HARVARD study shows tax CUTS more effective reducing deficits

[westvirginia]

The Harvard study itself.

 

Synopsis article from the Reason Foundation.

 

Take the work of Harvard’s Alberto Alesina and Silvia Ardagna. They examined 107 efforts to reduce the debt in 21 OECD nations between 1970–2007. Their findings suggest that tax cuts are more expansionary than spending increases in the cases of a fiscal stimulus. Also, they found that spending cuts are a more effective way to reduce the debt-to-GDP ratio:

 

 

 

For fiscal adjustments we show that spending cuts are much more effective than tax increases in stabilizing the debt and avoiding economic downturns. In fact, we uncover several episodes in which spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions. We also investigate which components of taxes and spending affect the economy more in these large episodes and we try to uncover channels running through private consumption and/or

investment

.

 

 

 

 

 

 

Now all the wealth enviers will keep up the cry of "fairness" to justify their tax increases, when the wealthiest 1% earn 19% of the income but pay 37% of the taxes. Man, that's just so unfair - to the people who're paying those taxes.

[Azazello1313]

"balanced approach"

[bpwallace49]

Quick question. If cutting taxes really was the way to go, then why on earth did this economic recession/ increased debt levels ever happen? Bush reduced taxes to one of the lowest rates ever, and Obama cut taxes in the stimulus as well.

 

Shouldnt everything be booming with all these tax cuts according to your logic?

Edited August 11, 2011 by bpwallace49

[tazinib1]

Shouldnt everything be booming with all these tax cuts according to your logic?

 

 

A blooming onion with ranch dressing sounds really good right now.

[Yukon Cornelius]

Quick question. If cutting taxes really was the way to go, then why on earth did this economic recession ever happen? Bush reduced taxes to one of the lowest rates ever, and Obama cut taxes in the stimulus as well.

 

Shouldnt everything be booming with all these tax cuts according to your logic?

well if you count record profits and and money hording it has been.

[wiegie]

For the record I will note that OLS growth regression models are subject to problems such as endogeneity. The use of more sophisticated techniques (such as Dynamic Panel Analysis) will often wipe out the statistical significance of coefficients from OLS models.

[yo mama]

For the record I will note that OLS growth regression models are subject to problems such as endogeneity. The use of more sophisticated techniques (such as Dynamic Panel Analysis) will often wipe out the statistical significance of coefficients from OLS models.

I love it when you talk dirty.

[Brentastic]

Quick question. If cutting taxes really was the way to go, then why on earth did this economic recession ever happen? Bush reduced taxes to one of the lowest rates ever, and Obama cut taxes in the stimulus as well.

 

Shouldnt everything be booming with all these tax cuts according to your logic?

If you think taxes has anything to do with this economic crisis, then you're not paying enough attention.

[bpwallace49]

If you think taxes has anything to do with this economic crisis, then you're not paying enough attention.

 

Edited for accuracy above. Deficits should have been eliminated with the Bush tax cuts . . right? Isnt that the point? That cutting taxes eliminates deficits? Yes somehow that didnt happen in the last 10 years? how curious . . . .

[Azazello1313]

If you think taxes has anything to do with this economic crisis, then you're not paying enough attention.

 

obviously. but also, remember that the tax cuts bp is talking about were enacted in an effort to grow the economy coming out of the 2001-2002 recession. and there WAS strong economic growth AND, it is important to note, revenue growth, that followed those tax cuts. now, absent the tax cuts, there probably still would have been economic growth and revenue growth. economic growth would have been less, and revenue would have probably grown even more. the quantities are obviously subject to much debate. but an important thing to remember in all of these discussions is that the real solution is growth.

[westvirginia]

Edited for accuracy above. Deficits should have been eliminated with the Bush tax cuts . . right? Isnt that the point? That cutting taxes eliminates deficits? Yes somehow that didnt happen in the last 10 years? how curious . . . .

 

 

Weren't the deficits way down by 2007? Wasn't the "accepted" number down to like $160B and the "real" number like $340B? A FAAAAAAARRRRR cry from the 1.4 trillion the obamessiah is gonna have this year.

[The Holy Roller]

the real solution is growth.

 

This is the final answer.

[Azazello1313]

Edited for accuracy above. Deficits should have been eliminated with the Bush tax cuts . . right? Isnt that the point? That cutting taxes eliminates deficits? Yes somehow that didnt happen in the last 10 years? how curious . . . .

 

revenues did increase and deficits did decrease after the tax cuts were enacted (the deficit in 2007 was down to $160 billion, despite two wars and a buttload of other new spending, down from $412 billion the year the tax cuts were enacted)....until the financial crisis began to hit. then, obviously, revenues tanked and deficits soared.

[bpwallace49]

obviously. but also, remember that the tax cuts bp is talking about were enacted in an effort to grow the economy coming out of the 2001-2002 recession. and there WAS strong economic growth AND, it is important to note, revenue growth, that followed those tax cuts. now, absent the tax cuts, there probably still would have been economic growth and revenue growth. economic growth would have been less, and revenue would have probably grown even more. the quantities are obviously subject to much debate. but an important thing to remember in all of these discussions is that the real solution is growth.

 

That was a nice read. With some exceptions, most of the attached articles you provide tend to be top notch Az. Seriously.

[bpwallace49]

revenues did increase and deficits did decrease after the tax cuts were enacted (the deficit in 2007 was down to $160 billion, despite two wars and a buttload of other new spending, down from $412 billion the year the tax cuts were enacted)....until the financial crisis began to hit. then, obviously, revenues tanked and deficits soared.

 

eeehh . . I would challenge that Az. Bush treated the wars as "off budget" appropriations. Obama ended that practice, and the amounts went up expotentially. I am not excusing the other spending at all, but challenging of how the wars were accounted for. That is a massive number that changes how the deficits are/were calculated, isnt it?

 

And wasnt there hundreds of billions in tax cuts in the stimulus as well?

[Apathy]

Quick question. If cutting taxes really was the way to go, then why on earth did this economic recession/ increased debt levels ever happen? Bush reduced taxes to one of the lowest rates ever, and Obama cut taxes in the stimulus as well.

 

Shouldnt everything be booming with all these tax cuts according to your logic?

That's not really accurate.

 

From a 2006 NYT article...

 

The Liberals' Beloved NYT

 

Surprising Jump in Tax Revenues Is Curbing Deficit By EDMUND L. ANDREWS

WASHINGTON, July 8 — An unexpectedly steep rise in tax revenues from corporations and the wealthy is driving down the projected budget deficit this year, even though spending has climbed sharply because of the war in Iraq and the cost of hurricane relief.

 

On Tuesday, White House officials are expected to announce that the tax receipts will be about $250 billion above last year's levels and that the deficit will be about $100 billion less than what they projected six months ago. The rising tide in tax payments has been building for months, but the increased scale is surprising even seasoned budget analysts and making it easier for both the administration and Congress to finesse the big run-up in spending over the past year.

 

Tax revenues are climbing twice as fast as the administration predicted in February, so fast that the budget deficit could actually decline this year.

 

The main reason is a big spike in corporate tax receipts, which have nearly tripled since 2003, as well as what appears to be a big increase in individual taxes on stock market profits and executive bonuses.

 

On Friday, the Congressional Budget Office reported that corporate tax receipts for the nine months ending in June hit $250 billion — nearly 26 percent higher than the same time last year — and that overall revenues were $206 billion higher than at this point in 2005.

 

Congressional analysts say the surprise windfall could shrink the deficit this year to $300 billion, from $318 billion in 2005 and an all-time high of $412 billion in 2004.

 

Republicans are already arguing that the revenue jump proves that their tax cuts, especially the 2003 tax cut on stock dividends, would spur the economy and ultimately increase revenues.

 

"The tax relief we delivered has helped unleash the entrepreneurial spirit of America and kept our economy the envy of the world," President Bush said in his weekly radio address on Saturday.

 

Democrats and many independent budget analysts note that overall revenues have barely climbed back to the levels reached in 2000, and that the government has borrowed trillions of dollars against Social Security surpluses just as the first of the nation's baby boomers are nearing retirement.

 

"The fact is that revenues are way below what the administration said they would be a few years ago," said Thomas S. Kahn, staff director for Democrats on the House Budget Committee. "The long-term prognosis is still very, very bleak, and the administration doesn't have any kind of long-term plan."

 

One reason the run-up in taxes looks good is because the past five years looked so bad. Revenues are up, but they have lagged well behind economic growth.

 

The surge could also evaporate as quickly as it appeared. Over the past decade, tax revenues have become much more volatile, alternately soaring and plunging in the wake of swings in the stock market and repeatedly defying government projections.

 

Nevertheless, the short-term change has been striking. At the beginning of the year, the Congressional Budget Office projected that this year's deficit would be $371 billion and the White House Office of Management and Budget put the figure at $423 billion.

 

Corporate tax payments are expected to exceed $300 billion, up from $131 billion three years ago. The other big increase is an extraordinary jump in individual taxes that were not withheld from paychecks, usually a reflection of taxes on investment income and executive bonuses.

 

The jump in receipts is providing Mr. Bush and Republicans in Congress with a new opportunity to assert that tax cuts of 2001 and 2003 are working and that Congress should make them permanent.

 

Pat Toomey, president of the Club for Growth, a conservative political fund-raising group, said: "The supply-siders were absolutely right. All the major sources of revenue have grown, especially in areas where we said they would."

 

But budget analysts, supporters and critics of Mr. Bush alike, cautioned that this year's windfall would do little to improve the government's long-term budget woes.

 

Government spending under Mr. Bush continued to climb rapidly this year, more than twice as fast as the economy. Spending on the war in Iraq has accelerated, to about $120 billion this year.

 

Far more ominously, the nation's oldest baby boomers will be eligible for Social Security benefits in just two years. Conservatives and liberals alike predict a huge escalation in costs of Social Security and Medicare over the next several decades.

 

"The long-term outlook is such a deep well of sorrow that I can't get much happiness out of this year," said Douglas Holtz-Eakin, a former director of the Congressional Budget Office and a former White House economist under President Bush.

 

Despite almost five years of economic growth, individual income taxes — the biggest component of federal tax revenues — have yet to reach the levels of 2000. Even with surging payments for investment profits and business income, individual tax payments in 2005 were only $972 billion — below the $1 trillion reached in 2000, even without adjusting for inflation.

 

Over all, individual and corporate taxes have lagged well behind the economy's growth over the past five years. Government spending, by contrast, mushroomed far faster than the economy.

 

And federal debt has ballooned to $8.3 trillion, up from $5.6 trillion when Mr. Bush took office. Republicans are trying to raise the authorized debt ceiling to $9.6 trillion.

 

War costs for Iraq and Afghanistan have totaled more than $300 billion since 2003, and the Bush administration has not included any war costs in its budget estimates beyond next year.

 

Domestic discretionary programs, like education and space exploration, have slowed their growth after climbing rapidly in Mr. Bush's first term. But entitlement programs, particularly Medicaid and Medicare, are climbing rapidly as a result of rising medical prices and Mr. Bush's prescription drug program.

 

Outlays for Medicare have climbed 15 percent this year and are expected to hit $300 billion. About half of that increase results from the new prescription drug program, which is expected to cost nearly $1 trillion over the next 10 years.

 

"Even if spending is not going up as fast as it was before, it's not coming down," said Robert L. Bixby, executive director of the Concord Coalition, a bipartisan group that advocates budget discipline.

 

Despite a public outcry this year over pork-barrel spending sought by individual lawmakers for local projects, Mr. Bixby said, the main causes of higher spending stem from the war in Iraq and entitlement programs.

 

Both supporters and critics of Mr. Bush cautioned against attributing much long-term significance to the recent fiscal improvement, in part because tax revenues have become more volatile.

 

In the late 1990's, revenues exceeded predictions by more than $100 billion a year. After the recession of 2001, revenues plunged about $100 billion below what could be explained by slower economic growth and higher unemployment.

 

One reason for the increased volatility may be that, contrary to a popular assumption, a disproportionate share of income taxes is paid by wealthy households, and their incomes are based much more on the swings of the stock market than on wages and salaries. About one-third of all income taxes are paid by households in the top 1 percent of income earners, who make more than about $300,000 a year. Because those households also earn the overwhelming share of taxable investment income and executive bonuses, both their incomes and their tax liabilities swing sharply in bull and bear markets.

 

"These people have incomes that fluctuate much more rapidly, so when the economy is doing well and the stock market is doing well, tax revenues will be up," said Brian Riedl, a budget analyst at the Heritage Foundation, a conservative research organization. "Rapidly fluctuating tax revenues will continue to be the norm for years to come."

 

Compared with the size of the economy, tax revenues are still below historical norms and far below what the administration predicted as recently as 2003.

 

Tax receipts amounted to about 17.5 percent of the nation's gross domestic product in 2005, far below the level five years ago and still slightly below the average of 18 percent since World War II. Spending, by contrast, is running at about 20 percent of gross domestic product .

 

"Spending has not been restrained," Mr. Riedl said. "One hundred percent of the reduced deficit is because taxpayers are sending more money to Washington."

 

Plenty of talking points for Democrats and Republicans in this article but regardless, I think you're incorrectly trying to draw a correlation between tax rates and tax revenues. It will be difficult to show a consistent pattern throughout the last 100 years where increasing tax rates led to increasing tax revenues. And obviously (or at least I hope it's obvious), increasing tax rates (or revenues for that matter) doesn't guaranty a balanced budget.

[Apathy]

well if you count record profits and and money hording it has been.

I rarely visit the Tailgate anymore but I've seen a couple of recent references to stockpiling cash and I'm not sure I understand it.

 

U.S. corporations have roughly $2 trillion in cash sitting on their balance sheets...great!

 

But people forget there are two sides to a balance sheet. Companies also have several trillion $ of corporate debt outstanding with nearly $1 trillion maturing over the next few years. Not so great.

 

Banks still are not loaning at the same multiples or percentages from several years ago. Asset-based lending is still prevalent. So there is less assurance that companies will be able to refinance debt as it comes due.

 

Default rates are down significantly from a couple of years ago but we’re not far removed from annual rates of 12%-15%. Bank covenants mandate certain coverage ratios (debt to cash flow, debt to equity, etc.). Violation of these covenants can require the debt become due immediately.

 

The stock market is still very volatile and can impact covenants by turning capital structures upside down.

 

Does anybody believe corporate America likes earning 0% to 4% on its investments? One-year LIBOR is what...75 basis points? Do you think investors are okay with this? Over the last 85 years, total annual returns for large companies have been double-digit. Investment hurdle rates are set higher. It’s silly to think companies want to sit on cash.

 

Why is it misperceptions about corporate wealth bring the Keynesians out of the woodwork but when companies don’t build up cash reserves and go under, these same pseudo-economists lament poor corporate planning?

Edited August 12, 2011 by Apathy

[Azazello1313]

eeehh . . I would challenge that Az. Bush treated the wars as "off budget" appropriations. Obama ended that practice, and the amounts went up expotentially. I am not excusing the other spending at all, but challenging of how the wars were accounted for. That is a massive number that changes how the deficits are/were calculated, isnt it?

 

no (and I don't know how many times I've corrected this misunderstanding, but it's too many). the use of supplementals and other "off budget" stuff affected proposed budgets while bush was in office. so like in 2004 when he proposed a budget for 2005, his critics would complain that his budget was phony because there were real anticipated costs that were ignored, so it made the deficit picture for 2005 and subsequent years look much rosier than it actually would be. it was pretty much a valid criticism with respect to painting a "true" future budget picture, even though there's also a decent argument for funding the wars that way.

 

BUT, the deficit numbers at this point are historical. they reflect the money actually spent, including supplementals and anything else, and revenue actually received.

 

And wasnt there hundreds of billions in tax cuts in the stimulus as well?

 

kind of, but most of them would be more appropriately classiified as tax expenditures. like cash for clunkers, the homebuyer tax credit, a tax rebate for getting a new water heater or whatever. those things are a lot more like direct federal spending on homes, cars and water heaters than they are any sort of broad-based freeing up of money in the private economy.

Edited August 11, 2011 by Azazello1313

[Scooby's Hubby]

Forgive me if I sound naive, but, why is unemployment seem so easy? There are some people collecting unemployment that are very capable of working. Hell, why work if the gov't is gonna pay you close to the same for not working? I know a man who says just that, but then he tells me that all his interviews end up with them telling him "he is over qualified and they are affraid he will leave them for a better paying job". My interpretation is that he would rather sit and get paid by the govt rather than get a job and pay back into the system. How long is enough to get someone "back on their feet?" and why does that period of time keep getting extended?

Edited August 11, 2011 by Scooby's Hubby

[Double Agent]

For the record I will note that OLS growth regression models are subject to problems such as endogeneity. The use of more sophisticated techniques (such as Dynamic Panel Analysis) will often wipe out the statistical significance of coefficients from OLS models.

 

Put the parts I understood in bold.

[MikesVikes]

A blooming onion with ranch dressing sounds really good right now.

 

 

Are you buying?

 

I can smell it

Edited August 11, 2011 by MikesVikes

[Ursa Majoris]

kind of, but most of them would be more appropriately classiified as tax expenditures. like cash for clunkers, the homebuyer tax credit, a tax rebate for getting a new water heater or whatever. those things are a lot more like direct federal spending on homes, cars and water heaters than they are any sort of broad-based freeing up of money in the private economy.

And a 30% reduction in SS tax.

[Azazello1313]

And a 30% reduction in SS tax.

 

that one, of course, is more of a pure "tax cut". which is why I said most of them (not all of them) might be better classified as "tax expenditures".

[cliaz]

For the record I will note that OLS growth regression models are subject to problems such as endogeneity. The use of more sophisticated techniques (such as Dynamic Panel Analysis) will often wipe out the statistical significance of coefficients from OLS models.

 

 

::Samuel L Jackson:: English, Mother F*cker, do you speak it!!?? ::/Samuel L Jackson::

[gbpfan1231]

I rarely visit the Tailgate anymore but I've seen a couple of recent references to stockpiling cash and I'm not sure I understand it.

 

U.S. corporations have roughly $2 billion in cash sitting on their balance sheets...great!

 

But people forget there are two sides to a balance sheet. Companies also have several trillion $ of corporate debt outstanding with nearly $1 trillion maturing over the next few years. Not so great.

 

Banks still are not loaning at the same multiples or percentages from several years ago. Asset-based lending is still prevalent. So there is less assurance that companies will be able to refinance debt as it comes due.

 

Default rates are down significantly from a couple of years ago but we’re not far removed from annual rates of 12%-15%. Bank covenants mandate certain coverage ratios (debt to cash flow, debt to equity, etc.). Violation of these covenants can require the debt become due immediately.

 

The stock market is still very volatile and can impact covenants by turning capital structures upside down.

 

Does anybody believe corporate America likes earning 0% to 4% on its investments? One-year LIBOR is what...75 basis points? Do you think investors are okay with this? Over the last 85 years, total annual returns for large companies have been double-digit. Investment hurdle rates are set higher. It’s silly to think companies want to sit on cash.

 

Why is it misperceptions about corporate wealth bring the Keynesians out of the woodwork but when companies don’t build up cash reserves and go under, these same pseudo-economists lament poor corporate planning?

WRONG!!!! Where have you been you are stupid do you do yer lernin on the innernets? Corporations are evil. If you are successful you are evil. Corporations have tons of cash because they are trying to kill the middle class have you not been listening to Waterman or Yukon?? Corporations always pass up projects where spending money would create extra wealth so they can keep the cash and kill seniors and children. They do not want to make more money. Get on board or you are evil!!!!