Budget Deficit Shrinking Unexpectedly Quickly

[Dynasty]

[ 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]

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]

[ 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]

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%).
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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]

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]

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]

[ 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]

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 [img]/images/graemlins/smile.gif[/img]), 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]

Since you have gotten me started [img]/images/graemlins/smile.gif[/img]. 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

Budget revenues 2004

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

[andyfox]

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.