Republican and McCain Supporter Ben Stein Says Taxes Must Come Up
August 12th, 2008 . by economistmom
Wow… this is beautiful. I’ve just come up for air (temporarily) from the depths of my big home clean-up project (I will post on it later this week), so I only learned of this Sunday NYTimes column by Ben Stein–a Republican and a McCain supporter, as well as an economist and an actor (remember “Bueller? Bueller?…Anyone?”)–today.
Despite it being a little nutty for him as a conservative economist and a McCain supporter to be admitting such things, Ben makes a few big points which should sound strangely familiar to faithful EconomistMom readers. Let me paraphrase as EconomistMom, but offering Ben’s supporting quotes:
Ben Stein’s Point #1: There is no such thing as a free tax cut–the Bush tax cuts being no exception.
The sad truth of the last two two-term Republican presidents is that their economic premise, the key part of their economic game plan, simply has not done what it’s supposed to do.
That is, cutting taxes, especially on upper-income Americans, does not generate so much economic activity that it replaces all the lost I.R.S. take and then some. At least those have been the results so far.
…when President Bush drastically cut taxes after he was first elected, the I.R.S. take from individual income taxes fell and did not recover its 2001 level until 2006.
Ben Stein’s Point #2: Nor have the Bush tax cuts “starved the beast.”
A conservative purist might rejoin here that it would be fine if income tax receipts fell, because we would then have a smaller government and a freer society.
That would be nice, but far from true. Instead, government just keeps growing. Government spending grew dramatically under President Reagan, very nearly doubling, and leaving us with a federal deficit vastly bigger than the one he inherited. I know that a large chunk of that increase was to rebuild the military. I heartily approved of it.
But if you want to have a military buildup — and we need one now, desperately — that’s usually a reason to raise taxes, not cut them.
Under the current president, we have had the same story. As income tax receipts fell, military and other spending rose rapidly.
Ben Stein’s Point #3: Yes, the fiscal challenge is primarily a spending one, but if we have no good strategies to control that spending, it’s got to be considered a “revenue problem,” too.
The facts of life are that federal spending is almost all untouchable: the military, Social Security, Medicare, interest on the debt, pensions. The discretionary part is tiny.
Every category of federal spending is likely to grow. This means that if we don’t raise taxes, if we keep doing what we’re doing, the immense deficits and debt will not go away — and will probably grow.
Ben Stein’s Point #4: We can either raise taxes now, on those we know can afford it, or we’ll have to raise taxes much more on our children and grandchildren, who we’re not sure will be able to afford it.
The question is simply this: Do we want to step up to the plate like responsible people — I hate to say this, but the last responsible people who actually did this were named Bill and Bob (Clinton and Rubin) — and shoulder our responsibilities? Or do we just kick the can down the road a bit and leave the mess for our children and their children?
And if we do raise taxes, should people who are barely getting by pay them or should people who are getting by very nicely pay them?
I don’t like taxing rich people or anyone I like. But our government — run by the people we elected — needs the revenue. Do we pay it or do we make our children pay it? Dwight D. Eisenhower and Bill Clinton knew the answer: You behave responsibly and balance the budget except in rare circumstances.
Beautiful, Ben! May I pay tribute to you by saying: “Taxes? Taxes?…Anyone?”
Good for Stein (and another great post, Diane).
Just taking a step back for a second, the best argument for a President McCain being better for our fiscal imbalance than a President Obama may be — as strange as this sounds — that a President McCain would probably be much less successful legislatively (because of the Democratic Congress). In other words, McCain probably wouldn’t get nearly as much of what he (supposedly) wants in terms of fiscal policy.
Both candidates plans are bad for our fiscal outlook. Perhaps we should elect the guy who won’t be able to get what he promises
How’s this for a campaign slogan:
“Vote McCain — He can’t do as much damage!”
Brooks: that slogan is good… but as for not wanting what McCain promises, I guess that depends which promise you’re talking about: the one where he promises to cut taxes even beyond Bush, or the one where he promises to balance the budget in four years. We just know he can’t do both!
Diane,
lol, Where’s John Anderson when we need him (to deliver that classic line re: doing it “with mirrors”).
That is, cutting taxes, especially on upper-income Americans, does not generate so much economic activity that it replaces all the lost I.R.S. take and then some. At least those have been the results so far.
Thanks for the post about Ben Stein’s article. It’s great to hear from a Republican who has not bought into the supply-sider myth that tax cuts pay for themselves. When I heard about the touted rise in revenues after the Reagan tax cut, I went and looked at the numbers myself. After all of the bragging that I’d heard from supply-siders, I really expected to find something. Instead, the numbers were pretty much what one would expect. When taxes are cut, revenues go through a quick drop and then continue to grow with the GDP as before, just at their new lower level. Hence, tax cuts are not a free lunch. They require us the weigh their benefits versus their costs, just like most things in the real world.
I posted the results of my study of the numbers at this link. For years, I’ve asked supply-siders to tell me any specific numbers or conclusions in my analysis that they disagree with. Alternately, I’ve asked them to post a link to one serious economic study that purports to show evidence of any income tax cut that has ever paid for itself. None have.
This is one of the insidious problems with the myth that tax cuts pay for themselves. It’s now impossible to have a rational conversation with many supply-siders about the costs versus the benefits of tax cuts. If tax cuts are truly a free lunch where everybody wins, no such conversation is necessary! In any case, this article from Media Matters suggests that McCain and his advisors have been arguing both sides of this issue. This doesn’t surprise me too much as I’ve long noticed that many pro-tax cutters will make statements that imply that tax cuts pay for themselves but will never put those statements in writing and will back off those statements when pressed on them.
Ben is certainly a chip off the old block.
I think Ben is half right.
As Milton Friedman used to say, spending determines taxes. The only way the gov’t gets money for spending is by collecting taxes in the same amount. This is true even if it borrows to pay for current spending — uses deficit spending — because it then must pay interest on the debt which is financed with taxes. And the tax-financed interest on $1 of borrowing discounted to present value equals exactly $1. So taxes still equal spending, it’s just that the taxes are deferred.
Thus, claiming to “cut taxes” without cutting govt spending is pretty much the same as claiming you’ve cut your personal consumption by putting it on your credit card instead of paying cash — neither honest nor wise.
And clearly, you can’t claim to have “boosted the economy by cutting taxes” when you haven’t cut taxes. Even the Bush Treasury says the economy-boosting effects of the Bush cuts depend on them being financed with corresponding spending cuts.
But obvioulsy in politics it is much easier to embrace cutting taxes than cutting spending, so here we are with that sort of sham of tax cutting.
As far as all that goes, Stein if absolutely right that there is no such thing as a free tax cut. That’s the half he’s got right.
But as to whether tax-cutting actually has been proved a failure at “starving the beast”, that’s not so clear cut, and I’d say very probably wrong.
Friedman famously also favored every tax cut of any kind on any pretense, because he believed is would constrain growth of government spending.
A lot of people deride that idea now because the Bush tax cuts have been followed by so much spending on pork, “bridges to nowhere”, etc, by the Republicans, and now by the likes of the big agriculture subsidies thrown out by the Democrats while the agricultural sector is enjoying an historic boom, etc. Fully bipartisan lack of spending restraint following the tax cuts.
However, all that has been only typical “micro” level political spending that doesn’t require any politically painful tax increase, while still keeping the Bush deficits at the low end of the average of the last 40 years. Last year’s deficit was a “piddling” 1.2 of GDP, in spite of it all. So all that spending was easy for Congress to fund. Practically free.
When it comes to increasing spending by multiple points of GDP, requiring tax increases that are painful to politicians, it’s a whole different thing.
Not long ago Krugman in his column was moaning and groaning that Bush has successfully reset the tax baseline in a way that is keeping Obama from proposing to increase taxes as needed for his national health care program — in fact, it’s actually got Obama proposing his own tax cuts! Krugman was complaining that “starve the beast” actually works! And when two economists as disparate as Friedman and Krugman agree on something, I tend to believe there’s something to it.
Look at history: in 1983, when Congress had to “save” Social Security by closing a funding gap to keep it solvent using an overt tax increase, the whole political community was traumatized — and produced a typical political compromise that was 50% spending (benefit) cuts.. The funding gap for Medicare and Social Security just by 2030 is projected to be more than 12 times larger than that one in 1983. What should we expect will happen then?
By the 1983 precedent “starve the beast” remains entirely credible. Set taxes at a lower level, make Congress people raise their hands and say “I (my name) vote to increase taxes to increase this spending” and the compromise level of spending that will be reached through political deal-making will be at a lower level of GDP than if taxes initially were at a higher level. “Diet the beast”. “Cut some fat off the beast”. “Means test the beast”. Whatever.
After all, Krugman told the Asia Times that the US govt should be collecting 28% of GDP in taxes today to fund SS, Medicare, Medicaid, etc., (not counting national health care). That’s a good 10 points more than now, about equal to a 90% income tax increase across-the-board.
But he’s never said any such thing in his own NY Times column. Why not? Because very publicly attaching such a huge (if accurate!) tax bill to Democratic-party embraced entitlement programs in an election year would be …. ouch! IOW, the Democrats and he personally are intimidated into silence by the political force of “starve the beast”.
But that silence is going to have break around 2017, and when it does the lower that taxes are then, so the more they have to go up in points of GDP to cover entitlement spending, the worse will be the final political deal that the “big entitlement spenders” get. Krugman knows that, and that’s why he dreams of collecting 28 points of GDP now as the tax base line, and then adding nationalized health care and all the rest on top of it from there.
When Friedman and Krugman agree that a policy creates a budgetary political force to be reckoned with, I’m with them.
I remember that post you had recently about how deficit funded cuts are a bad idea. It’s funny because if either candidate says they are going to raise taxes they get torn apart. If there were more rational people in the world it would be the other way around. I’m kind of hoping that at least one of the candidates is lying (or bending the truth) about their tax plan. This kind of fiscal irresponsibility from the government needs to stop sometime. Why not before the economy declines to the point that tax payers can no longer afford to balance the budget?
This claim by Stein: ‘Government spending grew dramatically under President Reagan, very nearly doubling…’
Is refuted by the first graph here:
http://home.att.net/~rdavis2/recsrc.html
Spending as a percent of GDP was 23.5% in 1983 and dropped to 21.25 by Reagan’s last year, 1988.
It further declined in 1989, before nudging up thanks to the recession in 1990-91. After the recession ended spending began to decline again, thanks to the Phil Gramm inspired spending caps in the 1990 Budget Act.
So, Stein is full of it.
Patrick: well, Ben is probably making the mistake(?) of looking at nominal spending in dollars, rather than spending as a share of GDP. Nominal spending did almost double (from 1980 to 1988), largely driven by defense spending (which more than doubled), but I think the better point to make is that although spending/GDP dropped slightly from 1980 to 1988 (from 21.7 to 21.2% of GDP), that half percentage point of GDP “savings” was not nearly enough to pay for the more than 2 percentage point decline in revenues as a share of GDP that took place from FY1981 to FY1984 (from 19.6 to 17.3% of GDP).
So, Mom, Ben’s not much of an economist then?
And, by 1988 receipts were back to the six decade post WWII average of 18.2%. Which, as I’ve pointed out before here is the elephant in the living room.
Is anyone aware of any public opinion data in regards to how Americans in general are likely to respond as these financial pressures continue to build (assuming that the President(s) and Congress don’t go off the deep end with borrowing over the next decade?)
In other words, as the problem becomes more evident to average Americans and tough choices can no longer be avoided will the majority of Americans lean towards “starving the beast” or significantly raising taxes (degree of progressivity aside)? Likely a combination of both will occur but is one side of the equation likely to have more emphasis than the other?
Perhaps I’m too naive, but the assumption is that the aggregate will of the American people will eventually determine which tough choices will persist to resolve this unsustainable situation.
Patrick R. Sullivan wrote:
This claim by Stein: ‘Government spending grew dramatically under President Reagan, very nearly doubling…’
Is refuted by the first graph here:
http://home.att.net/~rdavis2/recsrc.html
Spending as a percent of GDP was 23.5% in 1983 and dropped to 21.25 by Reagan’s last year, 1988.
You’re correct that Stein’s statement is, at best, misleading. According to the source above, spending went from 21.67% of GDP in 1980 up to 23.49% of GDP in 1983 and then down to 21.25% of GDP in 1988. As Diane said, he may have been referring to nominal dollars which increased from $517 billion in 1980 to $909 billion in 1988, a 75.8% increase. Even this hardly rates as “nearly doubling”. In any event, measuring the increase in spending using nominal dollars is as misleading as measuring the increase in revenues using nominal dollars.
In fact, I noticed something interesting in looking at the categories of spending under Reagan. Spending on outlays other than Defense, Health, Medicare, Social Security, Income Security, and Net Interest plunged from 5.283% of GDP in 1980 to 2.980% of GDP in 1988. This more than offset the increase in Defense from 4.914% of GDP to 5.797% of GDP and the drop in revenues from 18.96% of GDP to 18.15% of GDP from 1980 to 1988.
And, by 1988 receipts were back to the six decade post WWII average of 18.2%. Which, as I’ve pointed out before here is the elephant in the living room.
The elephant in the living room is that tax cuts lead to lower revenues. As I pointed out at http://home.att.net/~rdavis2/taxcuts.html, those receipts included revenues from the increased FICA tax. Looking at the third graph at the source you gave shows that revenues from individual income taxes went from a high of 9.36% of GDP in 1981 to 7.77% of GDP in 1984 and then stabilized, ending at 8.01% of GDP in 1988. As I mentioned at the above link, much of that stabilization was likely due to the Tax Equity and Fiscal Responsibility Act of 1982 and the Deficit Reduction Act of 1984. In any event, individual income receipts did not start to recover to their 1980 level until after the Clinton tax hike.
Looking back at the third graph, one could perhaps argue that the 1980 level of receipts was unusually high and the Reagan’s tax cut returned them to the level that they were at in the mid-seventies. In fact, much of the rise in receipts as a percent of GDP was likely due to bracket creep combined with the high inflation of the late seventies. Hence, to some extent, Reagan’s tax cut offset this. There is little doubt, however, that Reagan’s tax cut caused revenues to be less than they would have been otherwise. As I said, I am yet to see a serious economic study that suggests otherwise.
As I note (angrybear.blogspot.com/2008/08/has-economistmom-been-tutoring-ben.html), a decent oped but with a few problems. Have you been tutoring Ben? Well, good job but there’s more work to be done.
Patrick R. Sullivan usually defends the rightwing silliness but I guess he had to refute the clam that Reagan spent like a drunken sailor. Well done Patrick but then you’ve just ticked off a few of your rightwing friends who often make the same dumb claim that Ben made.
Note to Diane & Patrick R. Sullivan: Ben Stein is not an economist. Ben Stein is a lawyer. And a comedian, which is probably more relevant to understanding his “economics” columns. Stein’s “economics” columns are typically riddled with blunders and howlers, and the NY Times contributes to Americans’ economic illiteracy by lending its credibility and mind-share to this blowhard. I’m disappointed to see this blog do the same.
‘…one could perhaps argue that the 1980 level of receipts was unusually high …’
You certainly can, since revenues have usually fluctuated between 17-19% of GDP. They revert to that range pretty quickly, usually–the late 90s dot com bubble notwithstanding.
Nice catch about Reagan’s defense spending increases, but you forget to credit it for defeating the Soviet Union, thus paving the way for the peace dividend that Clinton enjoyed in the 90s.
pgl, you’re even less coherent today than usual.
“pgl, you’re even less coherent today than usual.”
Ahem! I decide to give Patrick a little praise for getting something right - and as usual, he decides to hurl another one of his childish and meaningless insults. Don Luskin’s minnie-me at it again.
Patrick R. Sullivan wrote:
one could perhaps argue that the 1980 level of receipts was unusually high
You certainly can, since revenues have usually fluctuated between 17-19% of GDP. They revert to that range pretty quickly, usually–the late 90s dot com bubble notwithstanding.
Once again, you’re looking at total revenues. The recovery of revenues was very much helped by the Social Security Amendments of 1983 under which the FICA tax rate went up 12% from 6.7 to 7.51 percent of payroll from 1984 to 1988.
Regarding revenues reverting to their normal range, I addressed this in the two posts about the Wall Street Journal article “You Can’t Soak the Rich” at this link. The data suggests that there is a very close positive correlation between the effective tax rate and the corresponding tax revenue. That is, the effective tax rate and the corresponding revenue tend to go up and down together by similar amounts. The fact that revenues have tended to revert to their normal range indicates that politicians will tend to modify the tax laws when revenues get out of whack. After revenues fell sharply following the 1981 tax cut, Congress passes several tax bills that had a positive effect on revenues to counteract it. According to this Treasury document, they included the Tax Equity and Fiscal Responsibility Act of 1982, the Social Security Amendments of 1983, and the Deficit Reduction Act of 1984.
1981-82 had the most severe recession since the Great Depression.
You’re making a good point about how politicians respond to special interests, but I don’t think you fully grasped the implications; it’s why revenues are ALWAYS going to be about 18% of GDP.
Patrick said: You’re making a good point about how politicians respond to special interests, but I don’t think you fully grasped the implications; it’s why revenues are ALWAYS going to be about 18% of GDP.
Well, that’s exactly why groups like the Concord Coalition work from the grassroots up to try to get the special interests and the general interest to start to align better. I think it’s clearly in the general interest that revenues as a share of GDP have got to come up over 18%.
Jim Glass: “Look at history: in 1983, when Congress had to “save” Social Security by closing a funding gap to keep it solvent using an overt tax increase, the whole political community was traumatized — and produced a typical political compromise that was 50% spending (benefit) cuts.. The funding gap for Medicare and Social Security just by 2030 is projected to be more than 12 times larger than that one in 1983. What should we expect will happen then?”
Hint, Jim - ‘Social Security’ and ‘Medicare and Social Security’ is not the same thing. ‘We fixed program A, but programs A and B are collectively still in trouble’ is a very, very dishonest thing to say.