Monday, December 27, 2010

Balancing the Budget Requires Spending Restraint and Pro-Growth Policies, Not Higher Tax Rates

Scott Grannis has a great post about the pro-cyclical pattern of federal tax revenues, illustrating graphically above the huge increase in tax revenues recently due to the economic rebound.  Historically, tax revenues as a share of GDP have been fairly constant, despite large variations in the top marginal tax rate, see the chart below. 


This analysis leads Scott to conclude that:

"There is every reason to think that federal (and state and local) revenues will continue to grow at a relatively high rate as long as the economy continues to recover. Balancing the budget doesn't require higher tax rates, it just requires spending restraint and pro-growth policies. Holding spending constant, and assuming revenues grow at their current rate, the federal budget would be balanced in 5-6 years. If the new Congress can't make a significant move in this direction (i.e., holding the line on spending and keeping tax rates as low as possible), they deserve to be trounced in the next election."

19 Comments:

At 12/27/2010 10:12 AM, Blogger Jet Beagle said...

Unfortunately, two large constituencies have adopted goals which will directly conflict with balancing the budget. Government workers and their families, of course, will always desire more transfers from the private sector to the public sector.

The other group who stand in the way of fiscal sanity is the large number of voters who are eaten up with envy. I am convinced that millions of Americans care more about reducing the wealth of others than about increasing their own standard of living. The attitude almost seems to be:

"If I can't be a millionaire, then no one else should be either, and I'm ready to take down the economy if that's what it takes to achieve justice."

Do these folks ever grow up?

 
At 12/27/2010 11:20 AM, Blogger Ironman said...

A couple of interesting notes - first, since you're looking at the maximum personal income tax rate, if you look just at personal income tax collections, the percent share of GDP of these is remarkably stable over time - it's averaged 8.0% of GDP, with a standard deviation of 0.8% of GDP, at least since 1946. (The percent share of these tax collections can actually be described with a normal distribution - total tax collections do too, but there, the average since 1946 is 17.8% of GDP, with a standard deviation of 1.2% of GDP.)

Second, how much the federal government collects in taxes is almost perfectly correlated with median household income, which is fully independent of income tax rates. Budget deficits are then almost exclusively the result of excessive spending by the federal government.

 
At 12/27/2010 11:52 AM, Blogger Jet Beagle said...

ironman,

Are you sure that median household income is completely independent of income tax rates? or better yet, independent of income tax policy?

Where government tax policy distorts free market decision-making, it likely results in inefficient allocation of resources. Inefficient allocation of resources will eventually lead to a lower than possible standard of living for everyone. Though higher marginal tax rates may not immediately reduce standards of living from what they would have been, eventually they will.

 
At 12/27/2010 12:15 PM, Blogger Benjamin said...

I think we should be concerned with the total tax bite, perhaps even more than the top tax rate.

I would be happy with a system that limited federal revenues to 16 percent of GDP (about 5 percent lower than present) even if the top tax rate remain unchanged.

In other words, we could cut taxes extensively on the the middle class, or on business.

At this point, I believe the corporate income tax is so convoluted and lawyer-ridden, and such a minor source of income, that we could eliminate it entirely, perhaps offset just a bit by higher gasoline taxes.

The USA had very high top federal income tax rates in the 1950-70s (higher than 90 percent) and yet we prospered. Reason: The total federal tax bite was smaller than today.

I think this is an error that right-wing commentators make today, in that they focus on the top tax rate. It also does the right-wing a disfavor, making righties appear as minions for plutocrats, rather than primarily concerned with economic growth.

 
At 12/27/2010 1:50 PM, Blogger Jet Beagle said...

Benjamin,

Several reasons for focusing on the top rate:

1. Democrats - and some Republicans - have been pursuing a divide and conquer strategy on taxation. By inflaming class envy, they divide the electorate and enable much higher taxation than would be possible if all voters suffered proportionally.

2. High marginal tax rates penalize the business owners and other highly productive individuals who drive the economy.

3. It's a simple matter of justice. The idea that the masses has a right to the fruits of labor of some individuals more than others is, quite frankly, disgusting.

 
At 12/27/2010 2:24 PM, Blogger Benjamin said...

Jet Beagle-

Well, repulsive is in the eye of the beholder. The Founding Fathgers, in gereal, suported what is now called "progressive taxation." Milton Friedman believed that military mobilizations should be financed by a progressive consumption tax.

By whatever methods, I would like to see federeal revenues cut to 16 percent of GDP, and that each state receive back from the federal government roughly what it kicks in.

In other words, a balanced federal budget, and no states subsidizing other states.

It is remarkable how little traction these ideas get in the Republican Party.

I think the modern-day Republican Party is infested with venal poltroons who want more spending in their districts or states, and by sychophantic minions for the wealthy.

Eisenhower wasn't that way, even Nixon was better than this current crop of braying con men.

 
At 12/27/2010 3:27 PM, Blogger juandos said...

pseudo benny dreaming again: "The USA had very high top federal income tax rates in the 1950-70s (higher than 90 percent) and yet we prospered. Reason: The total federal tax bite was smaller than today"...

We?!?!

Did you miss this post and this post?

"I think this is an error that right-wing commentators make today, in that they focus on the top tax rate. It also does the right-wing a disfavor, making righties appear as minions for plutocrats, rather than primarily concerned with economic growth"...

Ahhh, ever the progressive leech eh, pseudo benny?

Why should the person making $250K per year pay 'one more penny' in extortion than someone making $25K per year?

 
At 12/27/2010 3:48 PM, Blogger Jet Beagle said...

Benjamin,

I would prefer to see as little money as possible ever go to Washington in the first place. However, I recognize there are several reasons why it makes sense for federal spending to exceed federal receipts for some states:

1. The constitution provides for federal funding of defense. Locating military bases in states such as California, Alaska, and Florida has long made sense strategically. The naval bases in San Diego have protected not just California, but the entire nation.

2. Air transportation fees are collected from passengers and shippers in all fifty states. The air traffic control and security services funded by those fees serve those same customers even when spent at large transport hubs in other states.

3. An interstate highway crossing a sparsely populated state provides economic benefit to shippers and end customers in many other states.

I understand your argument. I just don't view the U.S. as 50 independent nations, and so I don't agree that receipts must equal outlays for all parts of the U.S.

 
At 12/27/2010 3:52 PM, Blogger randian said...

Government workers and their families, of course, will always desire more transfers from the private sector to the public sector.

Unsurprisingly, DC now has the largest concentration of $200k+ income households of any city in the US.

 
At 12/27/2010 4:23 PM, Blogger Benjamin said...

Jet Beagle--

You make some good points. One could also argue that Social Security recepients retire where they want, and if they all retire to Florida, well then, more money goes to Florida.

I contend no state should be taxed and then subsidize other states not just for decades, but for generations, as is now the case.

The federal budget, and its outlays, are political footballs anyways...I contend there is almost no worthwhile federal spending...so it may as well balance out among states.

 
At 12/27/2010 4:54 PM, Blogger Jet Beagle said...

Benjamin: "The federal budget, and its outlays, are political footballs anyways"

Agreed.

Benjamin: "I contend there is almost no worthwhile federal spending"

That's probably true. I think we need a national military for defense. But you and I will probably agree on this: the defense budget could be much smaller and still allow Congress to accomplish the six national defense tasks assigned to it in the constitution.

 
At 12/27/2010 4:57 PM, Blogger Benjamin said...

Well, Jet Beagle and I have agreed on something. I guess anything can happen.
Brave New World, bring on 2011.

 
At 12/27/2010 5:35 PM, Blogger sethstorm said...

How about the consideration of using the debt as a weapon? Repudiate the debt, and have the other end eat itself alive. Desperate times require desperate measures, especially ones that can easily reverse the "irreversible".

 
At 12/27/2010 5:56 PM, Blogger Jet Beagle said...

Benjamin,

Santa brought me new Luchesse goatskin cowboy boots. I'm as agreeable today as I ever will be. :)

 
At 12/27/2010 5:58 PM, Blogger sethstorm said...


2. High marginal tax rates penalize the business owners and other highly productive individuals who drive the economy.

The problem is that you think that they should be exalted. This would lead to you wishing to contradict your first point, given that you've created or increased class warfare by such action.

Ignore it all you want, but it exists.

 
At 12/27/2010 8:58 PM, Blogger Benjamin said...

I have boot envy.
I was hoping to buy a used Woodmaster drum sander, but it looks like someone outbid me.
That's okay, I hopw all Carpe Diem readers have a prosperous 2011, even those of you misguided souls who disagree with me.

 
At 12/28/2010 10:42 AM, Blogger Jet Beagle said...

sethstorm: "The problem is that you think that they should be exalted."

I do not know what you mean. I do respect and admire those entrepreneurs and business leaders who drive our economy. Why do you believe that means I feel those leaders should be "exalted"?

sethstorm: "given that you've created or increased class warfare by such action"

Please be specific. What is it I have done or proposed which would create or increase class warfare? Are you referring to my advocating a flat tax on all incomes? Don't waste my time or anyone else's responding with generalities. What specifically have I done or proposed which would inflame class envy?

 
At 12/28/2010 9:10 PM, Blogger sethstorm said...

Jet Beagle said...
You are exalting business over every other party by giving it priority and specific preference over regular individuals. By doing this, it has made the situation with class warfare worse.

That has nothing to do with your flat-tax idea, which does not have such a problem. A flat tax brings uniformity and certainty by getting rid of the exceptions.

 
At 12/29/2010 5:27 PM, Blogger Jet Beagle said...

sethstorm: "You are exalting business over every other party by giving it priority and specific preference over regular individuals."

What in the hell are you talking about?

 

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