Bush Tax Cuts Expiring? Probably
With the Bush tax cuts scheduled to expire, let's just take a quick look at what we can expect to happen.
The administration says that the tax cuts favored the rich anyway, so it's just as well they expire. After all, the rich aren't paying "their fair share" now. They should pay more.
Some opponents of the administration are wringing their hands over the Bush tax cuts expiring. They're painting a scenario where the increase in taxes that results from the expiring tax cuts will be the next nail in the economy's coffin. Our recovery is weak, and tax increases will sink us.
Of course, to get somewhere near the truth, you've got to discount the fact that a lot of this sort of commentary is politically motivated noise that really doesn't help us understand things. It's just intended to get us potential voters to support Democrats or Republicans, liberals or conservatives.
Not that there's anything unusual about this game. That's what politicians do - politicians and the economists that support their positions. They try to manipulate the public - especially by emotional manipulation - to support their views.
But I was wondering whether there might be some useful information out there to give us a more objective way to evaluate what the expiration of the tax cuts might mean. And I did find what I think will prove useful - not only in evaluating what might happen if the Bush tax cuts expire, but about tax cuts or increases in general and their effect on our economy.
Now let's agree that the only reason that tax increases - specifically income tax increases - make sense (whether from allowing the Bush tax cuts to expire, or adding taxes outright) is if the increases add to the revenue of the federal government. And let's even put aside the whole question of whether increasing government revenue - in and of itself - represents some sort of net benefit to us (an interesting question, but we'll skip it for now). Let's just accept that increasing government revenue will somehow provide needed, important, even urgent benefits to all of us - or at least to those of us who aren't "rich" (since they don't deserve any sort of benefit, right?).
Now, according to the ever-insightful Caroline Baum (my favorite Bloomberg columnist), we have some facts we can use to draw some conclusions about whether tax increases or cuts have any long-term effects on government revenues. Ms. Baum states that we know empirically that, over time, federal revenue as a share of gross domestic product has stayed fairly consistent at 17.9%. That's been true if the marginal tax rate was 91% (in the 1950's), 50% (early 1980's) or 35% (early 2000s). The only exception is during recessions.
So, as a matter of normal policy, playing with the income tax rate doesn't seem to matter to government revenue.
Of course, we've just had (or are still in) a recession. In recessions, government revenue declines. You don't need an economist to explain this. If economic activity turns down, then business revenue and profits go down, and therefore taxes collected on business profits go down. And if unemployment goes up, people aren't making as much income, so personal income taxes go down.
So, what about the idea of at least raising government revenue by increasing taxes strictly on the rich. (Remember, we're allowing for the assertion that the increased government revenue would be used to benefit us - or at least some of us.) Well, it turns out that a fellow named Arthur Laffer has been writing about this for a long time, most recently in a number of editorials in the Wall Street Journal.
Laffer asserts something that strikes me as making sense. He says that raising taxes on the rich won't raise more money for the government. His reasoning is that the rich can counter the higher rates a number of ways. And having worked with some rich folks, what he says makes a lot of sense, based on my experience.
First, they can afford to pay accountants and lawyers to find loopholes. And, in spite of what you may think, or what you may read, there are always loopholes - even when every effort is made to close loopholes. In fact, closing some loopholes inevitably opens others. And the expensive hired help that the rich can afford to pay always find those loopholes one way or the other.
Second, the rich can decide to work less and take more leisure when income taxes go up. They can defer income from their businesses if that's to their advantage. (On the reverse side, they can decide to work more if tax rates go down.) The point is, they don't rely on a steady paycheck the way regular folks do.
(Note that if taxes wind up being increased on poor or middle class folks, that's bad news since those folks really can't do anything but suffer from a loss of income. They don't have the options the rich have.)
Really, this does ring a bell with me, based on my own professional experience. So the question becomes what's the point of all the talk about taxing the rich and the rich needing to pay their "fair share." Is it anything more than a kind of playing on envy? Is there any practical purpose besides scoring political points with one group of people at the expense of others?
What do you think? Do you think letting the Bush tax cuts expire will really benefit us all? Or is this just a kind of political football being thrown back and forth to see who can take advantage of it most, or who will be able to use it to win the coming November elections?
The administration says that the tax cuts favored the rich anyway, so it's just as well they expire. After all, the rich aren't paying "their fair share" now. They should pay more.
Some opponents of the administration are wringing their hands over the Bush tax cuts expiring. They're painting a scenario where the increase in taxes that results from the expiring tax cuts will be the next nail in the economy's coffin. Our recovery is weak, and tax increases will sink us.
Of course, to get somewhere near the truth, you've got to discount the fact that a lot of this sort of commentary is politically motivated noise that really doesn't help us understand things. It's just intended to get us potential voters to support Democrats or Republicans, liberals or conservatives.
Not that there's anything unusual about this game. That's what politicians do - politicians and the economists that support their positions. They try to manipulate the public - especially by emotional manipulation - to support their views.
But I was wondering whether there might be some useful information out there to give us a more objective way to evaluate what the expiration of the tax cuts might mean. And I did find what I think will prove useful - not only in evaluating what might happen if the Bush tax cuts expire, but about tax cuts or increases in general and their effect on our economy.
Now let's agree that the only reason that tax increases - specifically income tax increases - make sense (whether from allowing the Bush tax cuts to expire, or adding taxes outright) is if the increases add to the revenue of the federal government. And let's even put aside the whole question of whether increasing government revenue - in and of itself - represents some sort of net benefit to us (an interesting question, but we'll skip it for now). Let's just accept that increasing government revenue will somehow provide needed, important, even urgent benefits to all of us - or at least to those of us who aren't "rich" (since they don't deserve any sort of benefit, right?).
Now, according to the ever-insightful Caroline Baum (my favorite Bloomberg columnist), we have some facts we can use to draw some conclusions about whether tax increases or cuts have any long-term effects on government revenues. Ms. Baum states that we know empirically that, over time, federal revenue as a share of gross domestic product has stayed fairly consistent at 17.9%. That's been true if the marginal tax rate was 91% (in the 1950's), 50% (early 1980's) or 35% (early 2000s). The only exception is during recessions.
So, as a matter of normal policy, playing with the income tax rate doesn't seem to matter to government revenue.
Of course, we've just had (or are still in) a recession. In recessions, government revenue declines. You don't need an economist to explain this. If economic activity turns down, then business revenue and profits go down, and therefore taxes collected on business profits go down. And if unemployment goes up, people aren't making as much income, so personal income taxes go down.
So, what about the idea of at least raising government revenue by increasing taxes strictly on the rich. (Remember, we're allowing for the assertion that the increased government revenue would be used to benefit us - or at least some of us.) Well, it turns out that a fellow named Arthur Laffer has been writing about this for a long time, most recently in a number of editorials in the Wall Street Journal.
Laffer asserts something that strikes me as making sense. He says that raising taxes on the rich won't raise more money for the government. His reasoning is that the rich can counter the higher rates a number of ways. And having worked with some rich folks, what he says makes a lot of sense, based on my experience.
First, they can afford to pay accountants and lawyers to find loopholes. And, in spite of what you may think, or what you may read, there are always loopholes - even when every effort is made to close loopholes. In fact, closing some loopholes inevitably opens others. And the expensive hired help that the rich can afford to pay always find those loopholes one way or the other.
Second, the rich can decide to work less and take more leisure when income taxes go up. They can defer income from their businesses if that's to their advantage. (On the reverse side, they can decide to work more if tax rates go down.) The point is, they don't rely on a steady paycheck the way regular folks do.
(Note that if taxes wind up being increased on poor or middle class folks, that's bad news since those folks really can't do anything but suffer from a loss of income. They don't have the options the rich have.)
Really, this does ring a bell with me, based on my own professional experience. So the question becomes what's the point of all the talk about taxing the rich and the rich needing to pay their "fair share." Is it anything more than a kind of playing on envy? Is there any practical purpose besides scoring political points with one group of people at the expense of others?
What do you think? Do you think letting the Bush tax cuts expire will really benefit us all? Or is this just a kind of political football being thrown back and forth to see who can take advantage of it most, or who will be able to use it to win the coming November elections?
Comments