Supply side economics and tax policy

[Biochemist]

I don't think revaluing the yuan is imminent but it would hurt us more than it would them. China has a booming trade with plenty of other nations.

Maybe. But I doubt it.The majority opinion among economists is that the US would "win"in the short term, becasue a cheaper dollr means mroe expoerts to China. That is why there is pressure in Congress to let the yuan float. Probabaly short sighted, however.

For the fed to buy back debt, it would have to run a surplus budget. Now, how is that going to happen, with such a huge military and low tax revenue?

You got this backwards. If we needed to soak up additional cash in the system because China released their dollar reserves as you suggested, we would issue debt not retire it. We would sell US bonds to take out dollars in circulation to reduce money supply.

[lindagarrette]

LindaG, this is absolutely untrue. I have no idea where you got this. ...Natiional income statistics cleary show that revenue increased every time the higher marginal rates are reduced.... This data pretty much supports the Laffer curve

No so. Many "supply siders" argued that the incentive effects were so large that a reduction in tax rates would actually raise tax revenue, since the tax base would grow so much. There's no sign that this happened, and indeed most economists were pretty skeptical of this prediction at the time. Quite to the contrary, the budget deficits exploded in the 1980s after tax rates were cut by Reagan in 1981. The response of private savings and labor supply to the Reagan tax cuts was minimal: the labor supply did not increase and the effect on private savings was swamped by the reduction in public savings (the increase in the budget deficit). Since labor supply and savings increased only marginally, government revenues did not increase (relative to GDP) and the budget deficit became very large. The Laffer curve hypothesis was was flatly contradicted. Moreover, the 1980s tax cuts did not increase the rate of growth of GDP and productivity, nor the investment and savings rates. More details and examples on this web site: http://pages.stern.nyu.edu/~nroubini/SUPPLY.HTM

[lindagarrette]

.You got this backwards. If we needed to soak up additional cash in the system because China released their dollar reserves as you suggested, we would issue debt not retire it. We would sell US bonds to take out dollars in circulation to reduce money supply.

You misunderstood my point. I said it would be almost impossible for the US to buy back its debt given the current deficits. With the shrinking dollar accompanied by the low interest rates, foreign investors will continue to buy and dollars and spend them aboad.where multinational corporations find cheaper labor and materials.

[lindagarrette]

It is my opinion (which I rarely offer) that the US economy could use a good round of inflation. But it needs to be done quickly and massively before the wealthy take all their dollars overseas. Buy Euros.

[Biochemist]

You misunderstood my point. I said it would be almost impossible for the US to buy back its debt given the current deficits. With the shrinking dollar accompanied by the low interest rates, foreign investors will continue to buy and dollars and spend them aboad.where multinational corporations find cheaper labor and materials.

I did understand your point, but I can't figure out how it was relevant. The issue under discussion was that the US needs a mechanism to deal with a flood of US currency in the unlikely event that China disgorges their large foreign reserves of US dollars. The mechanism would be to sell bonds, not to buy them.

 

There is no reason for the US to buy back debt.

[Biochemist]

I don't think revaluing the yuan is imminent but it would hurt us more than it would them. China has a booming trade with plenty of other nations....

In a rare item of agreement between the major parties in Washington, both parties are currently advocating that China let the yuan float to a higher level. The immediate impact would be an increase in US exports to any country that currently buys Chinese products, since the US products would become relatively cheaper. Not that Congress is usuallly correct, but they do not agree with your assertion that it would be better for China, at least not in the short term.

[Biochemist]

No so. Many "supply siders" argued that the incentive effects were so large that a reduction in tax rates would actually raise tax revenue, since the tax base would grow so much. There's no sign that this happened, and indeed most economists were pretty skeptical of this prediction at the time. ...

I am not sure exactly what or who you are talking about, but individuals who advocated that reduction in higher tax rates would result in increase in revenue were correct. The levels of US revenue are not conjecture, and they are not really particularly open to interpretation.

 

In the attached link, check out out table 2.1, {federa} receipts by source 1939-2001-

 

http://www.gpoaccess.gov/usbudget/fy05/hist.html

 

You will note that revenue went up every year under Reagan, with the exception of 1983, before his tax cuts were passed. Revenue went up every year under Kennedy as well. This phenomenon is not open to debate. Cutting top marginal tax rates does not decrease revenue.

 

The more instructrive point is that federal revenue is much more closely aligned with GDP than tax policy. If we actually wanted to maximize federal revenue, we would adopt policies that maximize growth. But that was not the topic of this thread.

 

These charts do not show the more instructive information. The key point is that the revenue iincreased most dramatically from the brackets that got the largest rate decrease. That is the fraction of total federal revenue paid by people in the highest tax brackets rose when their rates were reduced. This is the part that most directly support the (somewhat obvious) Laffer curve.

 

I am not really sure why you suggest repeatedly that the Laffer curve is obsolete. It is a relatively simple idea, and is fundamentally explicable. Clearly, if tax rates were zero, federal receipts would be low. Also, intuitively, if tax rates were 100%, tax receipts would be low, since there would be little incentive to work at all. In between, total tax revenue would be higher than either the zero rate total or the 100% rate total. This "upside down" curve is the Laffer curve, and is not only true, it is somewhat obviously true.

 

The tougher question (related to the Laffer curve) is to identify the rate where federal revenue is maximized, and to identify how this rate is impacted by other tax policies (like local tax jurisdictions).

 

But the notion that reductions in upper brackets (rates over 40%, for example) results in increases in revenue is not open to debate. The data clearly shows it.

[lindagarrette]

I am not sure exactly what or who you are talking about, but individuals who advocated that reduction in higher tax rates would result in increase in revenue were correct. The levels of US revenue are not conjecture, and they are not really particularly open to interpretation.

 

In the attached link, check out out table 2.1, {federa} receipts by source 1939-2001-

 

http://www.gpoaccess.gov/usbudget/fy05/hist.html

 

.

The table shows revenue going down every year during the current spate of tax cuts for wealthy individuals:

2000 1,004.462

2002 994,339

2003 858,345

2004 782,600

2005 765,399 (projected)

[Biochemist]

The table shows revenue going down every year during the current spate of tax cuts for wealthy individuals:

2000 1,004.462

2002 994,339

2003 858,345

2004 782,600

2005 765,399 (projected)

That is correct. This is the first time we invoked a tax cut (in the highest brackets) during a recession. I don't think that first drop (for example) had anything to do with Bush's tax cuts. It could be reasonably argued that the stimulus lag during a recession should be longer that historical examples. Historically, the stimulus was in the 10-20 month range.

 

Are you conceding that high bracket tax cuts in a non-recession economy increase revenue from the highest brackets? I noted you did not reference those statistics. If so, the sequitur would be that tax cuts in a recessionary economy shorten recession.

 

I think they did.

[Biochemist]

The table shows revenue going down every year during the current spate of tax cuts for wealthy individuals:

2000 1,004.462

2002 994,339

2003 858,345

2004 782,600

2005 765,399 (projected)

I checked again. The Bush tax cuts were effective in the second quarter of 2003. This means that the greater drop in tax revenue form the highest brackets was before the tax cuts, not after.

[Skippy]

True. That is because federal SPENDING went up faster than the revenue increase. But revenue did go up dramatically. The feds just spent more than they got. Gee, what a surprise.

Remember, that was a US House dominated by Liberals and you had Reagan's singleminded determination to destroy the USSR. It is the nature of the beast of politics that you must give to get, so for Reagan to get his tax cuts and his increased defense spending, he had to compromise and agree to some of Rostenkowski's, Gephardt's and Foley's pork.

[Skippy]

Exactly how did the federal revenue increase?

Two ways - if you notice, each time there is a proposed tax rate cut, there is a corresponding removal of loopholes and tax deductions which can be taken, AND federal taxes are paid on income, a decrease in the tax rate has nothing to do with your or my salary except that I have the ability to save more or spend more. My spending becomes income to someone else, who is then able to save or spend more, on and on...

 

Don't belittle the saving part while you are discussing this matter. The availability of money to borrow for home buying (income to the builder) or car buying (income to manufacturer) or business expansion (meaning jobs which equals income to employees)... While there haven't been astronomical monthly numbers of new jobs being reported, there has been a steady 100,000+ jobs increase being reported each month with a corresponding slight decrease in the number of job losses (at the worst that number has not gone up).

[Skippy]

I'm not concerned with the details of how "they" caused devaluation but I'm damn sure it was "they" that caused it. Thatcher was also fond of this type of thing. Many other countries have done it too. In this case there was the need to reduce the foreign debt. Being denominated in US$, as you also said, the lower dollar also made the debt lower. If, for instance, you export at prices not denominated in US$ but instead get more dollars because the dollar is lower, you're paying the debt easier. It's obvious that there are pros and cons, they wouldn't want to put the dollar arbitrarily low and keep it there, but they do decide when it's an advantage to devalue to a certain measure and for how long. I was talking about foreign debt, not foreign reserves, nor about inflation so much.

 

Does that mean they have no influence on it? You must be joking!

Qfwfq and Biochemist have been tossing this question around for a few posts, what do any of you know about Muslim rules about credit? I read an article recently which stated that Muslim laws forbid them from granting credit (maybe just from infidels, not sure). U.S. currency is not printed dollar-for-dollar with gold reserves anymore, so in effect a dollar bill is a promissory note (i.e.- credit). The article stated that the mounds of dollars we send to Arab countries for their oil must be converted to gold in order to comply with Muslim Laws, so they very well could affect the dollar's value and the price of gold, which has been going up...?

[Skippy]

I really wanted to get back to the original question in post #1:

 

Why do you suppose that the media rejects the notion reducing tax rates (at least for the upper brackets) actually increases federal revenue? This appears to be true, in spite of the overwhelming evidence including the current windfall from the most recent US tax rate reductions.

Why do you suppose that the media rejects everything that President Bush and the Republicans propose? --Social Security reform, tax cuts, The War on Terrorism, anti-flag burning Amendment, Judicial appointments, UN Ambassador appointment..? Why is it that the media is for everything President Bush and the Republicans are against? --Killing Terri Schiavo, killing the unborn, homosexual marriage, Christianity and Judaism..? Why do you suppose that CBS ran a story about Pres. Bush which turned out to be a fabrication? Why does the media continue to perpetuate the lie that Bush lost in 2000 and that there were "disenfranchised voters" in 2000 and 2004?

 

Biochemist, are you just waiting for someone to say the obvious... Could the answer lie in the fact that about 80 plus percent of the media are registered Democrats and about 97% vote Democrat? Nah, that's too simple.

[Qfwfq]

Two ways - if you notice, each time there is a proposed tax rate cut, there is a corresponding removal of loopholes and tax deductions which can be taken, AND federal taxes are paid on income, a decrease in the tax rate has nothing to do with your or my salary except that I have the ability to save more or spend more. My spending becomes income to someone else, who is then able to save or spend more, on and on...

 

Don't belittle the saving part while you are discussing this matter. The availability of money to borrow for home buying (income to the builder) or car buying (income to manufacturer) or business expansion (meaning jobs which equals income to employees)... While there haven't been astronomical monthly numbers of new jobs being reported, there has been a steady 100,000+ jobs increase being reported each month with a corresponding slight decrease in the number of job losses (at the worst that number has not gone up).

When I said what you're replying to, I also made a joke about Bush making a lot of dough selling cherries by the roadside but I guess you didn't catch it. Why should it work only for the high income bracket? Many people with less high income also count as a spending force too. I haven't been hearing that jobs have been increasing so much in the US lately, I've even been hearing the opposite.

 

I read an article recently which stated that Muslim laws forbid them from granting credit (maybe just from infidels, not sure). U.S. currency is not printed dollar-for-dollar with gold reserves anymore, so in effect a dollar bill is a promissory note (i.e.- credit). The article stated that the mounds of dollars we send to Arab countries for their oil must be converted to gold in order to comply with Muslim Laws, so they very well could affect the dollar's value and the price of gold, which has been going up...?

If what you say about Arabic laws, and US dollar being credit, is true then why have the Arabic countries always opted for setting oil prices in US$ and not in gold?

 

Biochemist, are you just waiting for someone to say the obvious... Could the answer lie in the fact that about 80 plus percent of the media are registered Democrats and about 97% vote Democrat? Nah, that's too simple.

I hope this will not lead to a pointless ping-pong game. I think there are also ultra-conservative media in the States.

[Biochemist]

...Why should it work only for the high income bracket? Many people with less high income also count as a spending force too.

Speaking mathematically, there is a maximum revenue level in the "tax rate versus aggregate revenue" graph. Intuitively, if taxes were at a 100% rate, revenue would not be all that high becasue there would be little incentive to work. Also, if tax rates were at 0%, revenue would be zero. Intuitively, there is a maximum somewhere in between. The hypothesis is that revenue is maximized when the tax rate is somewhere in the mid 30% range. At any rate higher or lower than that, revenue is lower.

I haven't been hearing that jobs have been increasing so much in the US lately, I've even been hearing the opposite.

The US has outperformed Europe in job growth (or a lower loss during a recession) every year for the last several decades (I believe). It does not surprise me you don't hear about it.

I think there are also ultra-conservative media in the States.

Sure. But we are really discussing quantity here. It is true that polls of the press corps routinely show that well over 90% of them vote Democratic. It has never surprised me that they often give incremental creedence to left-leaning issues, but it does surprise me when they ignore facts, or get them backwards.