Carol Platt Liebau: A Different Approach

Sunday, June 11, 2006

A Different Approach

Writing in today's LA Times, Jonathan Chait argues that tax cuts "produce" more government spending, as though referencing some economic formula. In fact, he actually gets closer to the truth when he notes that the phenomenon is a result of politcs:

[W]hen Republicans cut taxes, Democrats refuse to give them cover to make politically unpopular spending cuts.

Set aside for a moment the fact that we're all waiting to see what spending cut a lefty like Chait would deem "politically popular" (aside from slashing the military budget). Apparently, it hasn't occurred to Chait that government spending may also result from politicians feeling flush from the additional tax revenues that tax cutting tends to produce.

But what's most interesting is his premise -- that conservatives support tax cuts because it allows them to "starve the beast," that is, deprive the government of revenue. While reducing the size of government would be a salutary byproduct and something that many conservatives like me support, that isn't the primary reason that cutting taxes is the right thing to do. It's because people are entitled to the fruits of their labor, and most of the time, the government is simply taking too much of their money -- money to which it has no inherent right.

In any case, tax cuts don't "produce" government spending in the same way that allowing people to keep more of their own money ends up producing more tax revenue for the government. And if Democrats would do more to help unleash the entrepreneurial spirit of the American people, rather than simply trying to force them to subsidize an ever larger federal government, maybe we could at once reduce the size of government and cut taxes.

Rather than following Chait's suggestion -- raise taxes to shrink government -- why don't we simply vote more tax-happy Democrats out of power?

17 Comments:

Blogger One Salient Oversight said...

Carol,

I'm afraid your position here is illogical and untenable.

I'm not about to go around putting massive amounts of money on my credit card. Why not? Because I know that one day I have to pay it all back - and the more I owe the more I have to pay back.

By running a large deficit, the US government is running up a massive credit card bill. Each year, more and more tax revenue has to be diverted to paying off interest than in paying for government services.

Remember back in the early 1990s when the budget deficit became a political problem? With Clinton in the White House and a Republican controlled congress, the deficit was cut down. The result? A drop in government bond rates and a period of economic growth.

Whenever the government lowers taxes and runs a deficit, it still has to get that money from somewhere (assuming spending isn't cut). That somewhere is the marketplace. Rather than getting tax revenue, the government borrows money from the market. Given the massive amounts of money involved, running a deficit changes market behaviour in a big way. In a sense, therefore, deficits affect the natural working of the marketplace. Without that deficit, the market may have invested that money somewhere else.

The problem with the supply-side argument that you use is simple - why not simply go the whole distance and reduce tax levels to zero? Why not cut every single federal and state tax and let everyone get rewarded for the fruit of their labour? After all, according to the supply-side logic, greater tax cuts will lead to greater tax revenue - which means that reducing taxes to zero will end up giving the government massive tax revenues.

Of course, such a notion is completely false - the government can't get tax revenue when taxes are at zero, no matter how much economic growth it magically causes.

So there has to be a "sweet spot" whereby tax levels reach their optimal point. If you increase them, the government gets less revenue, but if you decrease them, the government gets less revenue.

It's just another supply/demand curve in the end. I sell widgets for $1 each and make the best profit. If I sell them for $0.90 I lose money; if I sell them for $1.10 I lose money.

But where's the "sweet spot" in taxes Carol? If you're blindly committed to lowering taxes in the ideological belief that "less equals more" then you'll end up bankrupting the federal government.

At this present moment in time, the USA has a public debt level of 64.7% of GDP (Source: CIA factbook). This means that the federal government owes enough money to its creditors equivalent to two-thirds of the US economy to pay off.

That is a massive amount of money. Massive.

And when you work out who is to blame, ask yourself this - who has been in control of congress these past five years, and who has had the power to veto any overspnding bills?

Has it been the Democrats? No.

Mark my words - George W. Bush and the GOP will go down in history as the people who destroyed the US conservative movement. And they did this through complete and utter stupidity and incompetence.

6:47 AM  
Blogger Duke-Stir said...

...and greed. And pious arrogance.

7:04 AM  
Blogger COPioneer said...

And historically low unemployment, and excellent economic growth.

Carol's point is not illogical and untenable. It's been proven time and again that cutting taxes energizes the economy. There is simply more venture capitol, meaning more businesses, meaning more jobs, meaning more people paying taxes.

I do however, agree with your "sweet-spot", because that's basic economics. But the problem with most liberal's ideas is they seem to think it's a zero-sum game, and it's not even close. Everyone can become rich in America, if rich is what they want. And they can be as greedy and selfish as they want too. Or generous and selfless, as most of my conservative friends ARE.

9:18 AM  
Blogger wile e coyote said...

There is no way to offload from Republicans the blame for recent spending surges.

Since when did (or should) Republicans claim to need political cover to implement their avowed principles?

9:38 AM  
Blogger Greg said...

The reason , Mr. Oversight, that you find Carol's position illogical and untenable is because you have overlooked (or ignored) one extremely salient truth.

Reducing tax rates has proven time and again to increase tax revenue.

You simply cannot make the argument that reducing tax rates forces the government to "get the money from somewhere" else.

That is not true. Reducing tax rates INCREASES the amount of money the government gets from taxes.

Reduced tax rates puts more money into the Free Market economy. Individuals spend more money creating more demand for products which creates more jobs for workers who create those products. Businesses invest more money into the Free Market economy creating more profits.

More spending on taxable products creates more jobs with taxable wages and more taxable business profits.

If this weren't such a documented and provable fact, your point wouldn't be so untenable.

Also, would you care to re-read your comment about reducing the tax rate to zero. I realize inflating the elements of an argument in order to make a point is a common and sometimes effective tactic.

For example, I can say a 50% tax rate on $1,000.00 creates less tax revenue than a 25% tax rate on $3,000.00. The elements of the argument are greatly exagerated and over-simplified. But the logic is clearly understandable - and relavant.

Your attempt is completely void of intelligible logic.

It would be the rare conservative indeed who proposes zero taxes. No one here is suggesting the government shouldn't receive any tax money from the public. Most conservatives are simply suggesting the government spend the money it gets only on necessary services and be wise enough to know that reducing the burden on the individuals and businesses will spur the overall economy and increase its own revenue.

10:53 AM  
Blogger Greg said...

On the other hand, Wile E Coyote makes very clear what the truly salient point is in this debate:

"There is no way to offload from Republicans the blame for recent spending surges.

Since when did (or should) Republicans claim to need political cover to implement their avowed principles?"

Well said!

10:56 AM  
Blogger wrabkin said...

It's such a "well-known fact" that cutting taxes increases revenues that of course no one can pull up any statistics.

That's because this is a myth, disproven time and again.

Reagan cuts taxes and deficits exploded. Clinton raised taxes and the economy boomed.

But the myth is necessary to allow conservatives to live with themselves. Because otherwise they have to deal with the central contradiction in their lives:

Why is it that people who claim so ferociously to love their country refuse to help pay for it?

1:04 PM  
Blogger wile e coyote said...

Here is a study from the Heritage Foundation with the statistics wrabkin requested.

Generally, cutting rates increases revenues. Moreover, statistics are cited showing that cutting taxes on the highest incomes increases the share of taxes they pay. The study came out prior to the reduction of the tax on dividends to 15%, which also resulted in an increase in taxes paid by the wealthy, both in absolute terms and as a share of total taxes paid.

Some may question any data coming from the Heritage Foundation, just as some may question data coming from the ACLU. I hope criticisms of the statistics referenced abouve will focus on specifics, rather than a blanket denunciation of anything coming from the Heritage Foundation.

wrabkin fails to distinguish among deficits, lower taxes and higher spending. Deficits under Reagan resulted from a failure to reign in spending rather than a failure to collect more tax. The same has been happening under W the last couple of years.

Please also bear in mind that Clinton inherited an economy in strong expansion and left one in recession. Disagreements on spending priorities between the Clinton White House and the Republican Congress help reign in spending. As recent experience suggests, had one party controlled the White House and Congress, that party would have spent the money faster than it could have been brought in

6:09 PM  
Blogger wile e coyote said...

Oops.

I forgot to add the citation:

http://www.heritage.org/Research/Taxes/bg1765.cfm

6:10 PM  
Blogger JillMartin said...

This comment has been removed by a blog administrator.

6:31 PM  
Blogger One Salient Oversight said...

Just a point for Greg,

You said this:

You simply cannot make the argument that reducing tax rates forces the government to "get the money from somewhere" else.

That is not true. Reducing tax rates INCREASES the amount of money the government gets from taxes.


When I was referring to the government getting the money from somewhere else I was referring to the current deficit system, whereby the shortfall of tax revenue to pay for current expenditure is met by borrowing money from the market.

According to the CIA world factbook, 2005 federal revenues were $2.119 trillion while expenditures were $2.466 trillion. The shortfall is made by by issuing government bonds.

So, in words of Tom Cruise, "Show me the money". I've quoted figures and sources to support my argument, now you quote yours. You say If this weren't such a documented and provable fact, your point wouldn't be so untenable, so I'm saying document and prove it.

11:21 PM  
Blogger One Salient Oversight said...

Please also bear in mind that Clinton inherited an economy in strong expansion and left one in recession.

Actually it was the other way around. I'm not going to defend Clinton as an example of fine economic management but I will point out that he pretty much listened to what Alan Greenspan told him, and was part of the process to reduce the federal deficit.

When it comes to economics, I prefer to look at the whole. Bush is not solely to blame for the deficit mess but he does have some responsibility (he could veto overspending bills for example). In the same way Clinton was never fully responsible for the economic expansion between 1993 and 2000 but he did have something to do with it. Some conservatives will point out that the Republican controlled congress helped to usher in a reduction in the deficit and I'm prepared to accept that.

But it is quite plain that the current deficit is completely the responsibility of the Republican party.

You see, if the Republicans had cut taxes and then cut spending to match it, then I would have much more respect for the GOP and its small government philosophy. The fact that the current Republican leadership has allowed national debt levels to exceed two-thirds of GDP may be expected from a stereotypical "wild spending" democrat, but not from those who claim to be fiscal conservatives.

The GOP has shot itself in the foot. At some point in the future the debt will have to be repaid. The more the federal government owes, the more overseas investors will be likely to sell off the US dollar and devalue it.

11:30 PM  
Blogger One Salient Oversight said...

Wile,

I'm fairly familiar with The Laffer curve - it's that "Sweet Spot" that I was mentioning before.

I think my point is that I honestly believe that taxes have been cut too far beyond the "sweet spot", and have placed the economy in great danger.

Granted, reducing taxes may end up increasing revenue, but you can't simply keep cutting taxes and assuming revenue will go up all the time. Otherwise you'll get to zero and no revenue will result.

I'm all for lowering taxes if it results in greater revenue - but not if it results in large, unsustainable deficits.

And remember - the 1990s was a period of sustained economic growth that was typified not by tax cuts, but by reining in the deficit.

11:35 PM  
Blogger Alan Kellogg said...

JillMartin,

At our current state of knowledge and technology it is impossible for a woman to get another woman pregnant through sexual activity. So your imaginary fetus cannot be Carol's get.

(Sometimes being vicious is worth the price. :) )

2:00 PM  
Blogger JillMartin said...

This comment has been removed by a blog administrator.

7:33 PM  
Blogger JillMartin said...

Alan Kellogg,

Thanks for sharing your sick thoughts with all of us. Becoming a man just wasn't your cup of tea, obviously.

7:36 PM  
Blogger JillMartin said...

Kellog,

Vicious, NOT. Stupid is... stupid does. Old army grunts are just cerebral fluid, lacking two brain cells to rub together as Einstien once joked. And it isn't polite for you to practice your mental masturbation in public.

7:20 AM  

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