his advisors and weigh the pros and cons of tax cuts. Parliaments can’t do that. Every single deputy has been elected by folks who want something, irrespective of the situation. He has no choice to make, all is set.

In this sense, I agree that the Laffer effect should not be overplayed, not because it is irrelevant, but because a democracy does not even tell its own benefit, and would not see higher revenue if it hit it in the face.

Re: Extending Tax Cuts

Bill — Sat, 04 Dec 2010 06:27:51 GMT

They say keep the tax cuts for folks making less than 250k. Most people make less than that and they figure ya you're right screw the fat cats. In reality small businesses have to gross more than 250 just to survive and pay a couple of employees. Letting the tax cuts expire will hurt small business, forcing some out and making less competition for big business. All these payouts to the TO BIG TO FAIL corporate welfare bums makes it impossible for their smaller counterparts to compete. Once the competition is out of the picture they are free to set prices at will. They are also free to set salaries too. So if you let them screw small business you may as well bend over cause you're next.

Re: Extending Tax Cuts

resist272727 — Sat, 04 Dec 2010 04:14:56 GMT

Merlin:
Sure, but would you prefer higher rates if you knew it would mean lower overall government revenue? I don’t think that would be a sensible choice. What is good form the government’s POV and what’s good form the individual’s do coincide up to a point, the Laffer maximum.

With rates of, say 99% overall revenue would plummet. Should we advocate that?

I don't understand why anyone thinks we're higher than the Laffer maximum. After the Bush tax cuts Income taxes as a percentage of national income went down. It'd probably take 50 years for increase in relative national income due to the tax cuts to result in higher income tax revenues as well. And that's assuming that the theory of Ricardian Equivalence is untrue (I think it's true.)

I don't see what the fuss about the Laffer Curve is anyway. It may be useful if you're the government, but if you're anti-taxation you have no use for it.

Besides, it's not just the federal government that collects taxes. Usually under half of taxes are federal taxes in the U.S.

Re: Extending Tax Cuts

Merlin — Fri, 03 Dec 2010 22:58:25 GMT

I care because governments use tax revenue to enslave, torture, steal, and cage people.

Sure, but would you prefer higher rates if you knew it would mean lower overall government revenue? I don’t think that would be a sensible choice. What is good form the government’s POV and what’s good form the individual’s do coincide up to a point, the Laffer maximum.

With rates of, say 99% overall revenue would plummet. Should we advocate that?

Re: Extending Tax Cuts

mediahasyou — Fri, 03 Dec 2010 22:37:58 GMT

Merlin:
Who gives a hoot about the revenue the government is getting, as long as you pay lower rates?

I care because governments use tax revenue to enslave, torture, steal, and cage people.

Re: Extending Tax Cuts

GooPC — Fri, 03 Dec 2010 05:35:55 GMT

Since the real problem is spending, and not revenue, getting spending under control basically guarantees that the government can help the economy recover.

Currently US expenditures are $6.4 trillion while revenue is $4.5 trillion for 2010. Suppose in 2012 expenditures are $3.5 trillion while revenue remains $4.5 trillion. With an extra $1 trillion, the government has a variety of ways to cut taxes, all of them good (although not necessarily equally good). Fundamentally, it doesn’t matter if the government takes its surplus and cuts personal income taxes, corporate taxes, payroll taxes, or pays off the national dept – every possible solution is beneficial for the economy.

All this debate over tax breaks for the rich or tax breaks for the poor or tax breaks for corporations is rather trivial. If the government was actually in the position to offer a tax reduction, we would already be set for economic recovery.

"If they can get you asking the wrong questions, they don’t have to worry about answers"

Re: Extending Tax Cuts

TheInformant — Thu, 02 Dec 2010 20:56:30 GMT

Thanks everyone with the great replies.

I agree without major spending cuts, then these tax extensions or cuts or rate hikes or w/e they like to call them to appease the population, then we will just go into more debt. More debt usually more inflation. However, recently the dollar is getting stronger, and what I believe is the issue is that not only is the US in this large amount of debt but many countries like our own.

Any comments?

Re: Extending Tax Cuts

Autolykos — Thu, 02 Dec 2010 19:15:25 GMT

Prateek Sanjay:
The worst thing about libertarians is that they waste time talking about taxes, since removing taxes will still leave the government capable of getting it through other dangerous means.

Still, with lower income taxes, one can keep more of his income. In the absence of domestic capital controls, he can then invest more money in inflation hedges, such as gold and silver. (Ceteris paribus, of course.)

Re: Extending Tax Cuts

Prateek Sanjay — Thu, 02 Dec 2010 19:08:32 GMT

Yeah, I wonder if most people are aware that income tax laws around the world are such that certain specified categories of individuals can be exempted from tax if they use their income in such and such manner. A big part of the taxation system is creating what the government calls "economic incentives", and a tax rate cut is basically telling those individuals that it's now less costly for them to simply pay their taxes.

What is interesting is that those incentives mean that the government can carry out certain policies by having people directly spend their money that way instead of taxing it from them and then doing it. Like funding inefficient muncipal power corporations.

And the most interesting part is that it is not a rich v. poor issue, since the rich buy bonds or donate money to political parties anyway. But an ordinary person who suddenly gets a huge inflow of cash from selling his or something will fall into the highest tax bracket, but will not fall in that specified category. I have studied Indian Income Tax law in college, so I know basics of how tax systems work.

And ultimately, talking about taxes is a little pointless. In case of India, the government owns all the banks and can use their huge pool of capital for whatever purpose they want. They also have strong inflationary powers, with India being one of the most inflationary Third World nations out there, and the income tax is paid only by 10% of the working population here. It's more for solidarity or maybe having just another source of revenue, but governments have so many ways of getting money, that taxes are only the modest ways of getting it. The worst thing about libertarians is that they waste time talking about taxes, since removing taxes will still leave the government capable of getting it through other dangerous means.

Re: Extending Tax Cuts

Merlin — Thu, 02 Dec 2010 18:58:21 GMT

There were tax RATE cuts, which were TAX INCREASES

Tax revenue increased.

That's what matters, isn't it? Who gives a hoot about the revenue the government is getting, as long as you pay lower rates?

Re: Extending Tax Cuts

NewLiberty — Thu, 02 Dec 2010 18:55:12 GMT

We're getting into Orwellian language here.

There were no "tax cuts".

There were tax RATE cuts, which were TAX INCREASES

Tax revenue increased.

Re: Extending Tax Cuts

Prateek Sanjay — Thu, 02 Dec 2010 18:11:03 GMT

What is this silly language on Mises.Org?

Just because tax rates have not been increased, they are "extending tax cuts"? Pshaw! Even pro-government progressives have balked at such transparent language.