The Return Of Voodoo Economics

Sebastian Mallaby writes:

The Return Of Voodoo Economics: Nobody serious believes that tax cuts pay for themselves, as I noted last week. But most senior Republicans flunk this test of seriousness.... George W. Bush... told a New Hampshire audience, "You cut taxes and the tax revenues increase."... Dick Cheney... asserted in February that the "tax cuts have translated into higher federal revenues." Bill Frist.... "Many people in Washington have long known a dirty little secret about tax-cut measures: When done right, they actually result in more money for the government." Chuck Grassley... mouths the following nonsense: "There is a mindset in both branches of government that if you reduce taxes you have a net loss, if you increase taxes you have a net gain, and history does not show that relationship."...

Okay, so let's review this issue with the help of some experts.... N. Gregory Mankiw of Harvard... who chaired the Council of Economic Advisers in the Bush White House. Mankiw is a top-notch economist hired by Bush and Cheney to advise them. And last year he published a paper on how far tax cuts pay for themselves, reporting enthusiastically that this self-financing effect is "surprisingly large."... [O]ver the long run (the long run being generous to his argument), cuts on capital taxes generate enough extra growth to pay for half of the lost revenue. Hello, Mr. President, that means that the other half of the lost revenue translates into bigger deficits. Mankiw also calculates that the comparable figure for cuts in taxes on wages is 17 percent. Yes, Mr. President, that means every $1 trillion in tax cuts is going to add $830 billion to the national debt....

Mankiw isn't with them. Holtz-Eakin isn't with them. Which raises a question: When top Republicans go around claiming that tax cuts pay for themselves, which economic authorities are they relying on? None, is the answer. These people's approach to government is to make economics up....

Politicians are always speechifying about how the United States must lead the world in research to maintain its edge. But having the world's best economics research isn't particularly helpful if those same politicians are silly enough to tune it out...

Fine until the last paragraph. Then Mr. Mallaby stops saying "Republican politicians" and starts saying "politicians." You can say it, Mr. Mallaby: There's an obvious way to fix the problem you see: simply stop electing Republicans.

Comments

[Tim Worstall]

Tsk, come along now. Whether tax cuts increase or reduce revenue depends upon where the taxes are in the first place: and each and every different tax, as Mankiw shows, will have a different rate which maximises revenue, a different rate at which an increase or reduction will affect revenue.
All tax cuts all the time increase revenue is as silly a statement as all tax rises all the time increase revenue.
The answer is it depends.
For example, within my own lifetime we’ve had, in the UK, for one year only, a top rate of 130% on unearned (ie dividend and interest) income, at least a decade of 98% tax on such income and an 83% top income tax rate.
Cutting those did indeed increase revenue collection.

[Tom Marney]

OK, so cutting tax rates can increase collections if the rates are oppressively high. The disconnect comes from the right-wing's core belief that taxation itself is inherently oppressive and that all rates are therefore by definition oppressively high. That this belief persists among top Republicans in the face of such overwhelming contrary evidence is quite remarkable.

[stewart]

Taxation to pay for government is oppressive. Government paid for by other means is more oppressive, and lack of government is most oppressive.
Mallaby's comment needed one last 'Republican' inserted prior to the last use of the word 'politicians'.

[bakho]

I think Mallaby deserves credit for whacking the conventional wisdom. Truthiness feels that works as advertised. Mallaby delivers a bucket of ice water. If only the NRO and WSJ editorial page could be convinced that supply side tax cuts are whack.

[knzn]

“There's an obvious way to fix the problem you see: simply stop electing Republicans.” The problem – stated generally – is that politicians ignore the conclusions of economists. Brad, do you honestly believe that the problem will be solved if we stop electing Republicans? It will be ameliorated, I grant you, but solved?

[Bungler]

There should be a bi-partisan deal to raise income taxes on the rich and lower capital gains taxes to zero, if there really is a differential in the two taxes supply side effects. But compromise is taboo these days...

[PaulC]

> If only the NRO and WSJ editorial page could be convinced that supply side tax cuts are whack.

Since the people advocating tax cuts typically follow Grover Norquist's view on "starving the beast" then I have to conclude that they know this already and are lying when they suggest otherwise. The other thing they know is that the impossibility of proving what might have happened otherwise, so they can claim any policy is efficacious. No matter how bad the outcome, they just claim their policy worked because think how bad things would be without it.

Likewise, when Cheney said "Reagan proved deficits don't matter" he didn't mean Reagan had demonstrated mathematically that negative numbers are positive numbers, but that Reagan got re-elected. Deficits don't matter politically--up to some point. Obviously the situation is not indefinitely sustainable, but I'm not sure "top Republicans" are capable of thinking very far ahead.

[PaulC]

Frist: "Many people in Washington have long known a dirty little secret"

Many people outside Washington have long know a dirty little secret: the decisions involving very large quantities of taxpayers' money are being made by magical thinking innumerates.

I'm not sure how much of a secret this is, though.

[RW]

It was Alan Blinder who rephrased Murphy's Law as it applied to economic policy thus: "Economists have the least influence on policy where they know the most and are most agreed; they have the most influence on policy where they know the least and disagree most vehemently."

The first example he uses to illustrate this 'law' in his 1987 book, Hard Heads and Soft Hearts, is what he refers to as Professor Laffer's Flight of Fancy - a "mathematically trivial" exercise that demonstrated there was probably a point where raising taxes would produce diminishing returns but which did not identify any point where that might occur. Regardless 'proof' now existed, at least for policy makers so inclined to accept it, that now "we could add by subtracting."

Blinder uses this exemplar to add the economic version of O'Connor's Corollary: "When conflicting economic advice is offered, only the worst will be taken."

With the exception of the Clinton respite and all-to-brief periods where Reagan and then first President Bush reversed their tax cuts in their lame duck terms, the entirely predictable Republican-led deficit explosion has not stopped since 1981. We've come a long way babe but I suspect we're just about done with this one now. It will be interesting to see what the next violation of Murphy's Law of Economics is: Protectionism maybe, or another war to goose the stagflationary gander, or ...?

[dubblblind]

"The disconnect comes from the right-wing's core belief that taxation itself is inherently oppressive..."

The right wing's core belief isn't that taxation itself is inherently oppressive but that taxation on the rich is oppressive. Shifting the burden to the middle class is what their agenda is all about.

[dubblblind]

"Obviously the situation is not indefinitely sustainable, but I'm not sure "top Republicans" are capable of thinking very far ahead."

The Rethugs aren't having any problems with capable thinking, they are only working to assure that they and the donor class have reserve seating on the life boats as they steer a course towards the iceberg.

[piotr]

Just a thought: the only way cut in the capital gains tax can recover part of the lost revenue is that it may change the way people invest. Ivestments involve financial planning, true enough. But what tax rates are assumed in such a planning if (a) Congress changes rates every year, (b) the budget seems unsustainable, thus forcing increases in the future -- perhaps exactly when the planner would like to realize the capital gains.

[Barry]

"Brad, do you honestly believe that the problem will be solved if we stop electing Republicans? It will be ameliorated, I grant you, but solved?"

Posted by: knzn

Of course - look at the Clinton years. GOP politicians howled that his tax increase would lead to a recession. Notably, one of the three Ph.D.'s in econ in Congress, Phil (lying Enron wh*re) Gramm.

Instead, the deficit went down. The GOP then took credit for the fiscal discipline, which was proven to be a lie when Bush was selected.

[michael]

"The only thing worse than a tax and spend democrat is a borrow and spend republican."

Have you seen the Al Gore skit from SNL on Saturday? It was him addressing the nation in 2006 in an alternate world where he won...

"As we speak, the gigantic national surplus is down to a perilously low 11 trillion dollars. And don't get any ideas! That money is staying in the very successful lockbox!"

[Tim Worstall]

Tom Marney: I’m extremely right wing and yes I do think that some (note the some please) levels of taxation can be described as oppressively high. I wouldn’t say that current US levels of federal income taxation were so, no. Re corporate taxation I’d identify the problem as they way that all profits are taxed before the dividend is disbursed which is then taxed again: everyone else only taxes retained profits and then the dividend separately.

Add in things like, say, New York State and New York City income taxes and they’re getting there for those who live there.

When you add direct and indirect taxation (ie, income, capital, VAT, gas, property and other taxes) then Patrick Minford has pointed out that higher rate taxpayers in the UK (that starts at about $50-$55 k a year) actually pay 57% of each extra $ earned. I’d say that is getting oppressive, yes.

[Auros]

I am dubious of Tim Worstall's figures on British taxes in the first comment, though in principle I agree that whether a tax cut raises revenue depends on which side of the Laffer Curve you're on. I would submit that when Kennedy cut income taxes from their Eisenhower-era high, we probably were to the right of t* and as a result revenues were probably enhanced.

But I think it's crazy to suggest that any of our current taxes -- income, capital gains, dividends, whatever -- are high enough to exceed t*.

[Tom]

"Of course - look at the Clinton years. GOP politicians howled that his tax increase would lead to a recession. Notably, one of the three Ph.D.'s in econ in Congress, Phil (lying Enron wh*re) Gramm.

Instead, the deficit went down. The GOP then took credit for the fiscal discipline, which was proven to be a lie when Bush was selected. "

Wasn't that after the Republican captial gains cut in 1997?

[liberal]

Tom wrote, "Wasn't that after the Republican captial gains cut in 1997?"

Post hoc, ergo propter hoc.

Besides which, no one is going to take you seriously, as you don't appear to take into account real vs nominal figures in your claims:

http://delong.typepad.com/sdj/2006/05/radio_marketpla_1.html#comment-17217072

[Barry]

"Wasn't that after the Republican captial gains cut in 1997?"

Posted by: Tom

No. By then things were clearly established.

[RKKA]

"Wasn't that after the Republican captial gains cut in 1997"

The fiscal condition of the Federal government improved every year President Clinton was in office.

Just like a Rethuglican to try to steal the credit. The funniest thing about Clinton's 1993 economic plan was the train of Rethuglicans predicting disaster and preemptively rejecting responsibility for the consequences.

Too bad for them that what they rejected was peace, prosperity, and fiscal responsibility.

But now they've controlled all branches of the Federal government for a while, peace and fiscal responsibility lie in tatters, and prosperity is lookin' awful shaky.

[Tim Worstall]

Auros:
The 130 % was in a budget by Roy Jenkins. 1968 I think.
The 98% and 83% rates were 70s. Margaret Thatcher abolished the investment income surcharge and took the top income tax rate to 60% then to 40% a few years later.

Ever heard the Beatles song "Taxman"? Check out the lyrics about those tax rates.