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6 months from the largest tax increases in history (pg. 10)
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MisterOpus1
Sorry, I had a thing.

quote:
Originally posted by The17sss
You've had me thinking about this topic for the last 48 hours. You definitely know more about business than the strict academics in this forum, but hear me out on this:

The Bush tax cuts benefited all levels of income across the spectrum, not just the top 2%.


True, however the two questions that keep being rehashed and seemingly being avoided by you (and Conservatives for that matter) are:

1. Who benefited the most
2. What helps stimulate the economy the best

We’ve gone over this time and again, but here’s some more information worth noting:

quote:
Two-thirds of the nation’s total income gains from 2002 to 2007 flowed to the top 1 percent of U.S. households, and that top 1 percent held a larger share of income in 2007 than at any time since 1928, according to an analysis of newly released IRS data by economists Thomas Piketty and Emmanuel Saez.
During those years, the Piketty-Saez data also show, the inflation adjusted income of the top 1 percent of households grew more than ten times faster than the income of the bottom 90 percent of households.

http://www.cbpp.org/cms/index.cfm?fa=view&id=2908


Now the conservative argument is that the most affluent pays the highest amount of taxes and should therefore receive the most return on tax breaks. Of course that’s a logical argument, however it’s clear from above they were very disproportional in terms of actually helping people (and done deliberately so, IMO). Furthermore, those who earned above $1 million/yr saw an increase in their income of approx 7.5%, while the middle class saw a rise of about 2.3%, and the lower class less than 1%. In effect, the tax cuts of Bush were more regressive:

quote:
Put another way, households with incomes over $1 million will hold a larger fraction of total U.S. after-tax income than they would have received without the tax cuts, while households in the middle and bottom quintiles will hold a smaller share. The tax cuts thus have widened, rather than narrowed, income gaps, making them regressive.

http://www.cbpp.org/cms/?fa=view&id=1193
http://www.cbpp.org/cms/?fa=view&id=692


So it’s clear from question #1 who benefited the most from the tax cuts, and was done so in a deliberate disproportionate manner that clearly helped out the finances of the wealthy to a much greater percentage than anyone else. So then we need to ask question #2, and see if giving these huge tax breaks to the wealthy stimulated the economy more than some other measures would, i.e. gave more bang for the buck.

Umm, no. Not even ing close:

quote:
Given the economy’s present weakness, some argue that now is not the time to allow the 2001 and 2003 tax cuts for high-income households to expire. But analysis in a recent CBO report decisively refutes this argument.[1] CBO examined 11 options to stimulate growth and job creation and found that extending the 2001 and 2003 tax cuts in general came in last in effectiveness. [2] CBO concluded that a job-creation tax credit, funds to help states balance their budgets with fewer cuts in services and tax increases, and extended unemployment insurance benefits would all generate more jobs and growth on a dollar-for-dollar basis.

Furthermore, CBO indicated that extending the tax cuts for high-income households in particular would rate even lower in effectiveness than extending all of the tax cuts. This is because, as CBO explained, “higher-income households … would probably save [rather than spend] a larger fraction of their increase in after-tax income.”[3] An economy in a recession or the early stages of a recovery needs more spending, not more saving.

In short, CBO found extending the tax cuts for high-income households to be the worst of all options under discussion for preserving or creating jobs and boosting economic growth while the economy is weak.
http://www.cbpp.org/cms/index.cfm?fa=view&id=3241#_ftn3


Let’s just chew on those two lines in bold above again:

quote:
CBO examined 11 options to stimulate growth and job creation and found that extending the 2001 and 2003 tax cuts in general came in last in effectiveness.

Furthermore, CBO indicated that extending the tax cuts for high-income households in particular would rate even lower in effectiveness than extending all of the tax cuts. This is because, as CBO explained, “higher-income households … would probably save [rather than spend] a larger fraction of their increase in after-tax income.”[3]


When you see for yourself the table that the CBO provides on page 26 of their report:

http://www.cbo.gov/ftpdocs/108xx/do...ent.pdf#page=26

It’s clear that Bush’s tax cuts that disproportionately go to the wealthy are one of the worst bangs for the buck, period. This is a point that you need to acknowledge or accept in some way, shape, or form. You have not provided any evidence to the contrary, because there simply is none.

quote:
As for letting them expire on the top 2%... yeah perhaps they wouldn't be as personally affected as a Walmart register lady; like I said before, many of them can afford to lay low and that's what they'll do until the storm blows over. But included in that 2% group are at least half of small business owners- the vast majority of job creators and some of the most productive people for our economy- who show just over that much in profit each year (as explained earlier, Sub Chapter S Corp owners have to show their company's profits on their personal tax returns).


I think I demonstrated earlier that your argument pertaining to S-corp owners is not as scary as you depict. Furthermore, it’s funny how so many of the top corporations claim S-corp status in order to attain the same type of breaks that small business owners attain as I demonstrated earlier, which really defeats the purpose of having an S-corp status in the first place.

quote:
This includes the likes of Lee Fong the laundromat owner whose life's investment is tied up in his small business with 5 employees. Squeeze a little more money out of him, and Lee's going to reduce workers' hours, lay someone off, or simply not hire. The very "rich" that Obama believes need no tax relief are the same people who employ. These same "rich" 2% already pay about 50% of all income taxes, and the top 10% of earners pay over 70% of all income taxes. Real fair.


Nice stump speech, Senator. You wouldn’t happen to have any more bumper stickers I can buy, do you?

quote:
A few "targeted" tax breaks for short term periods of time aren't going to create growth for small businesses. Just one example, those breaks will EASILY be offset by one of the new health care mandates that requires owners to produce a 1099 form, at a cost of about $600 each, for every entity they do business with. It's a shell game man. I only have 11 employees at the moment, and I do business with about 100 different entities ranging from insurance companies, building owners, property managers, contractors, etc. just out of my Charlotte office……..


Look, I can respect the fact that you’re a small business owner, and that there are some enormous pressures in finances as a consequence to your position. My business’ owner has just recently offered me a partnership, which I’m flattered as hell, and am only beginning to learn the ropes on the finances of the business. I’m already saying “Holy Hell!” at least 10 times a day more than I ever have in my life, but I’m also eager as hell to keep learning and working towards growing our company.

The bottom line, however, is when I read your sentiments above, much of it is anecdotal and speculative at best. It’s not that I think you’re lying. As misguided as I think you are much of the time, you seem honest. It’s just that I can’t apply your particular situation and speculation on what COULD possibly occur to your business or other businesses to everyone else, and it would be patently absurd to do so at this point. I think it’s best to hold such speculations on what could happen in the future under this current Administration until it actually happens. Until then it’s only just speculation and anecdotes.

quote:
3 words: $0 down payments.


I think you missed the point of my argument of following your logic to absurdity completely.

quote:
Well in these examples, pretty much, yes. The factual evidence in exponential capital investment, rise in risk taking, direction towards a deficit surplus, and GDP growth post 1997 Taxpayer Relief Act (compared to post 1993 massive tax increases) is irrefutable.


So is your ignorance to the fact that correlation is not causation. I posted this previously as a more detailed reply to this argument, and I’d like your response in return:

quote:
Myth 2: Even if the tax cuts reduced revenues initially, they boosted revenues and lowered deficits in 2005 to 2007.

“Some in Washington say we had to choose between cutting taxes and cutting the deficit… Today’s numbers [the updated 2006 budget projections] show that that was a false choice. The economic growth fueled by tax relief has helped send our tax revenues soaring.” — President Bush, July 11, 2006

Reality: Robust revenue growth in 2005-2007 has not made up for extraordinarily weak revenue growth over the previous few years.

When discussing revenue growth since the enactment of the tax cuts, Administration officials typically focus only on revenue growth since 2004. This provides a convenient starting point for their arguments, as it sets a very low bar. In 2001, 2002, and 2003, revenues fell in nominal terms (i.e. without adjusting for inflation) for three straight years, the first time this has occurred since before World War II. Measured as a share of the economy, revenues in 2004 were at their lowest level since 1959. Given this historically low starting point, it is not surprising that revenues have recovered since then. Supporters of the tax cuts selectively cite revenue growth over just the past three years to argue that the tax cuts fueled increases in revenues.

Even taking into account the growth in revenues in fiscal years 2005-2007, total revenues have just barely increased over the 2001-2007 business cycle, after adjusting for inflation and population growth. (The business cycle began in March 2001, when the 1990s business cycle hit its peak and thereby came to an end.) In contrast, six and a half years after the peak of previous post-World War II business cycles, real per-capita revenues had increased by an average of 12 percent, and in the 1990s, real per-capita revenues were up 16 percent (see Table 1). Revenues in 2007 were still more than $250 billion short of where they would have been had they grown at the rates typical in other recoveries.

Further, while the Administration has credited the tax cuts with the drop in the fiscal year 2007 deficit to “only” $162 billion, the 2007 budget would have been in surplus were it not for the tax cuts. Based on Joint Committee on Taxation estimates, the total 2007 cost of tax cuts enacted since January 2001 was $300 billion (taking into account the increased interest costs on the debt that have resulted from the deficit financing of the tax cuts). This means that even with the spending for the wars in Iraq and Afghanistan, the federal budget would have been in surplus in 2007 if the tax cuts had not been enacted, or if their costs had been offset. While supporters of these tax cuts claim that their positive economic effects have lowered their cost, the non-partisan Congressional Research Service found in a September, 2006 report that “at the current time, as the stimulus effects have faded and the effect of added debt service has grown, the 2001-2004 tax cuts are probably costing more than their estimated revenue cost.”

Looking out over the next several decades, when deficits are projected to be far larger (because of the impact on the budget of the continued rise in health care costs and the retirement of the baby boomers), the tax cuts, if extended, will still be a major contributor to the nation’s fiscal problems. (http://www.cbpp.org/1-29-07bud.htm) To put the long-run cost of the tax cuts in perspective, the 75-year Social Security shortfall, about which the President and Congressional leaders have expressed grave concern, is less than one-third the cost of the tax cuts over the same period. (http://www.cbpp.org/3-31-08socsec.htm)

http://www.cbpp.org/cms/?fa=view&id=692


quote:
And, the Community Reinvestment Act which encouraged/forced bank lending to deadbeats, and the Fannie/Freddie debacle certainly wasn't spearheaded by Republicans. Some tidbits from some of the dozen attempts by Bush to reign in Fannie/Freddie's ticking time bomb:


Christ, you are all over the ing map with this thread. And now we’re back to the tried and true Conservative ing argument that it’s all Fannie’s and Barney’s fault (oh, and Maxine too). I’m just curious, in your eyes, was there ANY policies created by Conservative lawmakers that contributed to the mess? I know a few myself, but I’m curious if you’re willing to admit to any of them.

First off, I’m always suspect of your Conservative blogs and WSJ op-ed sources, since many of us here have proven time and again how they tend to misquote and take quotes completely out of context (like you did with Krugman a few pages ago in this very thread). But second, even if we take what Barney, Maxine said at face value, let’s take into consideration what the staff of the Board of Governors of the Federal Reserve System in their analysis of the crisis:

quote:
"the crisis is rooted in the poor performance of mortgage loans made between 2004 and 2007."

http://www.federalreserve.gov/newse...03_analysis.pdf


Considering you had quotes that preceeded this time, I fail to see how what they said was somehow relevant to anything. There was no crisis at this time. Furthermore, the narrative of Conservatives of Fannie and Freddie somehow manipulating the markets and bringing it down via widening the base of home ownership was exactly opposite of what occurred. Rather, it was the manipulation and lax of regulation from the markets that brought Fannie down.

Let’s also keep in mind on WHO exactly was in control of the House and the Executive back in 2003.

And who was it who “insisted that Fannie Mae and Freddie Mac meet ambitious new goals for low-income lending?" Why, that was George Bush! (http://www.nytimes.com/2008/12/21/b...&pagewanted=all) [/QUOTE]

Let’s also keep in mind some of the things Frank did do:

quote:
Frank's efforts to enhance regulatory oversight on Fannie Mae and Freddie Mac include:

• In 2005, Frank, then the ranking Democrat on the House Financial Services Committee, worked with committee chairman Rep. Michael Oxley (R-OH) on the Federal Housing Finance Reform Act of 2005, which would have established the Federal Housing Finance Agency (FHFA) to replace the Office of Federal Housing Enterprise Oversight (OFHEO) as overseer of the activities of Fannie Mae and Freddie Mac. After voting for the bill in committee, Frank voted against final passage of the bill on the House floor, stating that he was doing so because an amendment to the bill on the House floor imposed restrictions on the kinds of nonprofit organizations that could receive funding under the bill.

• In early 2007, as chairman of the House Financial Services Committee, Frank sponsored H.R. 1427, a bill to create the FHFA, granting that agency "general supervisory and regulatory authority over" Fannie Mae and Freddie Mac, and directing it to reform the companies' business practices and regulate their exposure to credit and market risk. Among other things, Frank's legislation, titled the "Federal Housing Finance Reform Act of 2007," directed the FHFA director to "ensure" that Fannie Mae and Freddie Mac "operate[] in a safe and sound manner, including maintenance of adequate capital and internal controls" and to establish standards for "management of credit and counterparty risk" and "management of market risk." The FHFA was eventually created after Congress incorporated provisions that House Speaker Nancy Pelosi (D-CA) said were "similar" to those of H.R. 1427 into the Housing and Economic Recovery Act of 2008, which the president signed into law on July 30.

Some in the conservative media have taken the charge further, suggesting that in the 1990s, Frank allowed his relationship with Fannie Mae executive Herb Moses to affect his responsibility as a senior member of the House Financial Services Committee to conduct oversight over Fannie Mae. For example, in an October 3 article, Fox News deputy Washington Managing editor Bill Sammon asserted, in a charge he later echoed on Fox News' The O'Reilly Factor, "Unqualified home buyers were not the only ones who benefitted from Massachusetts Rep. Barney Frank's efforts to deregulate Fannie Mae throughout the 1990s. So did Frank's partner, a Fannie Mae executive at the forefront of the agency's push to relax lending restrictions."

http://mediamatters.org/research/200810100022



quote:
As you know Mrs. Waters is currently under investigation for multiple ethics violations.


Your sleight of hand is amusing. Her ethics charges are not even remotely relevant to what you quoted her as stating above. Cute.

quote:
Continuted:

http://online.wsj.com/article/SB122290574391296381.html

Sickening.


What’s sickening is either your continual misunderstanding or complete willful ignorance of what exactly caused the crisis and what role Fannie and Freddie played. I’m really trying hard to see what you quoted above from Schumer and Dodd is somehow damning. I couldn’t agree more with them. Now we’ve already discussed Fannie and Freddie at length here and elsewhere. I suggest you go back in this thread and re-read the points I made on it and how their culpability was nowhere near as drastic as you attempt to depict. If you want to continue discussing them, fine, but do your best to try and refute those points I made earlier about their culpability (i.e. they got kicked out of the subprime stuff when it went out of control and subprimes were gobbled up by private investors instead), rather than continue to make quotes that really do your arguments no favors.

quote:
So you think we'd be better off now if we would have spent even more?


For infrastructure, unemployment benefits, and those things that the CBO analysis I linked above depict over tax cuts, yes. Please demonstrate for us now how tax cuts for the wealthy somehow trickle down and stimulate the economy better instead.

Then demonstrate for us with evidence to support your assertions how letting those tax cuts for the wealthy in the top 2% somehow will devastate our economy completely, as the title of this thread insinuates.

quote:
I'll get to that and Krugman below. For now, I'll let these gentlemen speak for me:

New York Times ombudsman Daniel Okrent: "Paul Krugman has the disturbing habit of shaping, slicing and selectively citing numbers in a fashion that pleases his acolytes but leaves him open to substantive assaults."


Yeah, a cheap shot at Krugman as Okrent was leaving the NYTimes. What a ing coward. When Krugman pressed Okrent to give examples of such behavior, Okrent did with one instance. Note Krugman’s response and some commentary from a progressive economist blogger:

quote:
Krugman: When I asked Daniel Okrent for the specifics behind his final attack, he offered two examples of what he claimed was improper use of numbers. This was the first time I heard from him, or anyone else, about either alleged problem. Let me start with the example that, I think, sheds most light on what is going on: Mr. Okrent's claim that I engaged in "blending, without explanation, numbers from the household survey and the establishment survey -- apples and oranges -- apparently in order to make a more vivid political point about Bush (5/25/04)."... I pointed out that his specific attacks -- especially the blatantly wrong characterization of my 5/25/04 column -- were unfair. I asked him to do what he would have expected me to do, and admit that he had been in error. He refused. Let me repeat that Mr. Okrent never raised these issues as public editor. He now says that he didn't because he "experienced your best-defense-is-a-good-offense approach, and found it futile to deal with it."...

To see that Okrent's example is wrong, consider this: Four months before Okrent wrote, the Bush Administration in its 2004 Economic Report of the President did the same calculation as Krugman using the same census and establishment survey sources. You can see it on p. 94:
quote:
The Labor Market: Nonfarm payroll employment fell an average of 50,000 workers per month in the first seven months of 2003, before increasing 35,000 in August, 99,000 in September, and an average of 48,000 per month in the fourth quarter.... In the fourth quarter, the unemployment rate averaged 5.9 percent.... Because the labor force is constantly expanding, employment must be growing moderately just to keep the unemployment rate steady. For example, if the labor force is growing at the same rate as the population (about 1 percent per year), employment would have to rise 110,000 a month just to keep the unemployment rate stable, and larger job gains would be necessary (and are expected) to induce a downward trend in the unemployment rate...


The only difference between the Bush Administration and Krugman is that the Bush Administration assumed 1% per year as the rate of adult non-elderly population growth, and hence concluded that nonfarm payroll employment had to grow at 1/12 of a percent per month--110,000, that is--in order to keep labor market conditions stable. But growth is more like 1.25% per year. With payroll employment of 130 million, that's Krugman's number of about 140K per month.

Sigh.

As I said, a certain horrifying fascination.

As one might expect, this made Paul Krugman just the weeniest, teeniest bit irritated:

quote:
Paul Krugman III: Okrent is lying to cover his mistake when he accused me of blending data from the household and establishment surveys. He now claims that he was only referring to my estimate of how many payroll jobs the economy needs to add per month [to keep labor market conditions from deteriorating], which for some reason he thinks is based on the household survey. But that's not what he said to me: he claimed that the basic numbers I gave on job growth were mix-and-match. In fact, in our correspondence, when I said that it was all payroll data, he declared that "your insistence that you relied only on one set of numbers is very puzzling. I don't see how the math works any other way; maybe you could further enlighten me." In other words, [Okrent] screwed up completely...

http://delong.typepad.com/sdj/2008/...s-ex-new-y.html

Okrent was a weenie and a coward, and he didn’t know on what he was talking about.


quote:
Robert Barro, the distinguished Harvard economist: "Krugman just says whatever is convenient for his political argument. He doesn't behave like an economist. And the guy has never done any work in Keynesian macroeconomics, which I actually did. He has never even done any work on that. His work is in trade stuff. He did excellent work, but it has nothing to do with what he's writing about."
http://www.theatlantic.com/politics...bert-barro/370/

(an excellent interview in the above link actually... you should read it)


Ahh yes, Robert J. Farrow, Senior Fellow at that wonderful Conservative think tank Hoover Institution:

http://www.hoover.org/fellows/10049

Putting my ad hominem aside for a moment, I think the responses to his interview below are appropriate:

quote:
Sorry, but Barro sounds an awful lot like other supply siders out there who ignore real wage levels and the tilting of wealth to the upper end. The 2003 tax cut did nothing to increase wages in real terms, but it sure provided a lot of capital to Wall Street firms. Tax cuts on the lower end DO lead to consumption. Low-end folks just can't save very much. But high-end taxes lead to more savings and not consumption. Probably not even much investment these days either.

And the idea that shifting tax rates will such a behavioral effect seems rather dopey. Sure, if you're talking about reducing a 70% level to 30% then you'll have major behaviorial change. But a shift of about 3-5% will do very little to incent people to work harder.

Barro says this proposal is "just like throwing money at people"...which apparently isn't stimulus...but that "the best evidence for expanding GDP comes from the temporary military spending that usually accompanies wars -- wars that don't destroy a lot of stuff." So building bombs is stimulus.

But how, exactly, is "temporary military spending" not "throwing money at people"?? If he can acknowledge that building bombs to drop on Iran can help the economy, how can he deny that weatherizing homes here at home can't help?

The man is in denial.

With some astonishment, Krugman pointed out a glaring mistake in Barro's analysis of WWII data.

It would have been nice if Barro had responded to this criticism instead of just making snotty personal remarks about Krugman.



quote:
Speaking of false logic, by your rationale we should tax everything 95-100% for best economic growth results.


Of course not, and nothing in my arguments directs or even implies that. However I do contend and history bears this out that higher taxes do NOT always equate to slowing down or even killing the economy.

I’m tired and need to get to bed. I’ll try to address the arguments against Krugman later. I will CYA myself a little and state that I don’t think Krugman or any macroeconomist is ever right on all points, and indeed I’m sure he’s been found to incorrect on his forecast analysis at times. He’s a very well-known figure, and with his popularity comes a great deal of criticism, some of it rightly so.
Shakka
quote:
Originally posted by pkcRAISTLIN
The argument is that cutting taxes cuts taxation revenue.


I'll go back and read the rest of your post when I get a chance today. For the time being I will say that I don't dispute this in the short-term. The problem is we need to think about long-term solutions. Everyone is so concerned about putting a band-aid on things near-term that we're not coming up with the long-term solutions to the problems we've created. Yes, over the next year or so in a recession, Government receipts go down. However with lower marginal tax rates, more private capital is left to put to work when an economy begins to recover that GDP growth will be stronger in the intermediate-to-long-term which will result in a stronger rebound in tax revenues.

Lefties like to point to the Clinton years and say that marginal tax rates were higher than they are today yet there was economic growth, so therefore it can't be a bad thing. However, the 90's were a period of spectacular productivity growth that isn't likely to be repeated.

Righties will point to the 80's under Reagan when marginal tax rates were cut substantially, yet combined with a strong economic recovery, federal tax receipts increased substantially in the following years.

My personal stance is that the private sector is our economic driver and more capital left in the hands of the private sector means more resources to drive growth in the private sector when the economy is on the mend.

Combine that with some actual fiscal restraint in Washington and I think we get our country (mine, not yours;)) back on the right track.
Comrade Stalin
Fuuuu, Opus's posts are ing books man.
Shakka
If you read Opus'post (and I assume many on the left, or those that hate rich people;)) you find that the substance is more of an argument that it's not fair to cut rich people's taxes because they BENEFIT more, not because of the impact on federal revenues. It's a class warfare argument that, to me, suggests they are less concerned with balancing the budget and addressing deficits than they are concerned about making sure the affluent don't realize any financial windfalls. It's a bait-and-switch argument at its finest. Never mind that the real argument is that lower marginal tax rates actually help increase federal revenues over time because more private capital is able to be put to better use and letting all people keep more of their own money is a powerful incentive for people to continue to go out and spend and support the economy. In their eyes, if a rich person sees benefit, it must be bad policy. Because everyone knows that rich people didn't earn their money and all wealth is actually the property of the government to distribute as it best sees fit.

quote:
Originally posted by Opus
Furthermore, CBO indicated that extending the tax cuts for high-income households in particular would rate even lower in effectiveness than extending all of the tax cuts. This is because, as CBO explained, “higher-income households … would probably save [rather than spend] a larger fraction of their increase in after-tax income.”[3]


Whether they save it or spend it, that money still stays in the private sector. If they spend it, great. If they save it, the bank or financial institution they put it in will likely lend it out to businesses that need capital and will create jobs. If it goes to the government, it just gets confiscated and wasted on bull. However, with new FinReg, who knows how that incentive system will now be altered since the government wants to punish the financial sector. Some of the proposals are great and make sense (like limiting leverage and requiring bigger capital cushions, as well as providing a central clearing house for OTC derivatives), but others are less useful (like using the financial collapse as an excuse for greater oversight of hedge funds that did not cause the problems and did not take bailout money, as well as saying "too big to fail" would be fixed, even though the biggest banks have only gotten bigger).

As to the real argument that I've been making (that lower marginal tax rates are a bigger boon to long-term economic growth and that spending is the problem, not revenue). The article below also highlights things like lower incidents of tax avoidance/evasion with lower rates which helps raise tax receipts.:

Source

quote:
April 1996
The Reagan Tax Cuts: Lessons for Tax Reform

During the summer of 1981 the central focus of policy debate was on the Economic Recovery Tax Act (ERTA) of 1981, the Reagan tax cuts. The core of this proposal was a version of the Kemp-Roth bill providing a 25 percent across-the-board cut in personal marginal tax rates. By reducing marginal tax rates and improving economic incentives, ERTA would increase the flow of resources into production, boosting economic growth. Opponents used static revenue projections to argue that ERTA would be a giveaway to the rich because their tax payments would fall.

The criticism that the tax payments of the rich would fall under ERTA was based on a static conception of human behavior. As a 1982 JEC study pointed out,[1] similar across-the-board tax cuts had been implemented in the 1920s as the Mellon tax cuts, and in the 1960s as the Kennedy tax cuts. In both cases the reduction of high marginal tax rates actually increased tax payments by "the rich," also increasing their share of total individual income taxes paid. Unfortunately, estimates of ERTA by the Democrat-controlled CBO continued to show falling tax payment by upper income taxpayers, even after actual IRS data had become available showing a surge of income tax payments by affluent taxpayers.

Given the current interest in tax reform and tax relief, a review of the effects of the Reagan tax cuts on taxpayer behavior and tax burden provides useful information. During the 1980s ERTA had reduced personal tax rates by about 25 percent, while the Tax Reform Act of 1986 chopped them yet again.

Tax Rates and Tax Revenues

High marginal tax rates discourage work effort, saving, and investment, and promote tax avoidance and tax evasion. A reduction in high marginal tax rates would boost long term economic growth, and reduce the attractiveness of tax shelters and other forms of tax avoidance. The economic benefits of ERTA were summarized by President Clinton's Council of Economic Advisers in 1994: "It is undeniable that the sharp reduction in taxes in the early 1980s was a strong impetus to economic growth." Unfortunately, the Council could not bring itself to acknowledge the counterproductive effects high marginal tax rates can have upon taxpayer behavior and tax avoidance activities.

Since 1984 the JEC has provided factual information about the impact of the tax cuts of the 1980s. For example, for many years the JEC has published IRS data on federal tax payments of the top 1 percent, top 5 percent, top 10 percent, and other taxpayers. These data show that after the high marginal tax rates of 1981 were cut, tax payments and the share of the tax burden borne by the top 1 percent climbed sharply. For example, in 1981 the top 1 percent paid 17.6 percent of all personal income taxes, but by 1988 their share had jumped to 27.5 percent, a 10 percentage point increase. The graph below illustrates changes in the tax burden during this period.

Click here to see Figure 1.

The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.

A middle class of taxpayers can be defined as those between the 50th percentile and the 95th percentile (those earning between $18,367 and $72,735 in 1988). Between 1981 and 1988, the income tax burden of the middle class declined from 57.5 percent in 1981 to 48.7 percent in 1988. This 8.8 percentage point decline in middle class tax burden is entirely accounted for by the increase borne by the top one percent.

Several conclusions follow from these data. First of all, reduction in high marginal tax rates can induce taxpayers to lessen their reliance on tax shelters and tax avoidance, and expose more of their income to taxation. The result in this case was a 51 percent increase in real tax payments by the top one percent. Meanwhile, the tax rate reduction reduced the tax payments of middle class and poor taxpayers. The net effect was a marked shift in the tax burden toward the top 1 percent amounting to about 10 percentage points. Lower top marginal tax rates had encouraged these taxpayers to generate more taxable income.

[i] The 1993 Clinton tax increase appears to having the opposite effect on the willingness of wealthy taxpayers to expose income to taxation. According to IRS data, the income generated by the top one percent of income earners actually declined in 1993. This decline is especially significant since the retroactivity of the Clinton tax increase in that year limited the ability of taxpayers to deploy tax avoidance strategies, temporarily resulting in an increase in their tax burden. Moreover, according to the FY 1997 Clinton budget submission, individual income tax revenues as a share of GDP will be lower during the first four years of the Clinton tax increase, which include the effects of the 1990 tax increase, than under the last four years of the Reagan tax changes (FY 1986-89). Furthermore, according to a study published by the National Bureau for Economic Research,[2] the Clinton tax hike is failing to collect over 40 percent of the projected revenue increases.[i]

Incidentally, the claim that unrealistic supply side Reagan Administration revenue projections caused large budget deficits during the 1980s is false. Nonetheless, this false allegation is often used against current tax reform proposals. The official Reagan revenue projections immediately following enactment of ERTA did not assume huge revenue increases, and were actually quite close to the CBO revenue projections. Even the Democrat-controlled CBO projected that deficits would fall after the enactment of the Reagan tax cuts. The real problem was a recession that neither CBO nor OMB could foresee. Even so, individual income tax revenues rose from $244 billion in 1980 to $446 billion in 1989.


Conclusion

The Reagan tax cuts, like similar measures enacted in the 1920s and 1960s, showed that reducing excessive tax rates stimulates growth, reduces tax avoidance, and can increase the amount and share of tax payments generated by the rich. High top tax rates can induce counterproductive behavior and suppress revenues, factors that are usually missed or understated in government static revenue analysis. Furthermore, the key assumption of static revenue analysis that economic growth is not affected by tax changes is disproved by the experience of previous tax reduction programs. There is little reason to expect static revenue analysis to evaluate the economic or distributional effects of current tax reform proposals much better than it evaluated the Reagan tax program 15 years ago.

Christopher Frenze
Chief Economist to the Vice-Chairman
Shakka
quote:

Principles for Economic Revival

Our prosperity has faded because policies have moved away from those that have proven to work. Here are the priorities that should guide policy makers as they seek to restore more rapid growth.

By GEORGE P. SHULTZ, MICHAEL J. BOSKIN, JOHN F. COGAN, ALLAN MELTZER AND JOHN B. TAYLOR

America's financial crisis, deep recession and anemic recovery have largely been driven by economic policies that have deviated from proven fact-based principles. To return to prosperity we must get back to these principles.

The most fundamental starting point is that people respond to incentives and disincentives. Tax rates are a great example because the data are so clear and the results so powerful. A wealth of evidence shows that high tax rates reduce work effort, retard investment and lower productivity growth. Raise taxes, and living standards stagnate.

Nobel Prize-winning economist Edward Prescott examined international labor market data and showed that changes in tax rates on labor are associated with changes in employment and hours worked. From the 1970s to the 1990s, the effective tax rate on work increased by an average of 28% in Germany, France and Italy. Over that same period, work hours fell by an average of 22% in those three countries. When higher taxes reduce the reward for work, you get less of it.
[shultz]

Long-lasting economic policies based on a long-term strategy work; temporary policies don't. The difference between the effect of permanent tax rate cuts and one-time temporary tax rebates is also well-documented. The former creates a sustainable increase in economic output, the latter at best only a transitory blip. Temporary policies create uncertainty that dampen economic output as market participants, unsure about whether and how policies might change, delay their decisions.

Having "skin in the game," unsurprisingly, leads to superior outcomes. As Milton Friedman famously observed: "Nobody spends somebody else's money as wisely as they spend their own." When legislators put other people's money at risk—as when Fannie Mae and Freddie Mac bought risky mortgages—crisis and economic hardship inevitably result. When minimal co-payments and low deductibles are mandated in the insurance market, wasteful health-care spending balloons.

Rule-based policies provide the foundation of a high-growth market economy. Abiding by such policies minimizes capricious discretionary actions, such as the recent ad hoc bailouts, which too often had deleterious consequences. For most of the 1980s and '90s monetary policy was conducted in a predictable rule-like manner. As a result, the economy was far more stable. We avoided lengthy economic contractions like the Great Depression of the 1930s and the rapid inflation of the 1970s.

The history of recent economic policy is one of massive deviations from these basic tenets. The result has been a crippling recession and now a weak, nearly nonexistent recovery. The deviations began with policies—like the Federal Reserve holding interest rates too low for too long—that fueled the unsustainable housing boom. Federal housing policies allowed down payments on home loans as low as zero. Banks were encouraged to make risky loans, and securitization separated lenders from their loans. Neither borrower nor lender had sufficient skin in the game. Lax enforcement of existing regulations allowed both investment and commercial banks to circumvent long-established banking rules to take on far too much leverage. Regulators, not regulations, failed.

The departures from sound principles continued when the Fed and the Treasury responded with arbitrary and unpredictable bailouts of banks, auto companies and financial institutions. They financed their actions with unprecedented money creation and massive issuance of debt. These frantic moves spooked already turbulent markets and led to the financial panic.

More deviations occurred when the government responded with ineffective temporary stimulus packages. The 2008 tax rebate and the 2009 spending stimulus bills failed to improve the economy. Cash for clunkers and the first-time home buyers tax credit merely moved purchases forward by a few months.

Then there's the recent health-care legislation, which imposes taxes on savings and investment and gives the government control over health-care decisions. Fannie Mae and Freddie Mac now sit with an estimated $400 billion cost to taxpayers and no path to resolution. Hundreds of new complex regulations lurk in the 2010 financial reform bill with most of the critical details left to regulators. So uncertainty reigns and nearly $2 trillion in cash sits in corporate coffers.

Since the onset of the financial crisis, annual federal spending has increased by an extraordinary $800 billion—more than $10,000 for every American family. This has driven the budget deficit to 10% of GDP, far above the previous peacetime record. The Obama administration has proposed to lock a sizable portion of that additional spending into government programs and to finance it with higher taxes and debt. The Fed recently announced it would continue buying long-term Treasury debt, adding to the risk of future inflation.

There is perhaps no better indicator of the destructive path that these policy deviations have put us on than the federal budget. The nearby chart puts the fiscal problem in perspective. It shows federal spending as a percent of GDP, which is now at 24%, up sharply from 18.2% in 2000.

Future federal spending, driven mainly by retirement and health-care promises, is likely to increase beyond 30% of GDP in 20 years and then keep rising, according to the Congressional Budget Office. The reckless expansions of both entitlements and discretionary programs in recent years have only added to our long-term fiscal problem.

As the chart shows, in all of U.S. history, there has been only one period of sustained decline in federal spending relative to GDP. From 1983 to 2001, federal spending relative to GDP declined by five percentage points. Two factors dominated this remarkable period. First was strong economic growth. Second was modest spending restraint—on domestic spending in the 1980s and on defense in the 1990s.

The good news is that we can change these destructive policies by adopting a strategy based on proven economic principles:

• First, take tax increases off the table. Higher tax rates are destructive to growth and would ratify the recent spending excesses. Our complex tax code is badly in need of overhaul to make America more competitive. For example, the U.S. corporate tax is one of the highest in the world. That's why many tax reform proposals integrate personal and corporate income taxes with fewer special tax breaks and lower tax rates.

But in the current climate, with the very credit-worthiness of the United States at stake, our program keeps the present tax regime in place while avoiding the severe economic drag of higher tax rates.

• Second, balance the federal budget by reducing spending. The publicly held debt must be brought down to the pre-crisis safety zone. To do this, the excessive spending of recent years must be removed before it becomes a permanent budget fixture. The government should begin by rescinding unspent "stimulus" and TARP funds, ratcheting down domestic appropriations to their pre-binge levels, and repealing entitlement expansions, most notably the subsidies in the health-care bill.

The next step is restructuring public activities between federal and state governments. The federal government has taken on more responsibilities than it can properly manage and efficiently finance. The 1996 welfare reform, which transferred authority and financing for welfare from the federal to the state level, should serve as the model. This reform reduced welfare dependency and lowered costs, benefiting taxpayers and welfare recipients.

• Third, modify Social Security and health-care entitlements to reduce their explosive future growth. Social Security now promises much higher benefits to future retirees than to today's retirees. The typical 30-year-old today is scheduled to get an inflation-adjusted retirement benefit that is 50% higher than the benefit for a typical current retiree.

Benefits paid to future retirees should remain at the same level, in terms of purchasing power, that today's retirees receive. A combination of indexing initial benefits to prices rather than to wages and increasing the program's retirement age would achieve this goal. They should be phased-in gradually so that current retirees and those nearing retirement are not affected.

Health care is far too important to the American economy to be left in its current state. In markets other than health care, the legendary American shopper, armed with money and information, has kept quality high and costs low. In health care, service providers, unaided by consumers with sufficient skin in the game, make the purchasing decisions. Third-party payers—employers, governments and insurance companies—have resorted to regulatory schemes and price controls to stem the resulting cost growth.

The key to making Medicare affordable while maintaining the quality of health care is more patient involvement, more choices among Medicare health plans, and more competition. Co-payments should be raised to make patients and their physicians more cost-conscious. Monthly premiums should be lowered to provide seniors with more disposable income to make these choices. A menu of additional Medicare plans, some with lower premiums, higher co-payments and improved catastrophic coverage, should be added to the current one-size-fits-all program to encourage competition.

Similarly for Medicaid, modest co-payments should be introduced except for preventive services. The program should be turned over entirely to the states with federal financing supplied by a "no strings attached" block grant. States should then allow Medicaid recipients to purchase a health plan of their choosing with a risk-adjusted Medicaid grant that phases out as income rises.

The 2010 health-care law undermined positive reforms underway since the late 1990s, including higher co-payments and health savings accounts. The law should be repealed before its regulations and price controls further damage availability and quality of care. It should be replaced with policies that target specific health market concerns: quality, affordability and access. Making out-of-pocket expenditures and individual purchases of health insurance tax deductible, enhancing health savings accounts, and improving access to medical information are keys to more consumer involvement. Allowing consumers to buy insurance across state lines will lower the cost of insurance.

• Fourth, enact a moratorium on all new regulations for the next three years, with an exception for national security and public safety. Going forward, regulations should be transparent and simple, pass rigorous cost-benefit tests, and rely to a maximum extent on market-based incentives instead of command and control. Direct and indirect cost estimates of regulations and subsidies should be published before new regulations are put into law.

Off-budget financing should end by closing Fannie Mae and Freddie Mac. The Bureau of Consumer Finance Protection and all other government agencies should be on the budget that Congress annually approves. An enhanced bankruptcy process for failing financial firms should be enacted in order to end the need for bailouts. Higher bank capital requirements that rise with the size of the bank should be phased in.

• Fifth, monetary policy should be less discretionary and more rule-like. The Federal Reserve should announce and follow a monetary policy rule, such as the Taylor rule, in which the short-term interest rate is determined by the supply and demand for money and is adjusted through changes in the money supply when inflation rises above or falls below the target, or when the economy goes into a recession. When monetary policy decisions follow such a rule, economic stability and growth increase.

In order to reduce the size of the Fed's bloated balance sheet without causing more market disruption, the Fed should announce and follow a clear and predictable exit rule, which describes a contingency path for bringing bank reserves back to normal levels. It should also announce and follow a lender-of-last-resort rule designed to protect the payment system and the economy—not failing banks. Such a rule would end the erratic bailout policy that leads to crises.

The United States should, along with other countries, agree to a target for inflation in order to increase expected price stability and exchange rate stability. A new accord between the Federal Reserve and Treasury should re-establish the Fed's independence and accountability so that it is not called on to monetize the debt or engage in credit allocation. A monetary rule is a requisite for restoring the Fed's independence.

These pro-growth policies provide the surest path back to prosperity.


Mr. Shultz, a former secretary of labor, secretary of Treasury and secretary of state, is a fellow at Stanford University's Hoover Institution. Mr. Boskin, a professor of economics at Stanford University and a senior fellow at the Hoover Institution, chaired the Council of Economic Advisers under President George H.W. Bush. Mr. Cogan, a senior fellow at the Hoover Institution, was deputy director of the Office of Management and Budget under President Ronald Reagan. Mr. Meltzer is professor of political economy at Carnegie Mellon University. Mr. Taylor, an economics professor at Stanford and a senior fellow at the Hoover Institution, was undersecretary of Treasury under President George W. Bush.
MisterOpus1
quote:
Originally posted by Shakka
If you read Opus'post (and I assume many on the left, or those that hate rich people;)) you find that the substance is more of an argument that it's not fair to cut rich people's taxes because they BENEFIT more, not because of the impact on federal revenues. It's a class warfare argument that, to me, suggests they are less concerned with balancing the budget and addressing deficits than they are concerned about making sure the affluent don't realize any financial windfalls. It's a bait-and-switch argument at its finest.


I'm pretty sure that you didn't read my arguments very carefully if this is what you're coming up with. No, this isn't a "class warfare" argument, and it's pretty pathetic although very predictable that's what you assumed I was attempting to say. In fact, you made a refutation against my point #2 in which I am directly arguing about what gives a better bang for the buck (which I contend is anything but the specific types of tax cuts imposed by Bush).

You're an intelligent guy - that's rather perplexing of you.

Busy as at work, try to get to the other stuff later.
Shakka
quote:
Originally posted by MisterOpus1
I'm pretty sure that you didn't read my arguments very carefully if this is what you're coming up with. No, this isn't a "class warfare" argument, and it's pretty pathetic although very predictable that's what you assumed I was attempting to say.


I admit I only read your most recent lengthy post, but it seemed that the items you were highlighting were arguing much more about who benefitted as opposed to how successful the cuts were at fostering growth and increasing tax revenues. I'll go back and read the other posts more closely. However I, like you, have been pretty busy at work too. Ever since 2007 I haven't gotten a break!
The17sss
quote:
Originally posted by Lebezniatnikov
Ok, let's be consistent. The $4.7 trillion dollar reduction in revenue caused by the Bush tax cuts far surpass any spending by Obama in terms of deficit-creation.

Wow. Stick to the classroom and saving Africa. More revenue went to the Fed than at any point in history following Buler's tax cuts. And as stated before, the deficit was reduced 60% down to $160 billion by 2007 largely for this reason. Spending, spending, spending = problem. This is a perfect illustration of you vs. the real world (you being the professor):





quote:
Originally posted by MisterOpus1
Please demonstrate for us now how tax cuts for the wealthy somehow trickle down and stimulate the economy better instead.


Uh Ohhhhh... someone didn't read part of the post demonstrating exactly that: ;)

quote:
Ok you want legitimate peer reviewed evidence shattering your Krugmanian beliefs? READ IT AND WEEP:

Harvard economists Alberto Alesina and Silvia Ardagna examined 91 attempts at stimulus since 1970 in 21 OECD countries (USA, Canada, Mexico, Germany, Japan, France, Italy, etc.) and found that tax cuts, NOT spending, stimulated. After witnessing the last 2 failed stimuli (including W's), Krugman's (and your) argument is that it should have been larger. Krugman also says that more jobs would have been lost if not for it. Per his first point, we might get a chance to see. His second point is completely unsupportable. And so we are back to an argument based on availability of evidence. Who should we go with... the two Harvard economists and their legitimate analysis of 91 events in 21 OECD countries that all show Keynesian economic failure, in all environments with respect to both spending and tax cuts? Or Krugman who admits to the failures of Keynesian economics in the current modern economic environment with this stimulus (http://krugman.blogs.nytimes.com/20...bs-not-created/) by way of making unsupportable assertions?

Large changes in fiscal policy: taxes versus spending.
by Alberto Alesina and Silvia Ardagna.
August 2009
Revised: October 2009

click link below please, Opus!

http://www.economics.harvard.edu/fa...ctober_2009.pdf



Regarding this statement:
quote:
The bottom line, however, is when I read your sentiments above, much of it is anecdotal and speculative at best. It’s not that I think you’re lying. As misguided as I think you are much of the time, you seem honest. It’s just that I can’t apply your particular situation and speculation on what COULD possibly occur to your business or other businesses to everyone else, and it would be patently absurd to do so at this point. I think it’s best to hold such speculations on what could happen in the future under this current Administration until it actually happens. Until then it’s only just speculation and anecdotes.


I think it's just anecdotal and speculative sounding to you because you aren't the captain of the ship yet, rather an employee (and it's awesome btw that you've been offered a managing partner position- you will learn more than you imagined in that role). When you run a business, you have to plan 3 months, 6 months, 12 months out. We owners see what's coming down the pike and have to adjust accordingly. These 1 year tax breaks on this or that will not ramp up demand, and definitely won't encourage hiring for reasons I already explained. Like I said, why would someone hire new employees based on 1 year of increased bottom line, knowing that as soon as the break expired their costs to retain the new employees would jump through the roof? The people in charge have NO CLUE how to meet a payroll or run business... as explained by the founder of Home Depot the other day on CNBC. These are some very instructive, simple explanations... don't sweat the video length, it's worth the watch:












MisterOpus1
quote:
Originally posted by The17sss
Wow. Stick to the classroom and saving Africa. More revenue went to the Fed than at any point in history following Buler's tax cuts. And as stated before, the deficit was reduced 60% down to $160 billion by 2007 largely for this reason.


And you still haven't answered my reply as to why this little tidbit of yours is silly on the face. So since you seemingly tout this over and over again, I guess I'll continue to post my reply over and over again every time you say it:

quote:
Myth 2: Even if the tax cuts reduced revenues initially, they boosted revenues and lowered deficits in 2005 to 2007.

“Some in Washington say we had to choose between cutting taxes and cutting the deficit… Today’s numbers [the updated 2006 budget projections] show that that was a false choice. The economic growth fueled by tax relief has helped send our tax revenues soaring.” — President Bush, July 11, 2006

Reality: Robust revenue growth in 2005-2007 has not made up for extraordinarily weak revenue growth over the previous few years.

When discussing revenue growth since the enactment of the tax cuts, Administration officials typically focus only on revenue growth since 2004. This provides a convenient starting point for their arguments, as it sets a very low bar. In 2001, 2002, and 2003, revenues fell in nominal terms (i.e. without adjusting for inflation) for three straight years, the first time this has occurred since before World War II. Measured as a share of the economy, revenues in 2004 were at their lowest level since 1959. Given this historically low starting point, it is not surprising that revenues have recovered since then. Supporters of the tax cuts selectively cite revenue growth over just the past three years to argue that the tax cuts fueled increases in revenues.

Even taking into account the growth in revenues in fiscal years 2005-2007, total revenues have just barely increased over the 2001-2007 business cycle, after adjusting for inflation and population growth. (The business cycle began in March 2001, when the 1990s business cycle hit its peak and thereby came to an end.) In contrast, six and a half years after the peak of previous post-World War II business cycles, real per-capita revenues had increased by an average of 12 percent, and in the 1990s, real per-capita revenues were up 16 percent (see Table 1). Revenues in 2007 were still more than $250 billion short of where they would have been had they grown at the rates typical in other recoveries.

Further, while the Administration has credited the tax cuts with the drop in the fiscal year 2007 deficit to “only” $162 billion, the 2007 budget would have been in surplus were it not for the tax cuts. Based on Joint Committee on Taxation estimates, the total 2007 cost of tax cuts enacted since January 2001 was $300 billion (taking into account the increased interest costs on the debt that have resulted from the deficit financing of the tax cuts). This means that even with the spending for the wars in Iraq and Afghanistan, the federal budget would have been in surplus in 2007 if the tax cuts had not been enacted, or if their costs had been offset. While supporters of these tax cuts claim that their positive economic effects have lowered their cost, the non-partisan Congressional Research Service found in a September, 2006 report that “at the current time, as the stimulus effects have faded and the effect of added debt service has grown, the 2001-2004 tax cuts are probably costing more than their estimated revenue cost.”

Looking out over the next several decades, when deficits are projected to be far larger (because of the impact on the budget of the continued rise in health care costs and the retirement of the baby boomers), the tax cuts, if extended, will still be a major contributor to the nation’s fiscal problems. (http://www.cbpp.org/1-29-07bud.htm) To put the long-run cost of the tax cuts in perspective, the 75-year Social Security shortfall, about which the President and Congressional leaders have expressed grave concern, is less than one-third the cost of the tax cuts over the same period. (http://www.cbpp.org/3-31-08socsec.htm)

http://www.cbpp.org/cms/?fa=view&id=692


Still waiting.


quote:
Spending, spending, spending = problem. This is a perfect illustration of you vs. the real world (you being the professor):


And I feel this is the perfect illustration of you vs. reality, you being the boy:




Kindly spare me your lectures about the "real world." The real world is when you have factual evidence to support your assertions. You are always entitled to your own opinions, but when you have little to support them, you're no better than that guy above.

quote:
Uh Ohhhhh... someone didn't read part of the post demonstrating exactly that: ;)


Well it's pretty wonky for me, and I'm pretty certain their paper (which isn't a peer-reviewed paper and published in a peer-reviewed journal, or did it get published somewhere?) is way too wonky for you, which is why you likely resorted to your conservative blogs for further explanation beyond the headline. So being that the case, I see no better of a person to give a refutation than Krugman himself to demonstrate some of the errors in their logic:

quote:
I notice that commenters keep citing this paper by Alesina and Ardagna as if it were a definitive rejection of Keynesian economics. So I guess I should explain why I’m not convinced.

First, the whole stimulus debate is supposed to be about what happens when interest rates are up against the zero bound. Everything is different if the central bank is busy adjusting rates in response to conditions, and may well raise rates to offset the effects of any fiscal expansion. Yet the Alesina-Ardagna analysis doesn’t make that distinction; Japan in the 90s, which was up against the zero bound, is treated the same as a batch of countries in the 70s and 80s, when interest rates were quite high.

Second, they use a statistical method to identify fiscal expansions — trying to identify large changes in the structural balance. But how well does that technique work? When I want to think about Japan, I go to the work of Adam Posen, who tells me that Japan’s only really serious stimulus plan came in 1995. So I turn to the appendix table in Alesina/Ardagna, and find that 1995 isn’t there — whereas 2005 and 2007, which I’ve never heard of as stimulus years, are.

So to put it bluntly, I’m not much persuaded by a paper that doesn’t even identify the one clear example we have in the postwar period of large Keynesian stimulus in a zero-rate environment.

Are there any papers that, in my view, do this right? Yes: Almunia et al, which uses data from the 30s — a zero-rate era — and uses defense spending as an instrument to identify spending changes. And their results look pretty Keynesian.

http://krugman.blogs.nytimes.com/20...na-on-stimulus/


He quotes this paper by Almunia et al,: http://www.voxeu.org/index.php?q=node/4227

For more analysis, here's another paper that directly examines your conservative paper:

quote:
However, upon a further examination of the data such a
conclusion is unmerited. The overwhelming majority of the episodes used by A & A did not see deficit reduction in the middle of a slump. Where they did, it often resulted in a decline in the subsequent growth rate or an increase in the debt-to-GDP ratio. Of the 26 episodes that they identify as ‘expansionary’, in virtually none did
the country a)reduce the deficit when the economy was in a slump and b)increase growth rates while reducing the debt-to-GDP ratio. The sole example not covered by those two qualifiers can be explained by a combination of two policy maneuvers that are not easily
available to the U.S. at the moment: currency depreciation and interest rate reduction.

We expand on their initial examination and cover the entire data set of 107 observations, finding very little evidence for success when cutting in a slump—in our terminology, when the growth rate in the previous year was lower than the average growth rate over the past
three years. Only one additional case out of 107 can be seen as an example of success in fiscal consolidation, and we show that this does not bear scrutiny either.

Key Findings
• Countries historically do not cut their deficits in a slump, instead addressing these problems during a nonrecessionary time.
• When countries cut in a slump, it o#en results in lower growth and/or higher debt-to-GDP ratios. In very few circumstances are countries able to successfully cut during a slump, and this happens only when either interest rates and/or the exchange rates fall sharply.
• In our analysis, we find that there is no episode in which a country facing the same circumstances as the United States (recent recession, low interest rates, high unemployment) has cut its deficit and succeeded in reducing its debt through growth.
• We conclude that there is li!le evidence provided by A & A that cutting the federal deficit in the short-term, under the conditions the United States currently faces, would improve the country’s prospects. It may even make the United States’ situation far worse.

http://www.rooseveltinstitute.org/s...r_austerity.pdf


Some other commenters in Krugman's blog also noted a few things worth mentioning:

quote:
Alesina and Ardagna state right at the start of their paper that "it was also the case of the US in the nineties when without virtually any increase in tax rates or significant spending cuts, a large deficit turned in a large surplus."

Any paper that discards the fiscal actions taken by Clinton and a Republican congress to generated a budget surplus in the world largest economy as not "significant" makes you wonder exactly what they could have actually measured.

They manage to include only one United States event: the 2002 tax cuts that reversed the 1990's tax increases that were judged not "significant". How is one significant if the preceding is not?

http://community.nytimes.com/commen...id=56#comment56
-------------------------------------------------

I tried to read the Alesina rejection of Keynesian economics but had to laugh at the very first sentence, which was an obvious and unsubstantiated correlation fallacy.

"As a result of the fiscal response to the financial crisis of 2007-2009 the U.S. will experience the largest increases in deficits and debt accumulation in peacetime."

I mean, how many unsubstantiaties fallacies can an author put in the first line of a paper?

1) First of all, the fiscal response did not cause the largest increases in deficits and debt accumulation, the financial crisis caused the largest increases in deficit and debt accumulation. If Alesina had in fact done his homework, he would have know that we faced the largest increase in deficit and debt accumulation BEFORE the stimulus.

2) Fiscal response: we've had fiscal stimulus since 2001, when George W Bush and the Republicans decided to waste the surplus and spend more than we took in. This record after record, unfunded spending caused the greatest debt accumulation in our history; $8T and growing. The fiscal response to the entire 2007-2010 economic crisis has totalled less than $2T. Still a staggering amount, but only a fraction of the debt accumulation of the previous six years, during an economically stable era. In other words, the fiscal "response" is merely an adjustment of the previous fiscal stimulus packages and to ignore those betrays a bias from the get-go.

3) Peacetime
Peacetime? I had to re-read that three times to make sure my eyes were not deceiving me, but yes, in fact, Alesina is not even aware we are at war. GIGO. (Garbage In, Garbage Out)

http://community.nytimes.com/commen...id=62#comment62
---------------------------------------------------

t's important to note that this is the common thread tying together all empirical and theoretical work that purports to "disprove" the efficacy of fiscal stimulus. It's not just about Alesina by a long shot.

This is true of Cogan, Taylor, and Wieland.
This is true of Barro's empirical work
This is true of the more ad hoc dismissals from guys like Steve Horwitz

Their common assumption is the normal functioning of price adjustment in credit and/or labor markets. The theoretical work that doesn't model a liquidity trap consistently (and predictably) finds a weak impact for stimulus. The empirical work like Barro's that inexplicably uses data from periods when we weren't in a liquidity trap consistently (and predictably) finds a weak impact for stimulus.

What is the common thread between the theoretical and empirical work that finds strong impacts? This work doesn't compare apples to oranges and makes a point of modeling the dysfunctions in credit and labor markets that we're struggling with right now.

It's not rocket science. When the common thread between now just Alesina, but all the "disproofs" is that there's no liquidity trap, and when the common thread between all the studies finding a significant impact of fiscal stimulus is that they do look at liquidity traps, the obvious conclusion is that in liquidity traps stimulus works, and outside of liquidity traps fiscal stimulus is much more tenuous.

I know this is fundamentally your point, Paul, but I think the point can be made even more forcefully. It's not just Alesina. This is the common thread running through all disproofs.

http://community.nytimes.com/commen...id=13#comment13
---------------------------------------------

I've seen the Alberto Alesina and Silvia Ardagna paper cited repeatedly in anti-stimulus blogs postings. The first thing that struck me about the paper was that out of the 91 incidents of fiscal expansion it considered only two occured during a financial crisis when fiscal stimulus might be most effective: Japan in 1998 and Sweden in 1992. Reading how Alesina and Ardagna selected the countries, the time period and then identified episodes of fiscal stimulus I came to the conclusion they seemed to be cherry picking cases where fiscal stimulus would be least effective. I'm glad to see I'm in fairly good company.

In any case there are literally hundreds of research papers that reach opposite conclusions. However, for what it's worth here's a free (earlier unpublished) version of the paper

http://community.nytimes.com/commen...id=18#comment18


What's clear is that these two cherry-picked the out of historical evidence, ignoring anything that would disprove their pre-conceived notions, and overall compared apples to oranges with other countries versus the U.S. economy. This must happen quite frequently in macro-economic papers or something, which is why I can't ing stand this subject most of the time and tend to read more towards biological sciences (which admittedly it also happens, but on far, far less frequent occurrences).


quote:
Regarding this statement:


I think it's just anecdotal and speculative sounding to you because you aren't the captain of the ship yet, rather an employee (and it's awesome btw that you've been offered a managing partner position- you will learn more than you imagined in that role). When you run a business, you have to plan 3 months, 6 months, 12 months out. We owners see what's coming down the pike and have to adjust accordingly. These 1 year tax breaks on this or that will not ramp up demand, and definitely won't encourage hiring for reasons I already explained. Like I said, why would someone hire new employees based on 1 year of increased bottom line, knowing that as soon as the break expired their costs to retain the new employees would jump through the roof? The people in charge have NO CLUE how to meet a payroll or run business... as explained by the founder of Home Depot the other day on CNBC. These are some very instructive, simple explanations... don't sweat the video length, it's worth the watch:


I'll do you the respect to make sure I watch it some time this week. Just an FYI, however - my partner's wife is primarily responsible for the books. I've briefly discussed some of these issues with him and his wife last week that you've mentioned, and their response at least initially was nothing compared to the doomsday depiction you've created. Perhaps it is yet another apples to oranges comparison, i.e. we're not interested in hiring anyone else right now, our overhead has been very manageable over the past 2 years, etc. But again, I stand by my statement that as much as I respect your position as a small business owner, it's still anecdotal and speculative as we need to wait for many of these things yet to pass in order to make correct judgements.
Comrade Stalin
Warren Buffett to CNBC: Country Should Get Needed Income from the 'People Who Have It'

Warren Buffett tells CNBC he doesn't buy the argument that raising taxes for the rich would derail the nation's economic recovery.

In a taped interview with Becky Quick, Buffett says that while $250,000 in annual income is not necessarily his definition of "rich", he does think it is a "little obscene" that the tax system has gotten "tilted toward guys like me" over the last 20 years.

"When a country needs more income, and we do -- we're only taking in 15 percent of GDP ... they should get it from the people that have it."

http://www.cnbc.com/id/39321861/

Skip to 1 minute 40 seconds.











Shakka
Wellllll....Warren Buffett said it, it must be the answer!
Comrade Stalin
quote:
Originally posted by Shakka
Wellllll....Warren Buffett said it, it must be the answer!


What do you have against tax cuts expiring for the top 2% of income earners? Gee, those millionaires are reeeeeally going to have a tough time huh? After all, Clinton-era tax rates for the top 2% did so much bad in the 1990's right?:o
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