Department of "Huh?"

Greg Mankiw, seeking to score rhetorical points off of Paul Krugman, writes:

Greg Mankiw's Blog: A Kept Promise: In 2000, candidate George W. Bush said: "On principle no one in America should have to pay more than a third of their income to the federal government." Today, in Paul Krugman's NY Times column, I learn: "the effective federal tax rate on the richest 0.01 percent has fallen from about 60 percent in 1980 to about 34 percent today."

Because this is the group with the highest average tax rate, I guess we should conclude that President Bush kept his promise.

Huh?

No.

No. No! No!! No!!! No!!!!

In no meaningful sense has George W. Bush reduced the tax burden. In no meaningful sense has he kept any promise. George W. Bush has kept his promise to cut taxes in the same way that a spouse who decides to "save money" by making only the minimum required payment on the VISA bill has kept a promise to reduce household spending.

As Milton Friedman puts it, to spend is to tax. Bush's spending increases--defense, Iraq, the Republican porkfest, the Medicare drug benefit--are still there, just as things you have charged to your VISA don't go away if you make only the minimum monthly payment.

What George W. Bush has done has been to shift taxes from the present to the future--and also made future taxes uncertain, random, and thus extra-costly from a standard public finance view.

The reality-based right-wing public-finance economists right now are not complimenting George W. Bush for keeping his promises to cut taxes. No, no, no, no, no.

The reality-based right-wing public-finance economists are saying something very different than "President Bush kept his promise to cut taxes."

Here's Andrew Samwick:

Vox Baby: First Things First: I don't disagree with Calculated Risk... [who] writes: "Everyone should agree that the most immediate fiscal problem is the structural General Fund deficit. Excluding future health care costs, the structural deficit is around 4% to 4.5% of GDP. This serious problem has been caused almost exclusively by Bush's policies. And imagine if the economy slows next year, as many people expect, adding a cyclical deficit on top of the huge Bush structural deficit."... As I have discussed... the appropriate target for the General Fund deficit is for it to average to zero over a business cycle. A corollary to that is that the General Fund should be in surplus during the non-recessionary parts of that business cycle...

Here's Tyler Cowen:

WSJ.com - Are Tax Reforms Sensible, Or Just a Cut for the Rich?: Commentators frequently refer to the Bush "tax cuts," but this is a misnomer. Government spending has risen sharply, including at the domestic level, so our taxes are going up in the future, especially once you consider the implicit liabilities from Social Security and Medicare. Bush has given us a "tax shift," combined with a long-run net tax increase; read Alex Tabarrok here. We simply haven't yet been told which taxes are going up and when...

Here's Alex Tabarrok:

What Tax Cut?: Newsroom: The Independent Institute: I favor a much smaller government but I do not favor the Bush tax cut. Or, to be more precise, I would support a tax cut if one had been proposed. But so far President Bush has neither proposed nor implemented a tax cut--only a tax shift. To grasp the difference between a tax cut and a tax shift, we must first understand that what ultimately drives taxes is spending. If spending increases, as it has under the current administration, then sooner or later taxes must increase (or inflation, a type of tax, will go up). Milton Friedman, the libertarian-leaning Nobel prize-winning economist, has long reminded us to be suspicious of any tax cut not matched by a spending cut. If spending isn't cut, then less taxes today means more taxes tomorrow. Thus, the Bush tax cut plan is really a plan for future tax increases...

Here's Bill Niskanen:

Bill Niskanen: For nearly 30 years, many Republicans have asserted that the best way to control federal spending is to “Starve the Beast” by reducing federal tax revenue.... There are at least three problems with this perspective:

1. It is most implausible that reducing the tax burden of government spending on current voters would reduce the level of government spending that Congress would approve. In private markets, there is a consistent negative relation between the price of a good or service and the amount demanded.
2. The “Starve the Beast” assertion is inconsistent with the facts, at least since 1980...
3. An increased belief in the “Starve the Beast” assertion has substantially reduced the traditional Republican concern for fiscal responsibility - leading to a pattern of tax cuts, increased spending, and increased deficits. This pattern has been strongest during the current Bush administration...

All impeccably right wing. All reality-based. All well worth listening to. None would say that President Bush has "kept his promise" in any meaningful sense.

Comments

[howard]

so prof, can we concede that either greg mankiw was always not reality-based, or that selling his reputation out for the bush administration was permanent, and he is no longer reality-based?

and therefore, his comments are no longer worthy of the excessive attention you seem to pay them?

[anne]

"As Milton Friedman puts it, to spend is to tax. Bush's spending increases--defense, Iraq, the Republican porkfest, the Medicare drug benefit--are still there, just as things you have charged to your VISA don't go away if you make only the minimum monthly payment."

Well, yes and no. What has changed is the structure of taxes which has come to increasingly favor the wealthiest. We have a mildly graduated tax system beginning with the middle class and becoming flat for the wealthier middle class to wealthy, and regressive for the wealthiest. Unless tax structure is made progressive again, the wealthier have indeed had a tax reduction.

[anne]

Besides, what we do not need to pay in tax now, if we have enough to invest, can and should be invested. Avoiding taking capital gains by choosing investments carefully, gives a significant tax advantage over time. Again, there is the California governor's effect. Remember, a governor who offers voters the chance to pay taxes now is no longer governor. "Hasta la vista." I prefer to pay taxes tomorrow and tomorrow and tomorrow.

[anne]

http://economistsview.typepad.com/economistsview/2006/09/paul_krugman_wh.html#comments

September 8, 2006

Paul Krugman: Whining Over Discontent
Edited By Mark Thoma

Paul Krugman continues the discussion on inequality and tries to clear a few things up amid attempts to cloud the issue:

New York Times - We are, finally, having a national discussion about inequality, and right-wing commentators are in full panic mode. Statistics, most of them irrelevant or misleading, are flying; straw men are under furious attack. It's all very confusing — deliberately so. So let me offer a few clarifying comments.

First, why are we suddenly talking so much about inequality? Not because a few economists decided to make inequality an issue. It's the public — not progressive pundits — that has been telling pollsters the economy is "only fair" or "poor," even though the overall growth rate is O.K. by historical standards. ...

Some conservatives whine that people didn't complain as much about rising inequality when Bill Clinton was president. But most people were happy with the state of the economy in the late 1990's, even though the rich were getting much richer, because the middle class and the poor were also making substantial progress. Now ... most working Americans are losing ground.

Second, notice the amount of time that inequality's apologists spend attacking a claim nobody is making: that there has been a clear long-term decline in middle-class living standards. Yes, real median family income has risen since the late 1970's ... But the rise was very small — small enough that other considerations, like increasing economic insecurity, make it unclear whether families are better or worse off. ...

Third, notice the desperate effort to find some number, any number, to support claims that increasing inequality is just a matter of a rising payoff to education and skill. ... In fact, the data refute any suggestion that education is a guarantee of income gains: once you adjust for inflation, you find that the income of a typical household headed by a college graduate was lower in 2005 than in 2000.

More broadly, right-wing commentators would like you to believe that the economy's winners are a large group, like college graduates or people with agreeable personalities. But the winners' circle is actually very small. Even households at the 95th percentile ... have seen their real income rise less than 1 percent a year since the late 1970's. But the income of the richest 1 percent has roughly doubled, and the income of the top 0.01 percent ... has risen by a factor of 5.

Finally, while we can have an interesting discussion about questions like the role of unions in wage inequality, or the role of lax regulation in exploding C.E.O. pay, there is no question that the policies of the current majority party — a party that has held a much-needed increase in the minimum wage hostage to large tax cuts for giant estates — have relentlessly favored the interests of a tiny, wealthy minority against everyone else.

According to ... Thomas Piketty and Emmanuel Saez, the leading experts on long-term trends in inequality, the effective federal tax rate on the richest 0.01 percent has fallen from about 60 percent in 1980 to about 34 percent today. Meanwhile, the U.S. government — unlike any other government in the advanced world — does nothing as more and more working families find themselves unable to obtain health insurance.

The good news is that these concerns are finally breaking through into our political discourse. I'm sure that the usual suspects will come up with further efforts to confuse the issue. I say, bring 'em on: we've got the arguments, and the facts, to win this debate.

[anne]

The voter's priciple in paying taxes is taxes yesterday, taxes tomorrow, but never taxes today. California has a governor who has shown just how dear the principle is :)

[kharris]

Yes. The "tax shift" logic makes sense not just between generations, but between income and wealth classes. Today's tax policy gives the rich more resources with which to influence tomorrow's tax policy. I see no mechanism in place to offset the tendency for legislators to respond favorably to political contributions and I see no mechanism to discourage the beneficiaries of today's tax policy from spending on political influence up to the point that the marginal cost equals the marginal benefit. I have seen no credible argument against these views from apologists for Bush's tax policy.

The tax shift favors the rich. So does the shift in shares of national income. It's hard to think of a policy development that has done anything but benefit the rich during the Shrub administration.

[Steven Donegal]

You're not reading the right economists. Larry Kudlow says all is well.

"Lower tax rates from President Bush and the Republican Congress have unleashed economic growth and generated a literal cascade of tax receipts. If spending had been held down, today’s budget would be in balance. Think of it."

[Paul J. Reber]

From anne: "Besides, what we do not need to pay in tax now, if we have enough to invest, can and should be invested."

This implies a "tax shift" can be a winner if the return on investment is greater than the cost of financing the debt incurred (I'm no economist, but this is basically the Keyensian idea of why there should be govt deficit spending during a recession, right?).

Estimating the cost/benefit requires knowing growth, which is why I suppose Samwick is appropriately concerned about a slowing economy.

But it also requires an accurate assessment of the debt service cost. With respect to yesterday's discussion about the implication of the Chinese holding so much of the US's debt, isn't there a danger of misestimating this? Many people pointed out that it would be disastrous for the Chinese to do anything sudden about they ongoing financing our current account deficit. However, it certainly seems to be in their power to do slower, subtle things. Like demand better return on their investment and require higher interest, increasing the debt service cost.

Perhaps this is simply restating Brad's fear of his inner Fredrich Hayek, that the cost of untangling the US economy from its dependence on Chinese finance could be a lot more than it currently appears to be.

However, I do like this emphatic rejection of the concept of a tax rate cut as any kind of actual tax reduction when spending continues unabated. I hadn't heard it put so simply before and now wishfully hope it might become a standard point in any discussion of current fiscal policy.

P.S. By this approach, wouldn't the same point need to be made about Reagan's first term "tax cuts" w/o spending cuts that created about a trillion dollars in deficit?

[anne]

Paul J. Reber:

"Besides, what we do not need to pay in tax now, if we have enough to invest, can and should be invested."

'This implies a "tax shift" can be a winner if the return on investment is greater than the cost of financing the debt incurred (I'm no economist, but this is basically the Keyensian idea of why there should be govt deficit spending during a recession, right?).

'Estimating the cost/benefit requires knowing growth, which is why I suppose Samwick is appropriately concerned about a slowing economy.

'But it also requires an accurate assessment of the debt service cost.'

Excellent argument.

[pgl]

Bush has not cut the aggregate tax burden. But in the following sense - Mankiw may be correct in a way that I suspect he'd cringe at. Let's suppose those deferred tax bills will one day be paid by the middle class and/or working poor. Bush will have made sure that the highest average tax rate was near 33.3% - buth the lowest average rate might be be rather close to 33.3% as well.

[anne]

Again, we have a mildly progressive tax system at the lowest to middle class levels, a flat tax through the upper middle class and wealthier levels and a mildly regressive system to the wealthiest.

[me]

"On principle no one in America should have to pay more than a third of their income to the federal government.""

Once again mankiw proves he is and idiot. Why should any American pay their whole income for heatlhcare? A guy retired from IBM after 30 years. His healthcare tab when working $236 a month. His healthcare tab the next month upon retiring? $1425 a month.

So his pension, that has already been cut in half, and his company paid lifetime healthcare, use up his entire pension.

[anne]

Me:

"A guy retired from IBM after 30 years. His healthcare tab when working $236 a month. His healthcare tab the next month upon retiring? $1425 a month."

Please explain: I was recently sent Blue Cross/Blue Shield rates for this year, and in a state that has the highest or near highest rates the cost for the most complete coverage is $567 a month. That is harsh, but not as harsh as your figure.

[Bruce Webb]

And we can never forget that the Economic Right has their own definition of "starve the beast" and "smaller government". I doubt in the extreme that Stephen Moore and Grover Norquist don't understand that there is ample waste, corruption and graft in the Pentagon budget or that many wealthy people are actively cheating on their taxes. But I suspect you could search the archives of the Cato Institute, the Club for Growth or Grover's public record and not find a single call for beefing up the IRS or do a serious performance audit of military spending.

When Norquist says "beast" or Moore says "smaller government" each means "domestic social spending" or "New Deal and Great Society programs". Or to be harsher but still fair anything which serves to shift gains from productivity down the ladder rather than up.

Mankiw is exactly right, once translated Bush has kept his promise: he cut effective rates on top earners, and made any increases in social programs almost impossible to enact.

Remember the existance of the ever expanding General Fund deficit has a silver lining for the very wealthy. People who can measure investments in units of $100,000 and so can invest in 30 Years directly have their future share of debt repayment offset by their guaranteed returns on that debt today. Similarly anything which keeps inflation low increases the value of their guaranteed return over the life of that bond. For them increased economic inequality is not something to be regretted, for some among us it is portfolio protection.

The hyper wealthy and their lackeys like Brooks, Kudlow and Mankiw simply have a separate measuring stick than Krugman or God knows Sawicky. As a result there is a great deal of talking past one another.

Marx got a great deal wrong. His understanding of economic conditions during the early middle ages was cartoonish, though essential to his theory, and the Labor Theory of Value has helplessly biased towards one factor of production, but he did identify one historical verity: there is a Class Struggle between Capital and Labor. Those people who are sitting in the middle (say own your house, have a fully funded 401k but fundamentally rely on wages)have to make a decision about which side they fundmentally are on.

To pose the question another way: what is more important to you? The equity in your house? or The equity in your society?

[andres]

I'm not a tax expert, but I wonder if "effective tax rate" includes all of the numerous loopholes in the tax code that allow the upper 1% to pay less than their share in taxes. If not, then the rate paid by the upper 1% is probably a good deal less than 34 percent.

But the tax shift logic taken by both Brad and the reality-based right commenters is sound.

(Are they still voting Republican? If not, they should meet and put the party leadership on mock-trial, with the sentence being the number of elections before they vote Republican and advocate Republican again, especially in view of the tragic, profligate waste of the Iraq fiasco).

Which once again establishes a basic point of mine. It's time to either (1) throw all politicians who promise a deficit-increasing tax-cut bribe to the electorate in prison for stealing from future generations, or (2) take control of the US Treasury and the power to tax away from politicians and turn it over to a theoretically impartial group of technocrats as in the Fed. I don't like the second option, but I favor it as long as (1) is politically impossible.

[Auros]

But as long as the tax hike is fought tooth and nail, and only comes under a Democratic President (and preferably a close-majority Congress), this tax shift serves the purpose of maintaining Republican power -- the GOP can say, "Aha! We told you all along they wanted to raise your taxes!"

[me]

"Please explain: I was recently sent Blue Cross/Blue Shield rates for this year, and in a state that has the highest or near highest rates the cost for the most complete coverage is $567 a month. That is harsh, but not as harsh as your figure."

anne, this it the retiree health cost for IBM. When they cancelled the lifetime benefit, they replace it with $10,000 to help you buy insurance from the company in the future. They call it FHA, future health account.

They segregate retirees into a class by themselves, not included with the employees. If they drive you out of the plan, they get to keep the money and no longer have to "subsidize" you healthcare.

[anne]

Me, thank you for explaining clearly, but we must still wonder why the health care cost is so high. I will ask. Please continue to use IBM as a model, for it has derved to be as much as General Motors or General Electric, for better and worse, for decades.