The "Economy" Argument for Keeping the Bush Tax Cuts

[magickyleo101]

I'm a bit baffled by the Republican argument that letting the Bush tax cuts expire will undermine the economy, and I'd like to hear from some of the people who buy it. I see a couple of problems:

First, while it's true that, all things held equal, lower taxes help economic growth, the two scenarios being discussed don't hold everything equal. In one scenario (where we let the tax lapse), we have higher taxes on part of society, but that also means we run a lower budget deficit. In the second (where we renew it), we have lower taxes and a higher budget. Since running a deficit is also a threat to economic growth, the overall effect depends on which of those two generalities (low taxes => higher growth; high deficit => lower growth) is more significant.

I mean, if anything, the paramount importance of "all things equal" in economic theory is demonstrated by the current situation: taxes are the lowest they've been in a decade (there is NO estate tax for people who die this year, no matter how wealthy) yet the economy is horrible. That doesn't disprove the correlation between taxes and growth, but it shows that economic analysis doesn't end at tax rates.

So if Republicans want to make a meaningful argument, they need to explain why raising taxes would do more to help the economy than a lower deficit would do to help it, and there's just no such argument forthcoming. Instead, Republicans seem to want to stomp their feet and pretend like Democrats are economics dullards; that if only Democrats could understand the one-dimensional economics reasoning being put forward by Republicans, it would be obvious that we should keep the tax cuts.

Second, there's no reason to think that the "lower taxes are generally better for the economy" principle applies terribly cleanly to the estate tax, which is a major portion of the Bush tax cuts. Allowing the government flexibility to cut taxes in other areas would probably help the economy more than keeping the Bush tax cuts.

A lower estate tax increases the amount of property a decedent can continue to control after their death - what's called "dead hand control." There's no reason to think dead hand control is anything but a drag on the economy.

To give an example, if I put all my money in a trust that's intended to feed staring kids in East Austin, my money might do a lot of good for several years. But as society changes, there might be less and less need for the resources in that trust to be applied to that problem. However, it's hard to shift the resources away from that project since the guy who started it is dead and isn't evaluating the project any more.

In other words, not all tax cuts are created equal. Taxes not only raise revenue but they shift resources: from person to person; from project to project. The Bush tax cuts are set up so that the net results is a distribution of resources to endeavors that aren't very efficient. The mere fact that keeping the Bush tax cuts would be a "tax cut," then, doesn't show that that particular tax cut is an ideal one.

In any case, let's see if I actually get a response.

[JP226]

errr, I think the Repugbican platform is to cut spending and keep taxes low... And how will not letting the current taxes expire lead to a higher deficit?

[Phier]

errr, I think the Repugbican platform is to cut spending and keep taxes low... And how will not letting the current taxes expire lead to a higher deficit?

Democrats only think short term.

At the current level of exchange A, if you raise taxes to X we will make Y money.

They always forget that if you raise X, A can go down, giving them even less Y than they currently collect.

[Viking Prince]

Money is not stuffed into a matress. Under the best of circumstances, the government can only hope to be as effective at using tax revenue towards building economic activity than the private sector. If you ask most economists about the tax cuts, you will probably get that the ones Obama wants to keep would have the least effect if canceled and the ones he wishes to let lapse have the biggest effect on new activity. Also, simply talking about changes to the tax code are a bit disruptive to long term tax planning. I blame the Republicans for creating the situation in the first place, but now that the code changes are expiring, the problem sits in the hands of the current Congress (and not Obama).

Remember it is the wealthy that can make investment and spending decisions in a big way -- the lower middle class family has very little left after paying the monthly bills to change anything regarding investents and new spending. The Obama proposal is pure populist politics and the politics of redistribution. Economic thought never entered into the discussion.

[InsaneHanz]

Money is not stuffed into a matress. Under the best of circumstances, the government can only hope to be as effective at using tax revenue towards building economic activity than the private sector. If you ask most economists about the tax cuts, you will probably get that the ones Obama wants to keep would have the least effect if canceled and the ones he wishes to let lapse have the biggest effect on new activity. Also, simply talking about changes to the tax code are a bit disruptive to long term tax planning. I blame the Republicans for creating the situation in the first place, but now that the code changes are expiring, the problem sits in the hands of the current Congress (and not Obama).

Remember it is the wealthy that can make investment and spending decisions in a big way -- the lower middle class family has very little left after paying the monthly bills to change anything regarding investents and new spending. The Obama proposal is pure populist politics and the politics of redistribution. Economic thought never entered into the discussion.

The richer are richer than ever, the middle class is shrinking. What would the rich invest in when there's not enough consumers to buy new products or services? There's a point when a person has more money than they could possibly ever need. Removing money from middle class families is much more detrimental to the economy than taking it from the obscenely rich.

[magickyleo101]

errr, I think the Repugbican platform is to cut spending and keep taxes low... And how will not letting the current taxes expire lead to a higher deficit?

Renewing the tax cuts keeps the deficit high by keeping the tax rate (and hence government income) low. This seems fairly obvious, which makes me think maybe I'm misunderstanding your comment?

Democrats only think short term.

At the current level of exchange A, if you raise taxes to X we will make Y money.

They always forget that if you raise X, A can go down, giving them even less Y than they currently collect.

This is just the laffer curve argument, which empirically doesn't carry nearly the weight that Republicans try to make it carry.

Money is not stuffed into a matress. Under the best of circumstances, the government can only hope to be as effective at using tax revenue towards building economic activity than the private sector. If you ask most economists about the tax cuts, you will probably get that the ones Obama wants to keep would have the least effect if canceled and the ones he wishes to let lapse have the biggest effect on new activity.

Again, I agree that as a general rule low taxes mean better economic growth. But lots of things can frustrate the effect of the general rule (which is why you have low taxes and low growth in the current economy). One of those things is the deficit, which will go up if the tax cuts are renewed.

So it doesn't do any good to just talk about the benefits of low taxes. If you could not tax and lower the deficit, that would be one thing, but we can't (since most of our spending commitments have no realistic chance of being slashed).

Remember it is the wealthy that can make investment and spending decisions in a big way -- the lower middle class family has very little left after paying the monthly bills to change anything regarding investents and new spending. The Obama proposal is pure populist politics and the politics of redistribution. Economic thought never entered into the discussion.

This is probably true for the wealthy who made their own money, but that's no who you're cutting taxes for when you cut or abolish the estate tax. You're cutting taxes for their children, who are probably actually less good at spending money efficiently than the government. Heiresses are rarely considered paragons of thrift.

[JP226]

Money is not stuffed into a matress.

This concept, and the whole idea of replacement versus "new" is the most misunderstood.

[Il-Principe]

There isn't much of a choice or is it? There are obviously two reasons for the growing federal deficit: Excessive spending and shrinking tax receipts. In the long term the federal government cannot allow that the already massive debt grows even larger. Currently America spends about 5-9% of its annual budget on interest. 2010 was a good a year as payments for interests were only about 5% (after 9% in 2007):

Spoiler Alert, click show to read: 

But that figure is likely to rise in the next years. I think that it was in an article from the Economist, which estimated the interest share of the federal budget in 2040 at 30%. Tax revenues were constantly shrinking the last years. This graph show the shrinking tax revenues quite vividly:

Spoiler Alert, click show to read: 

So economically speaking the president doesn't have much of a choice. I understand the argument that low taxes can stimulate growth. But the problem is that the tax revenues are that low that it would be very unhealthy not to rise taxes. Either that or dramatically cut Social Security, Medicare, Medicaid and Defense Spending.

Here is a graph, which illustrates the huge gape between revenues and expenditures in the federal budget:

Spoiler Alert, click show to read: 

And this graph shows nicely, what president is to blame for the current mess:

Spoiler Alert, click show to read: 

[chamaeleo]

I thought Bush's tax cuts were supposed to stimulate our economy...he must've accidentally signed the paperwork on his self-declared, super-secret Federal "Opposite Day" holiday. Would a fiscal conservative like to explain this contradiction, and how it applies to further justifying the concept of: low taxes = economic powerhouse conditions?

(there is NO estate tax for people who die this year, no matter how wealthy)

Well then...if this estate tax dealio is reversed, who else expects elderly conservatives to begin mysteriously dying off just before Christmas? "Must've been one a those greedy, illegal immigrant maids who kilt granny..."

[Platon]

Check out the countries with the highest tax burden - http://www.forbes.com/global/2006/0522/032a.html - all Scandinavian countries.. who have the happiest people in the world - http://www.forbes.com/2010/07/14/wor...lup-table.html

"Those high taxes have another effect. Since a banker can end up taking home as much money as an artist, people don't chose careers based on income or status. "They have this thing called 'Jante-lov,' which essentially says, 'You're no better then anybody else,'" said Buettner. "A garbage man can live in a middle-class neighborhood and hold his head high." Indeed, garbage man Jan Dion says he's an eight out of 10 in terms of happiness. He said he doesn't mind collecting garbage for a living, because he works just five hours in the morning and then can spend the rest of the day at home with family or coaching his daughter's handball team. Dion says no one judges his choice of career, and he actually loves what he does because he has many friends along his route. It makes him happy when he sees the children who wave to him and the old ladies who bring him cups of coffee"

Thats quality of life, right there!!

[molonthegreat]

Check out the countries with the highest tax burden - http://www.forbes.com/global/2006/0522/032a.html - all Scandinavian countries.. who have the happiest people in the world - http://www.forbes.com/2010/07/14/wor...lup-table.html

"Those high taxes have another effect. Since a banker can end up taking home as much money as an artist, people don't chose careers based on income or status. "They have this thing called 'Jante-lov,' which essentially says, 'You're no better then anybody else,'" said Buettner. "A garbage man can live in a middle-class neighborhood and hold his head high." Indeed, garbage man Jan Dion says he's an eight out of 10 in terms of happiness. He said he doesn't mind collecting garbage for a living, because he works just five hours in the morning and then can spend the rest of the day at home with family or coaching his daughter's handball team. Dion says no one judges his choice of career, and he actually loves what he does because he has many friends along his route. It makes him happy when he sees the children who wave to him and the old ladies who bring him cups of coffee"

Thats quality of life, right there!!

The jante law is a ing disgrace it's just about jealousy and hate against people who have had success in their lives, about bush tax cuts I read in the Wall Street Journal ( World edition) yesterday that Obama plans to raise taxes for some and take a lot of John Mccain ideas and help businesses with tax cuts in the Research and development development area.

[Mr. Scott]

Check out the countries with the highest tax burden - http://www.forbes.com/global/2006/0522/032a.html - all Scandinavian countries.. who have the happiest people in the world - http://www.forbes.com/2010/07/14/wor...lup-table.html
Thats quality of life, right there!!

Big table, few people. Besides, who wants to go graffiti something when its below freezing?

[JP226]

The richer are richer than ever, the middle class is shrinking. What would the rich invest in when there's not enough consumers to buy new products or services? There's a point when a person has more money than they could possibly ever need. Removing money from middle class families is much more detrimental to the economy than taking it from the obscenely rich.

robot response. Never bothering to answer why or how it's bad, or what caused it. It's just accepted.

[The spartan]

robot response. Never bothering to answer why or how it's bad, or what caused it. It's just accepted.

If you want to argue social semantics, it is bad because overall utility of the society is declining.

Wealthy people can do only two things with their wealth -- invest or consume. Where will grabbing a share of that wealth do anything better for the economy that would be done by a silly spendthrift heiress? Where was it written that when I die, the government should simply grab a cut off of the top? Do you realize that if the estate does not pay taxes on unrealized gains, the people inheriting the wealth will do so when they dispose of the assets? But to simply grab a gross value of an estate has nothing to do with income. Estate taxaton that is not related to income taxation (transfers are not income in and of themselves) is simply wealth redistribution which are populist measures and nothing more. Clever lawyers have protected the wealthy from this no matter how the laws are written -- only the middle class deceased suffer from this heavy handed use of the Treasury. Deceased farmers and small businessmen with large amounts of capital assets are not the best targets to balance the budget. If you do this, then to pay the estate taxes you sell the assets to a larger farm corportation and close the small bussiness into a larger business.

The wealthy spend less than the those who are not as wealthy. So sayeth economics.

[Viking Prince]

The wealthy spend less than the those who are not as wealthy. So sayeth economics.

Which means they are the investors. If you increase taxes on investors, do you suppose that this will adversely affect investment? Do you suppose that the wealthy will immediately change their lifestyle to maintain investments or change their investments to maintain a lifestyle? Obviously a bit of both, but the statistics (which I do not have at hand) indicate investment suffers the most in the short term.

[The spartan]

Which means they are the investors. If you increase taxes on investors, do you suppose that this will adversely affect investment? Do you suppose that the wealthy will immediately change their lifestyle to maintain investments or change their investments to maintain a lifestyle? Obviously a bit of both, but the statistics (which I do not have at hand) indicate investment suffers the most in the short term.

As leo stated originally, any amount of taxes will "impair" economic activity (ie, there will be deadweight loss), but that does not mean the tax is not worth it. The trade off may be beneficial overall.

[Viking Prince]

Wealthy people can do only two things with their wealth -- invest or consume. Where will grabbing a share of that wealth do anything better for the economy that would be done by a silly spendthrift heiress? Where was it written that when I die, the government should simply grab a cut off of the top? Do you realize that if the estate does not pay taxes on unrealized gains, the people inheriting the wealth will do so when they dispose of the assets? But to simply grab a gross value of an estate has nothing to do with income. Estate taxaton that is not related to income taxation (transfers are not income in and of themselves) is simply wealth redistribution which are populist measures and nothing more. Clever lawyers have protected the wealthy from this no matter how the laws are written -- only the middle class deceased suffer from this heavy handed use of the Treasury. Deceased farmers and small businessmen with large amounts of capital assets are not the best targets to balance the budget. If you do this, then to pay the estate taxes you sell the assets to a larger farm corportation and close the small bussiness into a larger business.

[JP226]

Renewing the tax cuts keeps the deficit high by keeping the tax rate (and hence government income) low. This seems fairly obvious, which makes me think maybe I'm misunderstanding your comment?

It's not an impact on the economy if you are keeping the status quo of extending the taxcuts. Nothing is going to change is the point I'm getting at. Besides, with the economy as weak as it is right now, I can't see how all of Bush's taxcuts are not going to be extended.

[Phier]

I can't see how all of Bush's taxcuts are not going to be extended.

He said hes going to drink all our milkshake.

[The spartan]

Haters gonna hate.