As arguments over tax increases versus spending cuts continue, Veronique de Rugy (NRO – The Corner) refers to a paper by Christina and David Romer (the former was Chair of President Obama’s Council of Economic Advisors for over a year and a half) on the effects of tax increases on GDP. The National Bureau of Economic Research summary of the paper has this eye-popper (emphaisis in original):
Tax changes have very large effects: an exogenous tax increase of 1 percent of GDP lowers real GDP by roughly 2 to 3 percent.
Within the paper itself, the range shrinks to 2.5-2.75%.
That is a very significant. When combined with my quick-and-dirty regression from yesterday. That means an exogenous tax increase designed to raise revenue by 1% of GDP will reduce GDP so much that the actual change to revenue ranges from an increase of 0.04% of GDP to a decrease of 0.05% of GDP.
Conversely, a tax cut of 1% of GDP would raise GDP to the point where Washington’s revenue would at worst fall 0.04% of GDP or at best rise 0.05% of GDP. In other words, tax hikes don’t help and tax cuts really do pay for themselves.
The trick is, of course, to make sure the tax cut doesn’t have to pay for new spending on top of the tax reduction. The only time a recent tax cut did not have to multi-task (the 1997 tax cuts) led to the only four budget surpluses since 1970.
We need to keep this in mind as the calls for tax increases grow louder.
Cross-posted to Virginia Virtucon
[...] Cross-posted to the right-wing liberal [...]
” In other words, tax hikes don’t help and tax cuts really do pay for themselves.”
on what planet? You guys insist on this but the last 8 years have proven that’s not necessarily true but yet you have no Plan B if it does not pan out – just continue to carry a 1.5 trillion deficit while yammering about a “spending problem” but not once showing what precisely needs to be done if the supply-side idiocy does nor produce as predicted.
” David Stockman ridicules GOP on budget”
“Stockman explained that raising taxes is normally “a bad thing to do,” but that the United States “is in such dire shape that we have no choice but to accept the negative trade-off of some harm to the economy to start paying our bills,” he said. “Otherwise, we’re dependent on the Chinese, we’re dependent on OPEC, we’re dependent on a bunch of hedge-fund guys to buy our debt and this game is about over.”"
http://abcnews.go.com/ThisWeek/reagan-budget-director-mad-men-fed-control/story?id=12080028
ya’ll are out of touch with reality and so dedicated to ideological “purity” that you’ve effectively removed yourself from any practical ways of actually doing something about the deficit.
Witness 8 years of Bush.. insisting on the same idiotic non-solutions and now under Obama the same old, same old.
listen to the original supply-side guy – Stockton – “… start paying our bills,” he said. “Otherwise, we’re dependent on the Chinese, we’re dependent on OPEC, we’re dependent on a bunch of hedge-fund guys to buy our debt and this game is about over.”
ya’ll off out of the game… strike 3… game over.. find another line of work other than politics or leadership.
What the Bush are revelaed is what I said: tax cuts can’t pay for themselves plus extra spending.
Then again, Bush’s worst deficit was less than one-third of what we face now.
So you got your history and your economics wrong, Larry. Otherwise it’s a fine comment.
the deficit under Bush DID DOUBLE but my point here is that we have run up a 14 trillion deficit, increasing by a structural annual deficit of 1.5 trillion that STARTED under Bush – and the Republicans refuse to responsibly own it and instead – continue to instead – 10 years in a row that supply-side “ought to work”.
Well… as David Stockton – one of the architects of supply-side has correct said – that at some point – you have to acknowledge that for whatever reason – supply side is not producing the expected results and confronting that reality to pay our debts in Plan B.
the Republicans are totally out to lunch on Plan B.
they’re like kids saying “see no evil”.
no longer can we rely/depend/trust the Republican Party to do the right thing.
they are as bad or worse than the Dems, just in a different way.
Fess up D.J. You know the truth here… you’re a smart guy.
[...] Why is President Obama adamant about raising taxes? That’s the question The right-wing liberal considers. That is, he notes tax increases stifle economic growth. Even the president’s own economic advisers know that. As arguments over tax increases versus spending cuts continue, Veronique de Rugy (NRO – The Corner) refers to a paper by Christina and David Romer (the former was Chair of President Obama’s Council of Economic Advisors for over a year and a half) on the effects of tax increases on GDP. The National Bureau of Economic Research summary of the paper has this eye-popper (emphasis in original): Tax changes have very large effects: an exogenous tax in … Read More [...]
DJ: I believe the 3:1 ratio is closest. Meaning for every dollar taken out of the economy for taxes 3 dollars are lost to GDP.
My graduate school macroeconomics class at Liberal U – Harvard for the benefit of your antagonistic readers – taught that every $150m in taxes killed 5k jobs. That meant every job was worth $30k (1980 dollars). Today it is more like $50k per job.
Furthermore, every dollar taken out of the economy to produce a Keynesian increase – produced less than 28 cents on the dollar. So, if you want 1 dollar of Keynesian stimulus you must take out 4 dollars in taxes. 3 dollars are lost to the one dollar gained.
This is what was taught by good Liberal, Keynesian economics professors. They imagine the temporary effect is worth the damage. Unfortunately, the damage of doing deficit spending over the long term is catastrophic.
are you folks differentiating between taxes on individuals and taxes on companies.
taxes on individuals just divert spending from lottery tickets and big screen TVs to soldiers in Afghanistan (with families who spend their paycheck) and 4 salaried DOD workers for every soldier.
The money stays in the economy but employs soldiers rather than big screen TV workers in China … right?
taxes on business? I agree… but are you not conflating the two?
“taxes on individuals just divert spending from lottery tickets and big screen TVs . . . ”
No wonder you say half the things you do, Larry. Your concepts of economics are so old *they’re* on Social Security.
Individuals don’t just spend money on trinkets; they invest it in small and large companies (especially wealthier individuals). That’s what the “crowding out” effect is: money government spend is borrowed or taxed away from the investment pool, and thus investment falls.
The idea that individual taxes affect nothing but consumption is straight out of the dark ages.
and I don’t really know…or trust the “theoreticals” no matter what side they come from.
I’m looking at the same thing that Stockman is – that we have a large debt that is growing at 1,5 trillion a year and 8+ years of supply-side theories did nothing to reduce it.
what is plan B? At what point do you take responsibility for the debt and do what you must that is effective instead of continuing to support “theories” that are not doing what they purport to do?
That’s the fundamental problem with Republicans now days. They refuse to own the debt and continue to insist on theories….
that doesn’t work. when do we do what we must do to respond to the realities?
in terms of “cuts” and “supply side”, the Ryan plan is one of the most bogus and cynical proposals ever seen were he proposes to “cut” the entitlements and rely on supply-side to make up the gap on military and other spending.
Medicare Part B and MedicAid constitute about a third of the deficit but you no more can cut them both to zero than the man in the moon,
Part B can be fixed fairly easily by increasing premiums and co-pays and means-testing. MedicAID is a STATE decision. It is not mandatory and the States have a major say in how the benefits are allocated.
We take in about 1.3 trillion in personal and corporate income taxes.
Our deficit is 1.5 trillion. Cuts alone do not seem to be a solution but I’m willing to listen to ANYONE who puts forth a plan – a politically feasibly plan – to achieve balance with cuts alone.
The Republicans are basically AWOL on the GOAL of budget IMHO,.
D.J.- most folks “investments” come out of their paychecks FIRST and then what is left is spent with “discretion” – to include food, shelter, car, etc PLUS King’s Dominion, second cars, second homes, etc.
all of these expenditures go into the economy but so do taxes collected and spent by the government on cyberwar experts, Tomahawk Engineers and highway constructors.
both do the same thing in the economy.
a taxpayer-bought road is just as “economic” as a Korean-made car.
I don’t my the blather than all money spent is “investment” unless you want to INCLUDE companies like Boeing and McDonnell Douglas….etc…