Friday, October 17, 2008

Here we arrive at the crux, please reply to comments

Our friend Rich asks questions. They are complex and deserve to be addressed. It may take some time and Mark and I will tag team.

Here is a DIRECT QUESTION:

How come Clinton's tax increase was such a success? How did it raise the Treasury receipts to 20%+ of GDP? Wouldn't the disincentive have prevented this overwhelming success?

One more DIRECT QUESTION:

When Dubya cut taxes, what happened to Treasury receipts? What percentage of GDP came in? How did Dubya's receipts compare to Clintons?

11 comments:

Jim G. said...

Clinton left during a recession (note, as a free marketer, I did not say that Clinton left during his recession). There was a dot com boom during the Clinton years which subsequently melted down. Then there was 9/11 and the subsequent wars. Now there is the RE market meltdown.

Now watch this Liberals, it is called admitting a error in your party's ways. During the Clinton years, the opposition party showed discipline and held down spending. These very same legislators abandoned their conservative principles and exacerbated the spending issues during the Bush years. I remember Bush attempting to address Social Security and asking for the growth of government to be held to a low percent.

But, as I have previously noted, if you think the Democrats, they of big government (socialism) will do better, you on crack. Also, as I have previously noted, our sins are admitted, yours are ingrained in liberal democratic culture.

Do you ever notice how my conservative themes and conclusions keep being repeated. That is because they are from a logical, consistent frame of reference.

However, my BIL, used to be for divided government to inhibit growth. Where did that consistent idea go?

Baxter said...

Your answers do not explain the 20%+ of GDP the Treasury enjoyed. Did you or Gary take the '90's off due to the high rate of taxation? Anyone who did missed out on a great era.

The dot.com boom helped the '90's, just as the housing boom helped the 2000's, but still the Treasury only pulled in 16 - 17% of GDP. It took Bush FIVE YEARS In office to even catch up to Clinton's 2000 receipts.

History shows that the Democrats + Keynesians are right! After the past 8 years, why don't you give up? You are playing with a very bad hand!

You aren't admitting when your side is wrong. Your philosophy is an abject failure. The evidence is all around us. Just imagine if we didn't have $10 Trillion of GOP debt what we could be doing to get out of this mess. Hey - we could even afford to cut taxes!

Mark R. said...

Rich,
Following is the answer to your questions. First one cannot evaluate various economic policies and certainly cannot compare and contrast them without looking at the underlying economic conditions that spawned them. Without doing that we are basically comparing apples to oranges. Your comparison is vastly too simplistic to be considered a valid comparison of tax policies.

In order to perform a thorough analysis of your questions we need to look at the underlying GDP of the periods. I have included this link so you may verify my statements. http://www.economicsnapshots.com/archives/2007/snap20070503.htm

Ouch, look at the chart of GDP during the Carter years. Then Ronald Reagan became our President and ushered in tremendous economic prosperity as you can see on the GDP charts. We can start with the 1986 tax act under Reagan.

The 1986 tax act represented the penultimate installment of an extraordinary process of tax rate reductions. Over the 22 year period from 1964 to 1986 the top individual tax rate was reduced from 91 to 28 percent. However, because upper-income taxpayers increasingly chose to receive their income in taxable form, and because of the broadening of the tax base, the progressivity of the tax system actually rose during this period.

Between 1986 and 1990 the Federal tax burden rose as a share of GDP from 17.5 to 18 percent. Even though there was a major cutting of the tax rate. Despite this increase in the overall tax burden, persistent budget deficits due to even higher levels of government spending, under the Democratic majorities in both houses of congress, created near constant pressure to increase taxes. Thus, in 1990 the Congress enacted a significant tax increase featuring an increase in the top tax rate to 31 percent. President Bush’s betrayal of his statement “read my lips, no new taxes”.

Shortly after his election, President Clinton insisted on and the Congress enacted a second major tax increase in 1993 in which the top tax rate was raised to 36 percent and a 10 percent surcharge was added, leaving the effective top tax rate at 39.6 percent. Clearly, the trend toward lower marginal tax rates had been reversed, but, as it turns out, only temporarily.

Now pay attention everyone because here it gets interesting. Despite the higher tax rates, other economic fundamentals such as controlled government spending under the Republican majorities in both houses, Newt's Contract with America, low inflation and low interest rates, an improved international picture with the collapse of the Soviet Union, thank you Ronald Regan and increased defense spending, but now a “peace dividend” for President Clinton, and the advent of a qualitatively and quantitatively new information technologies (“dot com bubble”) led to a strong economic performance throughout the 1990s. This, in turn, led to an extraordinary increase in the aggregate tax burden, with Federal taxes as a share of GDP reaching a postwar high of 20.8 percent in 2000.

Now comes President George W. Bush. He inherits an economy from President Clinton that is in recession. The unemployment rate bottomed at 3.8 percent in April 2000, and started deteriorating steadily from there (during the Clinton administration).
The fed funds rate — the overnight interest rate administered by Alan Greenspan and the Federal Reserve — peaked at 6.5 percent in 2000, and had to be lowered in an emergency move on January 3, 2001, "in light of further weakening of sales and production" (during the Clinton administration).
GDP growth fell off a cliff in the third quarter of 2000 (during the Clinton administration). Despite the shock of the 9/11 terrorist attacks, growth started to revive in the fourth quarter of 2001 (during the Bush administration).
By 2001, the total tax take had produced a projected unified budget surplus of $281 billion, with a cumulative 10 year projected surplus of $5.6 trillion. Much of this surplus reflected a rising tax burden as a share of GDP due to the interaction of rising real incomes and a progressive tax rate structure. Consequently, under President George W. Bush's leadership the Congress halted the projected future increases in the tax burden by passing the Economic Growth and Tax Relief and Reconciliation Act of 2001. This tax policy was also enacted to help the economy recover from the double whammy of an inherited recession and the attacks of 9/11. The centerpiece of the 2001 tax cut was to regain some of the ground lost in the 1990s in terms of lower marginal tax rates. Though the rate reductions were phased in over many years, ultimately the top tax rate fell from 39.6 percent to 33 percent. The success of this policy can be seen in the GDP growth in the chart above.

Tax revenues in 2006 were 18.4 percent of gross domestic product (GDP), which is actually above the 20-year, 40-year, and 60-year historical averages. The inflation-adjusted 20 percent tax revenue increase between 2004 and 2006 represents the largest two-year revenue surge since 1965–1967.

Comparing tax revenues in the fourth fiscal year after the end of each of the past three recessions shows nearly equal tax revenues of:

18.4 percent of GDP in 1987,
18.5 percent of GDP in 1995, and
18.4 percent of GDP in 2006.

While revenues as a percentage of GDP have not fully returned to pre-recession levels (20.9 percent in 2000), it is now clear that the pre-recession level was a major historical anomaly caused by a temporary stock market dot-com bubble. The NASDAQ reached its peak in March 10, 2000 and after that the bubble began to burst. This is the economy that President George W. Bush inherited.

Under the Bush tax cuts in 2006 the top-earning 25 percent of taxpayers (AGI over $64,702) earned 68.2 percent of the nation's income, but they paid more than four out of every five dollars collected by the federal income tax (86.3 percent). The top 1 percent of taxpayers (AGI over $388,806) earned approximately 22.1 percent of the nation's income (as defined by AGI), yet paid 39.9 percent of all federal income taxes. That means the top 1 percent of tax returns paid about the same amount of federal individual income taxes as the bottom 95 percent of tax returns.

From IRS data, we can see that in 2006, 92.7 million of the tax returns came from people who paid taxes into the Treasury. That leaves 43 million tax returns filed by people with positive AGI who used exemptions, deductions and tax credits to completely wipe out their federal income tax liability. Not only did they get back every dollar that the federal government withheld from their paychecks during 2005, but some even received more back from the IRS. This is a result of refundable tax credits like the Earned Income Tax Credit.

Yet it is still not enough for the liberals.

In summary it is not a valid comparison of tax policies when the underlying economic conditions are so vastly different. To compare the tax burden as a percentage of GDP from a year that is in the midst of growth due to the dot-com bubble to years when the economy is pulling itself out of a recession coupled with the 9/11 attacks is utterly useless. It would be a much more valid comparison if we could compare a period where we were in a recession and we raised taxes to a period like the beginning of the Bush Presidency which started on the heels of the dot-com bubble bursting. Guess what we can. In the early 1930’s President Hoover raised taxes when the economy was moving into a recession and can you guess what happened?

Jim G. said...

And just to show that I actually read and ponder the posts.

Mark, what do you attribute the "calming" of the graph over time?

Mark R. said...

I think we should ask Rich to answer since he is such an expert at comparing various economic periods and their tax policies.

Baxter said...

So, when Mark can't answer he punts to me?

Baxter said...

Mark:

First of all, thank you for your thoughtful analysis. You obviously spent a lot of time on the topic. I agree with all of your data - just not your conclusions.

I also like the website economicsnapshots - thanks.

There are many moving parts to the economy as it is a complex topic. However, when trends are noted over time they can legitimately lend support to an argument. Using your logic, no point can ever be made since you can simply identify some unique attribute to the period, disqualifying the point with which you disagree. With all of the evidence of failure around us, the right wingers seem to be one big walking excuse these days.

I make no excuse for the Carter years. He too inherited a bad economy and he handled it poorly. He also made decisions, such as Volker, that didn't bear fruit until later.

Reagan has a mixed legacy, which unfortunately includes mountain of debt. When our country takes its place as a second rate power due to our overwhelming debt, we can thank Reagan
and his supply side policies for starting us down that road.

Reagan also did some things right including his hastening the end of the Soviet Union. He also restructured our tax system removing the myriad and counterproductive deductions. The '86 changes - most of which I supported - had a tremendous impact going forward (good and bad - see S+L Crisis). Most of his tax cutting occurred in his first term, when he nearly doubled the national debt in four years.

I think that GHW Bush was a key contributor to our deficit reduction of the 1990s. His betrayal included pay/go as well as a 31% top end that did not serve as a meaningful disincentive to anyone.

You very briefly pass over the 1993 Budget Bill that was noteworthy for it's courageousness and it's lasting impact. It probably cost the Dems the Congress in 1994 (along with the assault weapons ban and failed Hillarycare). The bill acted as the blueprint for the federal receipts and expenditures until your boy Dubya stumbled along. There is NO EVIDENCE WHATSOEVER THAT THE 39.6% TOP RATE IMPAIRED ECONOMIC ACTIVITY. On the contrary.

You give far too much credit to Gingrich + Co for the budgets of the 1990s. They merely followed the 1993 budget bill blueprint, which raised taxes and controlled the growth of spending. Pay/Go - thanks to Bush I and George Mitchell - remained in place. We saw what happened to fiscal rectitude as soon as our beloved Democratic president left town.

You are right about the peace dividend but it only helps to explain reduced expenditures - it doesn't help the revenue side. In fact, it hurt the revenue side as less taxes were paid as a product of defense spending (note the Keynesian observation).

Bush did inherit a business cycle recession. He foolishly cut taxes reintroducing a STRUCTURAL DEFICIT that President Clinton and the Democratic Congress had worked so hard and at great political cost to eliminate.

I give no credit to the tax cuts for our GDP growth in the 2000s. They were not responsible for any incremental growth - they were not particularly stimulative. They would have been ideal had we been starved for capital in the private sector. However, the world was awash in capital! Creating more while having to sell more T-bills merely stoked the next bubble (see housing crisis).

Doesn't it strike you as odd that a tax plan designed to "give the surplus back to the taxpayers - it's yours after all!" was the exact same package they used to combat recession? Isn't it downright irresponsible to cut taxes when we are heading into what we know will be an expensive war against Iraq and stateless terrorists (goodbye peace dividend!). Why the tax cuts? The public wasn't crying for them. It was so foolish and irresponsible...

Believe it or not - you and I agree for the most part about the EITC as I previously stated. In fact, I don't think our next president should cut taxes at all save for some middle class TEMPORARY relief. Unfortunately, he needs to propose the cuts if for no the reason than political survival. He is raising taxes on a few high end folks and look at all the grief he gets!

In summary - Republican supply side tax policies will probably bankrupt us. They are incredibly selfish and irresponsible. They represent a failed and corrupt economic system. Thanks to years of GOP deficits and our $10 Trillion of GOP debt, we NEED (not want) 20%+ of GDP in revenues while we hold expenditures to 17% (we probably agree on the spending part). We need to not only balance the budget, we have to pay down the debt just as Boomers are beginning to retire.

I think we are going to pay for many sins over the next 10-20 years and we'll be very fortunate to maintain our standard of living.

Jim G. said...

Gosh this makes reading worthwhile.

Rich...what is a structural deficit?

You site 20/17 for receipts vs expenditures why not 18/16?

You beg for Keynesian policies and stimulus, why is a tax cut not a stimulus?

You think taxing the upper earners and extra 7% (appox.), will cure everything?

Now, these are specific questions not random pondering's.

Mark R. said...

Rich,

First you did not answer Jim's question. Why do you do that all the time?
I know it is a waste of time pointing things out to you because you won't even consider that most of the time cutting taxes works to stimulate the economy. However as they say facts are facts.

If what you say was true about the beginning of Bush's term with a world awash in cash than why did we go into a recession at all?

You again are way too narrow in your analysis of the housing crisis. You must be blind and deaf. By now almost every economic expert has agreed with the fact that the housing crisis had its start well before the time Bush took office. Even your boy William Clinton has stated that. With the exception of your agreeing on the Carter years you just can't bring yourself to admit to any Democratic wrongheadedness ever. Even when they have been caught on tape.

Of course there is no evidence that the 39.6% rate impaired economic activity but there is no evidence that it helped economic activity either. We were in the midst of the dot com boom that should have given us an insight into the housing bubble bursting as well. Only problem is the housing bubble grew much slower over time and there was an underlying asset at least, where with the dot com boom so many companies did not have assets nor profits yet continued to go up in value.

I cannot ever recall a time where raising taxes spurred economic activity. Have they raised government revenue? Of course but so have tax cuts. The Bush tax cuts helped to increase government revenues by a whopping inflation adjusted 20%. You sort of missed that one in your analysis.

You also missed the fact that the tax burden under Bush has been pretty similar to the one under Clinton. How can that be when one raised taxes and the other cut taxes?

News for you pal it is not so much the tax revenues coming in as it is the dollars going out in government spending that is the problem. Jim has hit the nail on the head over and over again and deserves the credit for pointing this out.

The biggest problem with the budget deficit increase during Bush's first term is the government spending under the leadership of the other crook from my State, Illinois, the ex-speaker Denny Hastert. These republicans are not conservatives and they hurt the party tremendously and betrayed President Bush when he was trying to hold down most government expenditures. We are all better for the fact that a lot of these pieces of garbage are no longer in the House.

We are starting to get to a common ground since we both want to see spending reined in. However there is only one candidate running now who is serious about it and his last name is not Obama. At no time in history can you show me that giving all this money to the masses has brought a country out of a recession. It certainly did not work during the depression and had it not been for World War II we might still be in a depression.

Raising taxes on the wealthy has never brought a country out of a recession either. It is shameful what Obama is proposing with his class warfare rhetoric of spreading the wealth around. He is preying on those less sophisticated in financial matters by buying votes with promises he will not be able to keep. No politician in history has ever used the tax code in such a shameless fashion. The man disgusts me to the core because he is either utterly stupid as to economic policies that work during a recession or he is knowingly lying to the American public because there is no way he will be able to deliver on his promises with Speaker Pelosi already planning the spending of billions more. I believe it is the latter. You think the deficit is big now you ain't seen nothing yet. With the tax and spend crowd that is in control of the current Democratic party we could be in for another four years of Jimmy Carter revisited. King of the earmarks John Murtha will not be able to add pork into bills fast enough knowing he has a willing signer in the White House. You have to wake up and face the facts that are presented to us today. Not dream about Slick Willie and >20% tax burdens because they will not occur under Obamamessiah's stated economic policies.

When I hear Barry say that he is going to crack down on earmarks and rein in Pelosi's spending plans than we will be getting some where. But you and I both now that ain't gonna happen. There is only one candidate running for president who has stated things like this and his name is John McCain.

Baxter said...

Jim:

A STRUCTURAL DEFICIT is when the budget is not in balance such that we have deficits even in times of economic growth.

I would argue for 20/16 before 18/16. The point is we can afford the 20 as President Clinton so capably illustrated. We need to pay down debt. If you can get spending down to 16, that is all the better! Lets stick with the 20 so that only your daughters have to pay your bills and not your grandchildren too.

Tax cuts are stimulative - especially on the lower ends. There are diminishing returns to cuts at the top end. The lower + middle classes will promptly consume the additional dough, which provides the needed stimulus. Tax cuts at the top end help to create capital formation, which is not particularly stimulative and is completely unnecessary in a world overflowing with cash.

Please note - even with our ongoing meltdown - the world has buckets of liquidity. There is just no good place to put it. There is no shortage of cash - only confidence and a healthy economic environment. We have imbalances that need to be addressed - including way too much DEBT!

No - raising the top end will not cure everything. There is so much to do, including the rationalizing or resizing of government.

Our next president will have his hands full. Thanks to our massive deficits and debt, we have few good options and there are less every year. I guess we can thank the "starve the beast" crew for hastening the end of Pax Americana.

Baxter said...

Mark -

It is bad enough when you complain about getting one of your questions answered. You don't need to chime in when I haven't dropped everything to answer someone else's question.

Tax cuts do stimulate the economy. Please refer to other thoughtful and insightful posts that I submitted today.

Unfortunately, a world awash in cash does not automatically mean economic growth, as demonstrated today. In fact, it can be counterproductive and lead to bubbles and other imbalances.

I don't claim Democratic purity in this crisis or most any other. I simply give the vast majority of the blame to the party that held a monopoly on power. I know that is frustrating in some highly partisan quarters.

"There is no evidence that (39.6% top rate) helped economic activity either." Huh? Where were you in the '90's?

The private sector is more efficient than the public. No question about it and that is why tax dollars are precious. That said, tax dollars that go to paying off debt do not slow the wheels of industry one bit. If not for the tax dollars to pay off the debt, we'd have to sell bonds which would still take that money out of the system. It is the one scenario where tax dollars have the same efficiency as private sector dollars.

Do you not acknowledge the great harm that our debt does to the economy and our standing in the world? Have you or any conservatives put forth a plan to PAY DOWN THE DEBT?

Bush's tax cuts did not INCREMENTALLY add to growth. Clinton raised taxes and enjoyed superior growth. Bush was in office FIVE YEARS before he was even able to match the revenues that Clinton had so graciously handed him. If you look at the federal "P+L" of the Bush years it is an unmitigated disaster on revenue and expenditure sides. There is no excuse.

I've never thought Hastert was a crook - just a dimwitted marionette operated by Tom DeLay + Co.

The class warfare is being fought by the right wing. The rest of us are merely defending ourselves and our country. When the top 1% of the population has as much or more wealth than the bottom 90%, who is winning the class war?

You are right to point out that McCain is a bonafide spending hawk. I take comfort in this and know that it will not be the end of the world should he be elected. Unfortunately, he has been coopted by the GOP base and lost his bearings. I do not trust the people he would bring to populate his administration. We all know that economic matters are not his brief.

I would also take comfort in divided government. Obviously, I support Obama but I do feel that McCain and heavily Democratic Congress could do the nations business IF the supply-siders are permanently sent to the children's table. It would create a situation where Republican and Democratic fingerprints are on the bitter medicine bottle that we need to take with respect to entitlements, etc.

I agree with you on earmarks - the gateway drug of corruption and runaway government spending (I think that is a Coburn line). Mitch McConnell, one of earmarking's chief advocates, may actually lose his job next month.

I have a hunch we agree on spending. I just need to get you to come around on tax policy.