links for 2007-12-09
links for 2007-12-10

Don't Worry: You're in on the Con...

Hoisted: A new comment from "Slocum" was received on the post "Justin Fox on Arthur Laffer and Company" http://delong.typepad.com/sdj/2007/12/justin-fox-on-a.html#comment-92874900

"I KNOW THAT reducing taxes produces more revenues"

There are two ways to read this:

  1. That reducing taxes produces not only more revenues but an increase greater than the amount of the tax cut, or
  2. That it produces more revenue that would have been expected just based on the new rate and the old GDP because the tax cut increases the GDP -- just not enough to pay for itself.

20071208_delong_micro.jpg Nope. People who believe in (2) and are truthtellers say, instead:

Tax cuts grow the economy and so lose less revenue than static revenue estimates predict.

People who believe (2) say "reducing taxes produces more revenues" only when they are trying to con the wingnuts--trying to convince the wingnuts that they are believers in (1).

Slocum is trying to make us believe that the Republican High Politicians are in fact in the business of conning the wingnuts--that we should vote for them because they do not mean what they say. Slocum is saying: "Psst. You are in on the con."

This is itself a con: all the best cons begin that way.

Slocum is not the first to do this: this con was first run on me 28 years ago by a future Republican CEA chair. I have finally learned not to fall for it. But it took me a very long time.

Slocum goes on

The first is only true at rates of taxation well above the current U.S. levels. The second is generally true except at very low levels of taxation (where more tax money spent on public infrastructure would more than pay for itself). But we're in a middle zone where tax cuts both:

  1. Help grow the economy, and
  2. Reduce the overall government tax revenue (but by less than the > amount of the tax cuts).

Bottom line of this approach -- the government taking a smaller slice of a growing pie. The economy grows while the government shrinks -- for Republican presidential candidates (and primary voters), what's not to love about that?

Personally, I have mixed feelings about tax rates -- I think we look at federal income taxes rates only and think our tax burden is low, but if you add our 17% FICA, 28-33% top federal rate (mostly 28 but a bit of 33), 4% state income tax, 6% state sales tax, and local property taxes that amount to another ~5% of income, we're at over 50% marginal rates now -- probably closer to 60. I'm not a supply sider, but nor am I in favor of increasing marginal tax rates.

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