Budget Deficit Shrinking Unexpectedly Quickly [Archive]

MMMMMM

07-13-2005, 07:56 AM

(excerpt)"Bush's Budget Update May Show Deficit Goal Being Reached Early

July 11 (Bloomberg) -- President George W. Bush's administration will report this week that surging tax revenue is shrinking this year's budget deficit from the record 2004 level, possibly by as much as $90 billion, giving him a shot at fulfilling his deficit reduction promise three years early.

With tax revenue running $1 billion a day ahead of the 2004 pace in late April and May, the deficit will likely decline to about $325 billion from $412 billion last year, according to the Congressional Budget Office and private forecasters such as Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut.

``An expanding economy, creating more receipts, is putting us on a very good path to deal with our deficit,'' Treasury Secretary John Snow said at a press conference in Calgary on July 8. ``It's pretty clear now the path we are on will take us below the president's initial target.''

Bush promised during his election campaign last year that he would pare the annual deficit to about 2.25 percent of the nation's gross domestic product by 2009.

As recently as February, the government was projecting the deficit would rise this year to $427 billion, or about 3.5 percent of the nation's gross domestic product. Some economists, including Mike Englund of Boulder, Colorado, research firm Action Economics LLC, now predict the shortfall will drop to 2.5 percent of GDP this year and as low as 2.0 percent next year. That would mean a deficit next year as low as about $250 billion. (end excerpt)"

http://www.bloomberg.com/apps/news?pid=10000103&sid=aZgwyLsWjDDc

Just some timely facts for those who tend to view economics as a purely zero-sum game.

Higher tax rates do not imply greater tax revenues, nor do lower tax rates imply lesser tax revenues.

BZ_Zorro

07-13-2005, 08:18 AM

[ QUOTE ]
Higher tax rates do not imply greater tax revenues, nor do lower tax rates imply lesser tax revenues.

[/ QUOTE ]
Or vice versa. I fail to see a causal link between Bush's tax cuts and these numbers.

[ QUOTE ]
Just some timely facts for those who tend to view economics as a purely zero-sum game.

[/ QUOTE ]
There are actually people who think this?

MMMMMM

07-13-2005, 08:51 AM

[ QUOTE ]
[ QUOTE ]
Higher tax rates do not imply greater tax revenues, nor do lower tax rates imply lesser tax revenues.

[/ QUOTE ]

Or vice versa. I fail to see a causal link between Bush's tax cuts and these numbers.

[/ QUOTE ]

I'm not arguing for the vice versa here (although it is probably true as well. Didn't tax revenues rise after the Kennedy and Reagan tax cuts?)

[ QUOTE ]
[ QUOTE ]

Just some timely facts for those who tend to view economics as a purely zero-sum game.

[/ QUOTE ]

There are actually people who think this?

[/ QUOTE ]

Yes, there are people who "tend to view economics as a purely zero-sum game." Some of them frequent this board. Where have you been?

adios

07-13-2005, 11:07 AM

[ QUOTE ]
I fail to see a causal link between Bush's tax cuts and these numbers.

[/ QUOTE ]

Actually there is but my impression of you is that nothing would convince you so why bother.

BZ_Zorro

07-14-2005, 03:21 AM

Actually, there is plenty that would convince me. A link to an unbiased, respected source that analyses the recent changes in the economy would go a long way.

I agree that tax cuts can and do stimulate the economy, that's ABC economics. It doesn't always happen that way though. I've yet to read a non-conservative article that establishes that link with the Bush tax cuts, but I'm open to being proven dead wrong.

lastchance

07-14-2005, 03:49 AM

Tax Revenues are made up of

Tax Rate * amount of money that flows into tax rate, correct?

So, for tax revenues to be greater with a lower tax rate, the amount of money that flows into the new tax rate must be multipled by 1/(1-tax rate reduction (as a decimal reduction from the original)) greater than the original tax rate.

This is all assuming tax rate is an independent variable.

Clearly, I have shown tax rate to have a direct effect with tax revenue, unless the amount of money that is generated by a lower tax rate to increase money flow by a multiplier of exactly 1/(1-tax rate reduction), which would be highly unlikely and illogical.

Also, F(tax rate) is a continuous graph, correct?

Clearly, at some point, depending on the what the graph of F(tax rate) looks like, there will be a point where increasing taxes will have a positive effect on tax revenue, probably the closer you get to 0%.

BTW, what does/should F(tax rate) look like?

BZ_Zorro

07-14-2005, 04:20 AM

[ QUOTE ]
Higher tax rates do not imply greater tax revenues

[/ QUOTE ]
Dumb Question of The Day: If higher tax rates do not imply greater tax revenues, why do governments raise taxes when they need money?

[censored]

07-14-2005, 04:25 AM

[ QUOTE ]
[ QUOTE ]
Higher tax rates do not imply greater tax revenues

[/ QUOTE ]
Dumb Question of The Day: If higher tax rates do not imply greater tax revenues, why do governments raise taxes when they need money?

[/ QUOTE ]

to raise more revenue.

the statement should read "higher taxes does garuntee more gross tax collected than would have occured under a lower tax rate"

Arnfinn Madsen

07-14-2005, 07:38 AM

adios

07-14-2005, 08:17 AM

The notion of economists "proving" something is wrong is actualling quite funny.

Dynasty

07-14-2005, 08:34 AM

[ QUOTE ]
The claim that lower taxes might lead to higher tax revenue has been proven wrong by so many economists (right to left) that it is considered dead. There is no way you can increase GDP by 10% by reducing taxes by 10% (i.e. from 20% to 18%).

[/ QUOTE ]

You position is completely indefensible simply from a common sense perspective.

There is a tax rate which will yield maximum tax revenue for the government. If the current tax rate is higher than that, then lowering taxes would increase revenue. And, of course, if the current tax rater were lower, then raising taxes would increase revenue.

Just use some simple examples. If the tax rate were 99%, the economy would be in shambles. Everybody would agree that lowering the rates would improve the economy and raise tax revenues. If the tax rate were 1%, everyone would agree raising tax rates just a little would not hurt the economy significantly but would increase revenues for the government.

As a side note, I always like the idea of lowering taxes. But, I simply don't want the government to have the money. It's not because I think lowering taxes will necessarily generate more for them.

BZ_Zorro

07-14-2005, 09:17 AM

I thing you're being disingenous here.

[ QUOTE ]
Your position is completely indefensible simply from a common sense perspective.

[/ QUOTE ]
Actually it's not.
[ QUOTE ]
Just use some simple examples. If the tax rate were 99%, the economy would be in shambles. Everybody would agree that lowering the rates would improve the economy and raise tax revenues.

[/ QUOTE ]
His point is that at the current, real world level of taxes (which is near optimal - not 99% or 1%), cutting taxes a certain percentage will not increase GDP by that same percentage, which is required to increase revenue.

For example:
GDP $10 trillion. Flat tax 20%. Current revenue 2 trillion
Cut taxes 10% (20%->18%). New revenue $1.8 trillion
Need an extra 200 million in taxes, which is a more than 10% increase in GDP. Given that yearly growth in GDP is of the order of 3-4% (at best), and tax cuts affect the economy far less than this percentage (if at all - inflation and other factors come in), it will take quite a few years to even get the tax revenue back to its old level - and you're cumulatively losing money every year. Again, if the tax cut has any effect at all. Many governments have undertaken tax cuts to try and stimulate the economy and have gotten nowhere. That's how much of a fantastic effect they have on GDP.

BZ_Zorro

07-14-2005, 09:30 AM

[ QUOTE ]
There is a tax rate which will yield maximum tax revenue for the government. If the current tax rate is higher than that, then lowering taxes would increase revenue. And, of course, if the current tax rater were lower, then raising taxes would increase revenue.

[/ QUOTE ]
This is true. However, the optimal tax rate is not a fixed number. It depends on how hot or cold the economy is, how much capital investment, inflation rates, interest rates, etc. And even if it were a fixed number, it would take many years for the economy to readjust to this optimal level and see and an increase in tax revenue. In the meantime, the government would be dealing with a shortfall in revenue every year.

Tax cuts are best used under certain circumstances, and many prominent economists have said those circumstances did not exist when Bush made his tax cuts. Additionally, cutting taxes for the uber rich has far less of an effect on the economy than middle class tax cuts.

In short, the idea that the tax cuts have caused this revenue increase is certainly debated and considered false by most economists.

Felix_Nietsche

07-14-2005, 09:58 AM

The claim that lower taxes might lead to higher tax revenue has been proven wrong by so many economists (right to left) that it is considered dead. There is no way you can increase GDP by 10% by reducing taxes by 10% (i.e. from 20% to 18%).
************************************************** ********
You have been programmed well by the European Socialist Hive. It is time to open your eyes and look at facts. Even if those facts are hurtful because they clash with beliefs that you cherish too much.

The Reagan tax cuts occurred over a three year period 1981-83. After a dip in tax revenue (it is believed that it takes 2 to 3 years for tax cuts to take effect), tax receipts surged in 1984 and beyond. Think about it. People pay lower taxes and the govt has more money to spend. This is called having the best of both worlds. The Laffer curve is an economic process of trying to determine the tax rate that will maximize govt tax revenue. The Laffer Curve says at a 0% tax rate the govt will have zero tax receipts. At a 100% tax rate the govt will also have little tax receipts because when 100% of a person income is confiscated there will be no incentive to work. Someone between 0% and 100% is the magical tax rate called "R" which will produce maximum govt tax revenue. But don't believe me. look at the data yourself...

http://www.heritage.org/Research/Taxes/images/chart.gif
http://www.cato.org/pubs/pas/pa-261.html
http://www.rightwingnews.com/reader/taxcuts.php

John F. Kennedy was the last Democrat president who had an understanding of economics. He was a tax cutter and believed cutting taxes led to a stronger economy.

The Laffer Curve
http://www.investopedia.com/terms/l/laffercurve.asp

At the bottom of this link is a pie chart showing that 80% of the people in the USA account for only 20% of the tax receipts. Yet the American Democrat party claims the "rich" are not paying their fair share of taxes and therefore taxes should be increased.
http://www.rushlimbaugh.com/home/today.guest.html

Arnfinn Madsen

07-14-2005, 11:06 AM

I am aware of the Laffer curve, I have attended several lectures on it and read a lot.

As Zorro specified I was speaking about current tax levels. The height of the Laffer curve is believed to be at a MUCH higher tax level than current US tax level, thus claiming that a decrease in tax will increase tax revenue is not valid.

Why doesn't tax cuts have such large effect? Simply because lower tax rate is not such a good incentive to work harder. To put it in another example, you have a salary of $100/hour, if they reduce the tax rate from 20 to 18%, would you work 10% more hours? Does an increase from $80 to $82 make you work 10% more hours?

You just don't work more and more the higher your net hourly wage is since an increased wage also makes you substitute free time for work. It is believed that a increase of 10% in salary (which could be done through a tax cut) in western economics now would make male work appx. the same while women would work more (leading to a GDP-increase, I don't question this).

This discussion is silly, you base your view on propaganda, I haven't seen 1 credible Economist support your claim. I don't think Bush claims it either.

Arnfinn Madsen

07-14-2005, 11:10 AM

Just also to tell you where the propagandists have gotten you on your hook. If a government would do nothing at all to stimulate the economy and not change anything in the tax policy, the tax revenue would increase substantially on 8 years. Just look at 3% GDP-increase:

1.03x1.03x1.03x1.03x1.03x1.03x1.03x1.03=1.27

Oops, more than the increase in the Reagen-area.

Pwned.

MMMMMM

07-14-2005, 11:34 AM

[ QUOTE ]
Why doesn't tax cuts have such large effect? Simply because lower tax rate is not such a good incentive to work harder. To put it in another example, you have a salary of $100/hour, if they reduce the tax rate from 20 to 18%, would you work 10% more hours? Does an increase from $80 to $82 make you work 10% more hours?

You just don't work more and more the higher your net hourly wage is since an increased wage also makes you substitute free time for work. It is believed that a increase of 10% in salary (which could be done through a tax cut) in western economics now would make male work appx. the same while women would work more (leading to a GDP-increase, I don't question this).

[/ QUOTE ]

Sorry to say, but this shows you are not thinking completely clearly about this, despite whatever lectures you may have attended.

Quite simply, GDP growth is not predicated on workers working longer hours. GDP also grows based on increased consumer spending levels. So if you spend more, but don't work any longer hours, you have contributed to an increase in GDP. Additionally, you have helped generate more tax revenue through sales taxes, have helped increased the income taxes the proprietor of the store you bought from ends up paying, etc.

In other words, increased economic activity increases overall tax revenues collected.

If you have less tax taken out of your paycheck, you have more discretionary income available to spend and by spending you increase the overall level of economic activity (as do others). Increased overall economic activity-------->more tax revenues paid.

Arnfinn Madsen

07-14-2005, 11:57 AM

Yes,
I agree to everything you write, what you pointed out as wrong was some simplifications I made (because if not simplyfying I would have to write 200 pages /images/graemlins/smile.gif), but in the end all GDP increases has to be anchored in increased total number of hours worked (when you consume more somebody has to produce more) or increased productivity. The increased productivity factor is an underlying factor increasing tax revenues almost constantly.

What I tried to point out that even if a tax cut leads to increased consumption it is unrealistic that the increased number of working hours trough reduced unemployment and longer working week compensates for the loss in tax revenues.

I am not thus saying that a tax cut is wrong, it can be healthy for the economy. Just a bit fed up when the claim that rigth wing economists found unvalid more than 15 years ago, keeps coming back again.

Arnfinn Madsen

07-14-2005, 12:07 PM

Since you have gotten me started /images/graemlins/smile.gif. For anyone with free time available they may compare these two lists and see that most countries, right-wing or even communistic; have increased their tax revenues significantly during the last 8 years:

Budget revenues 1995 (http://www.theodora.com/wfb/1995/rankings/budget_revenues_million_0.html)

Budget revenues 2004 (http://www.photius.com/rankings/economy/budget_revenues_2004_1.html)

To increase it on a 8 year basis, is simply not impressive.

andyfox

07-14-2005, 12:19 PM

We should keep in mind that by the "tax rate" we're (usually) referring to the marginal tax rate. And usually just the income tax rate. So economic behavior doesn't react to the "tax rate" as much as one might, at first blush, think.

Arnfinn Madsen

07-14-2005, 12:22 PM

You really got me starting /images/graemlins/smile.gif:

Budget revenues pr 2004 pr capita:

US: $6,646
Germany: $10,552

I guess the Germans are idiots when they claim that their higher tax rates makes more free state services possible /images/graemlins/confused.gif

andyfox

07-14-2005, 12:28 PM

The first economic statement by Adios with which I actualling agree.

/images/graemlins/wink.gif

Matty

07-14-2005, 12:48 PM

[ QUOTE ]
Yes, there are people who "tend to view economics as a purely zero-sum game." Some of them frequent this board. Where have you been?

[/ QUOTE ]Name some.

Felix_Nietsche

07-14-2005, 01:19 PM

Also there is the question of morality/ethics of the government taking money by force (taxes) from it's citizens. Most agree taxes are necessary, but should a govt's role be to maximize it's tax coffers or foster a freer society that allows people to keep more of THEIR income? I would prefer to err on the latter because big govt lead to less freedom.

Felix_Nietsche

07-14-2005, 01:23 PM

Budget revenues pr 2004 pr capita:
US: $6,646
Germany: $10,552
****************************************
Ouch! I feel sorry for the Germans. I'm glad I live in the USA rather in Germany. Their govt makes thieves look honest. These numbers show why Germany's unemployment is 10% rather than 5% in the USA.

Arnfinn Madsen

07-14-2005, 01:24 PM

[ QUOTE ]
Budget revenues pr 2004 pr capita:
US: $6,646
Germany: $10,552
****************************************
Ouch! I feel sorry for the Germans. I'm glad I live in the USA rather in Germany. Their govt makes thieves look honest. These numbers show why Germany's unemployment is 10% rather than 5% in the USA.

[/ QUOTE ]

And in this you might be right, just wanted to point out that higher tax leads to higher revenue.

Arnfinn Madsen

07-14-2005, 01:37 PM

ptmusic

07-14-2005, 01:45 PM

[ QUOTE ]
Also there is the question of morality/ethics of the government taking money by force (taxes) from it's citizens. Most agree taxes are necessary, but should a govt's role be to maximize it's tax coffers or foster a freer society that allows people to keep more of THEIR income? I would prefer to err on the latter because big govt lead to less freedom.

[/ QUOTE ]

If you are concerned about a loss of freedom, then surely you are against the Patriot Act? Or are you concerned about a loss of freedom only when it fits with the Bush package?

-ptmusic

Felix_Nietsche

07-14-2005, 01:45 PM

[censored]

07-14-2005, 01:51 PM

[ QUOTE ]
[ QUOTE ]
Also there is the question of morality/ethics of the government taking money by force (taxes) from it's citizens. Most agree taxes are necessary, but should a govt's role be to maximize it's tax coffers or foster a freer society that allows people to keep more of THEIR income? I would prefer to err on the latter because big govt lead to less freedom.

[/ QUOTE ]

If you are concerned about a loss of freedom, then surely you are against the Patriot Act? Or are you concerned about a loss of freedom only when it fits with the Bush package?

-ptmusic

[/ QUOTE ]

Couldn't one turn around ask you if you are concerned about the loss of freedom from the Patriot act than surely you are for the Bush tax cuts. Or are you concerned about a loss of freedom only when it fits with the Democratic talking points?

Also to actually be fair, the Patriot Act while troubling has not actually prevented me from doing something that I was doing before its enactment. and this is true for almost everyone. On the other hand, every dollar of tax that is taken from me is one less dollar that I would have made sometype of choice with.

so if it is only an arguement about which infringes freedom more. taxes win easily.

Arnfinn Madsen

07-14-2005, 01:53 PM

just wanted to point out that higher tax leads to higher revenue.
**********************************************
This does not prove anything. A true test of studying tax rates vs. tax receipts would for Germany to lower their taxes, say 10%, and then we look at THEIR tax receipts for the next 5 years...then we could objectivly evaluate the effect of tax rates and tax receipts. Germany's GDP gowth has been terrible. Schoeder is in huge political trouble for the German economy.

[/ QUOTE ]

You are mixing the issues, Felix. Their GDP pr capita 27% lower than US, way too large to be explained by tax level or unemployment difference. It comes down to lower productivity. There are many factors in government policy that effects productivity more than tax level.

ptmusic

07-14-2005, 02:00 PM

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
Also there is the question of morality/ethics of the government taking money by force (taxes) from it's citizens. Most agree taxes are necessary, but should a govt's role be to maximize it's tax coffers or foster a freer society that allows people to keep more of THEIR income? I would prefer to err on the latter because big govt lead to less freedom.

[/ QUOTE ]

If you are concerned about a loss of freedom, then surely you are against the Patriot Act? Or are you concerned about a loss of freedom only when it fits with the Bush package?

-ptmusic

[/ QUOTE ]

Couldn't one turn around ask you if you are concerned about the loss of freedom from the Patriot act than surely you are for the Bush tax cuts. Or are you concerned about a loss of freedom only when it fits with the Democratic talking points?

Also to actually be fair, the Patriot Act while troubling has not actually prevented me from doing something that I was doing before its enactment. and this is true for almost everyone. On the other hand, every dollar of tax that is taken from me is one less dollar that I would have made sometype of choice with.

so if it is only an arguement about which infringes freedom more. taxes win easily.

[/ QUOTE ]

I am for tax cuts. Not the way Bush has done it, and not when we have a record high deficit and two wars going on, but generally speaking, I agree with Republicans and conservatives on taxes and smaller federal government.

I'm also against the Patriot Act, so there is no blindly following contradictory party propaganda on these two issues by me. I was simply pointing out a contradiction in "raise taxes = less freedom" vs. the Patriot Act.

-ptmusic

Felix_Nietsche

07-14-2005, 02:37 PM

I was simply pointing out a contradiction in "raise taxes = less freedom" vs. the Patriot Act.
*******************************************
You are reading a newspaper with binoculars.
There is a correlation between the size of govt and the amount of freedom people have. The Patriot act when compared with the amount of restrictive laws on the books is just a minnow to a whale.

adios

07-14-2005, 02:37 PM

[ QUOTE ]
I am for tax cuts. Not the way Bush has done it, and not when we have a record high deficit

[/ QUOTE ]

Bzzzzzzt wrong. Another victem of political spin doctoring /images/graemlins/smile.gif. The U.S. is not running a record high deficit. This ground has been covered many times before on this forum. The deficit in absolute terms is higer than say it was in 1990. However, the economy has grown a lot since then. The way that people compare budget deficits historically is to do as a percentage of GDP and the budget deficits as a percentage of GDP are not anywhere close to record levels. Also there was this nasty thing called a recession that started in late 2000 or early 2001 (take your pick). Look at the budget data and you'll see a precipitous decline in tax revenues the correlate to the recession. This is easy to understand since rising unemployment means lower tax revenues. The magnitude of the tax cuts of 2003 would not remove the budger deficit either. I would urge you to actually look at the budget data and make your own conclusions. I've posted links to the data many times. Start at www.cbo.gov (http://www.cbo.gov) and go from there.

ptmusic

07-14-2005, 02:39 PM

[ QUOTE ]
I was simply pointing out a contradiction in "raise taxes = less freedom" vs. the Patriot Act.
*******************************************
You are reading a newspaper with binoculars.
There is a correlation between the size of govt and the amount of freedom people have. The Patriot act when compared with the amount of restrictive laws on the books is just a minnow to a whale.

[/ QUOTE ]

Ok... so you're against the minnow, right?

-ptmusic

ptmusic

07-14-2005, 02:49 PM

I didn't say "record high deficit" as a percentage of GDP, did I? I hope you got your thrills pushing your buzzer, though.

What's your point? I'll repeat mine: I am for tax cuts, but not the way Bush did it, and not at the time he did it. Even if it wasn't a record deficit by any definition (absolute or otherwise), I still would be: for tax cuts, but not the way Bush did it. And the fact that the magnitude of the tax cuts wouldn't account for the whole deficit (I THINK that's what you were trying to say) is beside the point: I still think he made a mistake adding to the deficit the way he (and obviously congress) did.

-ptmusic

Felix_Nietsche

07-14-2005, 03:22 PM

If you want to design a true SCIENTIFIC experiment on the effects of tax rates versus tax revenues for GERMANY then you would need to do as I descibe in the previous post.

Obviously there are other factors that effect tax receipts. Punitive business laws can aslo hurt businesses which aslo hurts the amount that a company can pay their employees.

lastchance

07-14-2005, 04:22 PM

Actually, that sample size would be far too insignifigant. You suggest running it on a 5 year basis one time? This would be very, very subject to other independent factors outside of your control. Also, considering over time, economy grows in general, tax revenues will increase because of that anyway, and so you have to adjust for that.

Certainly BZ_Zorro is right, that F(tax rate) is a graph dependent on many other factors. We cannot possibly begin to imagine what these factors are, and what exact effect they have on tax revenue.