12 January 2010

Things that go round and round

Reaganonomics

This is the fatal flaw in the GOP's "cutting taxes" mantra. The reason it "worked" for Reagan is that marginal tax rates up until and during the early part of his administration WERE too high and did generate deadweight losses and considerable forms of evasion. What the government also did as a result was close a lot of the loopholes that people used to evade the taxes (legally) in exchange for lowering the rates themselves. Effectively much of the reason the supply-sider argument increased revenues wasn't that they cut taxes and more revenue was generated in the private economy in order to increase the base of taxes, but that the tax base itself was significantly broadened to include large sources of incomes that weren't previously taxable. Some of the appeal of a national sales tax is that it would do much the same thing, lower the marginal rates while broadening the tax base. This is really the only serious way to discuss cutting taxes. It isn't the way we get sold on them now days. You can claim to want to issue a pure cut to taxes all you want, but there still needs to be a revenue stream to operate the government sufficient that we're not swamped in deficit spending and future debts. At a certain point, the economic theories (like the Laffer curve) necessary to demonstrate that a tax cut would generate more (future) revenues also predict that further tax cuts would cut (future) revenues. We're roughly in that point, given historical tax rates in relative to GDP.

For example, I think it would be a good idea to cut the corporate income tax rates. But in order to do it, what we would also need to do is reduce the amount of tax breaks and subsidies we offer specific corporations. You don't cut the marginal rates for income taxes without offering some way to recoup the revenue losses in the shorter term (or cut spending to offset the losses). But yet this is the complex fiction of Reaganonomics: that you can have a free lunch. You "can" cut taxes and still spend as much as you want on things. This is why Bush's stubborn economic policy was so frustrating. Reagan's actual approach was specific to the policy conditions that existed at the time. It was not a one-size fits all system. It seems clear that people have interpreted (perhaps correctly given Reagan's generally folksy wisdom regarding economics) his underlying philosophy to policy as meaning that you should cut government revenues in order to starve the beast, and concurrently, that you should cut taxes in order to grow an economy. Nevermind that our monetary policy under Volcker was simultaneously choking it on purpose and the real effect of Reagan's tax policies was to INCREASE government revenues in order to feed it. And never mind that the real issue with tax rates is not to increase them substantially (as was done by Hoover/FDR) during a recessionary period. We did raise tax rates under Clinton, during a downturn/recovery period in the economy. No great apocalypse occurred as a result. And nevermind that the only real way to constrain spending is to argue against the spending. And that all not funding a public program does by not raising sufficient revenues, in real life rather the magical candyland of modern Republicans, is increase the deficit and thus increase the amount of revenues you will require to run the government.

So thanks.

Addendum: this does mean that the cut in the payroll tax idea has a problem as far as revenue generation. The reason that proposal has emerged however is to create JOBS and to do so without requiring new public programs that may or may not create jobs at greater public expense. If a tax cut will do something that spending money may or may not, it makes more sense to cut the tax rate. Unemployment however is often a very different discussion than the deficit spending/revenue generation angle or even the general state of the economy regarding growth.
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