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The NY Times and Len Burman on “A Real Debate on Taxes”

August 25th, 2010 . by economistmom

Why do I need to think/write this week, when I have friends like Len Burman doing it for me?  Here’s a New York Times editorial on the Bush/Obama tax cuts from earlier this week.  There’s absolutely nothing in it that I do not wholeheartedly agree with.  I suspect the NY Times may have gotten some of their ideas from Len, given Len’s July 14th testimony before the Senate Finance Committee.

Thanks, Len!  :)

33 Responses to “The NY Times and Len Burman on “A Real Debate on Taxes””

  1. comment number 1 by: SteveinCH

    Why does the NYT insist on quoting CBPP when the CBO does the same analysis without their thumb on the scales?

  2. comment number 2 by: VAT Brat

    A real debate on taxes, but no debate about spending. Par for the course for the NYT and Economistmom. Exhibit A for why the political process is dysfunctional. Budget geeks pretend that taxes are the solution and completely ignore spending. Illustrates the political tin ear of Economistmom, NYT, and other assorted left-wing politicos.

    Ughhhhh! http://www.thepeoplesdebt.com
    is the only way to truly address this problem.

  3. comment number 3 by: AMTbuff

    This does not address the politically critical question of the progressivity ratchet, as I posted a couple weeks ago. If only the top rates expire, it will be that much harder to enact the necessary regressive tax increases later.

    However I very much agree that the two sides are getting more and more extreme as the crisis approaches. This seems weird, but I’m sure someone will explain why it happened after we go over the fiscal cliff.

  4. comment number 4 by: VAT Brat

    Instead of tampering with tax rates, right now the better way to raise tax revenue is to:

    Abolish exemption of healthcare benefits from taxation.
    Abolish home mortgage interest deduction.
    Abolish state tax deduction
    Bring all government employees into Social Security system.

    The Republicans will especially love the last suggestion as a wonderful FU to the SEIU and the teachers’ unions with their overly-generous pension and healthcare plans.

    Eliminating these deductions doesn’t affect investment and savings activities at the margin that we need to stimulate the economy. Instead, it will create wonderful market incentives to curtail healthcare expenditures and speed up the necessary adjustments in the housing markets.

  5. comment number 5 by: SteveinCH

    And that all that does VB is raise effective tax rates.

  6. comment number 6 by: BillSmith

    “and permanently extend them for everyone else”

    What does the word ‘permanently’ mean? Until someone decides to change them again?

  7. comment number 7 by: VAT Brat

    SteveinCH
    Yes, effective tax rates go up, but they don’t negatively impact savings and investment activities as much as explicit increases in the rate schedule. Obviously, bringing government employees into Social Security system doesn’t affect investment activities.

    This offer to eliminate deductions and raise revenue must be coupled with reductions in federal spending. Otherwise, the politics are not going to work.

  8. comment number 8 by: SteveinCH

    VB,

    I agree revenues have to go up and I’m all for eliminating deductions as long as we eliminate all of them. Cherry picking just makes a silly problem sillier. FWIW, I’d start with all refundable tax credits since they aren’t even notionally related to the tax code just transfer payments by another name.

  9. comment number 9 by: Brooks

    I’ve seen good stuff from Len Burman (as far as I can tell), but I thought the following odd:

    Some have argued that lower income tax rates are necessary to encourage “pass through entities” whose owners pay individual income taxes to hire, but the CBO also was skeptical of that claim: “increasing the after-tax income of businesses typically does not create much incentive for them to hire more workers in order to produce more, because production depends principally on their ability to sell their products.”

    I realize they are at least hinting at a matter of degree rather than arguing the basic concept, but they seem to be saying that a business owner won’t have an incentive to invest more money in production (via labor or other factor of production) if we increase the portion of every revenue dollar that remains after tax. Surely that’s silly. Yes, I realize that demand is lower in a bad economy, but demand is not static. More after-tax income from each dollar of revenue means the business has the potential to lower prices and sell greater volume and increase profit, or to invest in more promotion and grow sales volume that way. And a new venture or initiative that provides sufficient ROI to be a “go” under one tax rate may be a “no go” under a higher tax rate.

    Isn’t that Microeconomics (and even Macroeconomics) 101?

  10. comment number 10 by: Jim Glass

    Shouldn’t it be: “A Real Debate on the Budget”?

    Then we could consider realistic possibilities such as tax increases coupled with matching-sized spending cuts, which would (1) actually address the problem, and (2) be politically possible, as per the 1983 Social Security Act closing the SS funding gap, the Bush I budget deal reducing the Reagan deficits, etc.

    I’m not sure that “A Real Debate on How We Can Increase Taxes to Keep Running Up Totally Unsustainable Spending Growth For As Long As Possible Without Dealing With The Fact That It Is Totally Unustainable”, is very helpful, in any direction.

  11. comment number 11 by: Brooks

    Jim,

    The problem is that X - Y is too large. Why do you call Y “the” problem and imply that projected spending is inherently unsustainable? We could just keep raising taxes UNLESS your argument is that doing so would so injure the goose that lays the golden eggs that the revenues literally just can get high enough (at wrong side of Laffer Curve).

    So that premise seems implicit in your implication that projected spending is inherently unsustainable. Seems to me that argument should be made explicitly and substantiated, or you should back away from the literally unsustainable argument and move to an argument about how undesirable it would be to spend per projections, which still wouldn’t establish spending as “the” problem.

  12. comment number 12 by: Brooks

    oh, technically the problem is that X - Y (meaning Revenues minus Expenditures) is to small (too large a negative number).

  13. comment number 13 by: AMTbuff

    Brooks, the real debate (often intentionally obscured by partisans) is about what size the government should be, namely how much of the economy’s output passes through the hands of tax collectors and politicians on its way from the earners to the spenders. Unseen but also important is the regulatory burden on the economy, changing activity and incurring deadweight losses that are difficult to estimate.

    Do Americans want a freer, larger economy with more inequality of outcomes? Or do they want a more regulated, smaller economy with more equal outcomes? We will learn the answer over then next 15 years or so. I am confident that the people will get what they want, whichever it is.

  14. comment number 14 by: Jim Glass

    The problem is that X - Y is too large. Why do you call Y “the” problem

    I didn’t call Y “the” problem, which is why I said the only possible solution is the combination of both tax increases and spending cuts.

    and imply that projected spending is inherently unsustainable?

    I didn’t imply anything, I said it flat outright (with a link to data).

    We could just keep raising taxes UNLESS your argument is …

    No, we *can’t* keep raising taxes indefinitely with *no* spending cuts.

    Your “X - Y” is mere arithmetic, not economics, certainly not political economics.

    In 1997 Russia defaulted on its sovereign ruble-denominated debt. It could of course have raised taxes to close its X - Y gap and avoid the trauma of default … except it *couldn’t*.

    Since 1970 there have been 30-odd other sovereign debt defaults. In each and every case, as a matter of arithmetic, the gov’t could have increased taxes to pay its debt and avoid default … except it *couldn’t*.

    Why not?

  15. comment number 15 by: Brooks

    Jim,

    My point is there’s a difference between a given level of spending being impossible vs. people choosing against it. Some level is indeed literally impossible — if the required taxes would hurt the economy so much that sufficient revenue literally could not be raised. If that’s your argument, make it.

    If instead your argument is that we wouldn’t want that level of spending and taxation, and in particular that we’d choose default over it, then that’s a different argument, but you’d have to make that, too. And we’re not talking about a situation in which debt has risen to enormous levels; we are talking about keeping tax revenues sufficiently in line with spending. There might not be much to default on.

  16. comment number 16 by: Brooks

    In other words, what you’re really saying is that taxation (tax revenues) literally can’t go high enough to make projected spending sustainable. So explain why.

  17. comment number 17 by: AMTbuff

    >In other words, what you’re really saying is that taxation (tax revenues) literally can’t go high enough to make projected spending sustainable

    Look at the long-term trends on Medicare and Medicaid, and you will see that they continue to increase as a share of GDP. They reach 20% of GDP, then 30%, and eventually 100%. They would continue to rise from there if the system didn’t crash much earlier. Tax revenues cannot match unchecked growth in spending as a share of GDP.

  18. comment number 18 by: Arne

    100%? Did you really mean that?

    Both the patient and the doctor have to take time out to eat.

  19. comment number 19 by: AMTbuff

    The trend line is what it is. The growth as a share of GDP shows no sign of slowing. Furthermore it is theoretically possible for the government to spend more than 100% of GDP as long as people lend it money. I can’t look it up right now, but I believe that this may have happened during part of WW II.

  20. comment number 20 by: Brooks

    AMT,
    You are right and I was wrong. Any program projected to grow forever faster than GDP will eventually exceed GDP.

    Searching on my Blackberry is slow, so if it’s quickfor you could you check cbo altern fiscal scenario or something similar and let me know when total spending hits 40% and 60%?

  21. comment number 21 by: Arne

    You could also say that any program projected to grow faster than GDP will eventually fail to grow as fast as projected.

  22. comment number 22 by: Jim Glass

    My point is there’s a difference between a given level of spending being impossible vs. people choosing against it.

    Why do people choose against it? Simple reason: the *deadweight cost of taxes*, which rises, you will remember, not with the rise of the tax rate but by the *square* of the rise of the tax rate. So double the tax rate and the deadweight cost to the economy — and the people in it — *quadruples*.

    You reach a point where people just aren’t going to pay that exponentially rising deadweight cost — their reaction is going to range from building massive loopholes into the tax code to mass tax evasion to marching in the streets and toppling the government. Further tax collection from there is impossible.

    Now you may believe it was possible for the governments of Russia and Argentina (and the 30-odd others) to have avoided default by increasing taxes yet further, and that they just “chose” not to do so. Tell that to them. :-)

    we’re not talking about a situation in which debt has risen to enormous levels; we are talking about keeping tax revenues sufficiently in line with spending…

    In other words, what you’re really saying is that taxation (tax revenues) literally can’t go high enough to make projected spending sustainable. So explain why.

    Hey, who am I to explain? Let CBO explain. This is CBO (through here) on the option of increasing taxes enough to keep revenue even with projected spending in their “alternative scenario” [the realistic one]:

    With no economic feedbacks taken into account and under an assumption that raising marginal tax rates was the mechanism used to balance the budget, tax rates would have to more than double. The tax rate for the lowest tax bracket would have to be increased from 10 percent to 25 percent; the tax rate on incomes in the current 25 percent bracket would have to be increased to 63 percent; and the tax rate of the highest bracket would have to be raised from 35 percent to 88 percent. The top corporate income tax rate would also increase from 35 percent to 88 percent.

    Such tax rates would significantly reduce economic activity and would create serious problems with tax avoidance and tax evasion. Revenues would probably fall significantly short of the amount needed to finance the growth of spending; therefore, tax rates at such levels would probably not be economically feasible.

    Clear enough?

    Hey, I think you can explain this for yourself:

    Feldstein puts the marginal deadweight cost of income taxes today at 76 cents per dollar. Now, as per CBO, to keep taxes even with spending would require a doubling of tax rates — which means *quadrupling* the deadweight cost of tax collected to over $3 per $1.

    How many people do you think will vote for tax increases (on them! nobody’s going to escape these taxes!) that reduce the economy by more than $3 for every extra $1 of tax collected. Would you?

    If not, then you probably agree with CBO that “tax rates at such levels would probably not be economically feasible”.

    Which will get us back to the necessity of discussing spending cuts…

  23. comment number 23 by: Brooks

    Jim / AMT,

    I just had a chance to check CBO numbers. I hope to find time tonight to comment further.

  24. comment number 24 by: Arne

    http://www.cbo.gov/ftpdocs/115xx/doc11579/06-30-LTBO.pdf

    extended baseline scenario: “Extrapolating to 2080, total federal spending on those major health care programs would reach about 17 percent of GDP”

    alternative fiscal scenario: “Extrapolating to 2080, federal spending on those programs would continue to rise, reaching about 19 percent of GDP”

  25. comment number 25 by: AMTbuff

    Until we have a credible (meaning economically and politically sustainable) plan to stop (not merely slow) the rise in government spending as a fraction of GDP, adding more tax revenue will be both premature and harmful.

    Once we know that the spending is under control both now and over the long term, adding tax revenue to reach fiscal balance will be both necessary and responsible. I don’t personally know any tea party people, but I’d bet that most of them would agree with this approach.

  26. comment number 26 by: Arne

    Jim,

    You lost me when you started mixing marginal tax rates and effective tax rates.

    Combining the analysis to include SS, which is projected to stabilize, and health care, which is not, also seems odd.

    Calculating the percentage increase in income taxes needed to pay the costs of a program covered by payroll taxes distorts the results as well.

  27. comment number 27 by: Jim Glass

    Arne, address your complaints to CBO, the tax calculations are theirs.

    But where are effective rates mixed with marginal rates?

    Of course, the CBO only counts the income tax cost of financing program expenses not covered by payroll taxes.

  28. comment number 28 by: Jim Glass

    Arnold Kling has a new paper Guessing the Trigger Point for a U.S. Debt Crisis, in which he disusses the difference between a nation’s “theoretical ability” to service its debt and real-world political ability to do so.

    The trigger point for a debt crisis is not quantifiable. This is often true even in the case of private debt, such as a credit card balance.

    What should be the trigger point at which your bank disallows use of your credit card? If the limit were based solely on your theoretical ability to pay, then the upper limit on your credit card balance would equal the present value of all of your future earnings. However, you clearly are not going to work solely for the purpose of paying the outstanding balance on your credit card. Your willingness to pay is much less than your ability to pay.

    This presents the bank with a problem in psychological guesswork. The bank has to estimate the maximum amount that you can borrow and still be willing to repay…

    Among other related issues.

  29. comment number 29 by: Brooks

    Let’s sort out the questions and arguments here:

    A. Is projected (long-term) spending spending literally unsustainable as a math (not economics or politics/political economy)?

    Yes, because if total spending — or even a single program — is projected to grow faster than the economy forever, it has to overtake GDP at some point. That’s just math. Even a tiny program growing forever slightly faster than the economy would overtake GDP — it might take hundreds of years, but it’s a literal truth. That’s why I was technically wrong above. BUT on a practical level, it wouldn’t be very sensible to invoke this mathematical truth as an argument for literal, mathematical unsustainability unless spending would reach 100% of GDP within some arguably reasonable time frame, and as Arne implies (although we should focus on total spending, not just particular programs), CBO does not project total primary (non-interest) spending to reach even 35% of GDP at the end of their time horizon — 2084. Interest would be on top of that, but the question at hand should presume that taxes are raised sufficiently to prevent a debt spiral and keep interest expense reasonable. So the answer to this question is “Technically yes, but practically no, and this argument is not worth making”.

    B. As a matter of economics (fiscal dynamics), is the projected spending literally unsustainable — meaning we couldn’t raise enough revenue even if we wanted to, because of Laffer Curve effects?

    Jim Glass’ CBO excerpt says the answer is that we probably could not raise enough revenue, meaning fiscally-speaking, projected spending is literally unsustainable. I am curious, though, as to why the U.S. could not raise about 35% of GDP in taxes when other nations raise much more, unless I’m missing something, which perhaps I am, and I hope someone will provide and/or point me to an explanation of this discrepancy.

    3. As a matter of politics / political-economy (the preference of “the people” implemented through politicians), is projected spending unsustainable?

    This question is ultimately moot if the answer to #2 is “yes”, but it’s possible that political-economy would make the spending path unsustainable before the Laffer Curve would.

    Now, if one’s meaning in presenting this argument is simply that the people will prefer lower (than projected) spending and corresponding levels of taxation, then it’s not much of an argument. The argument would simply be “It’s unsustainable because it’s not what the people will choose.”

    However, if this argument is intended to mean that the people won’t allow taxation to rise high enough to spend per projections without causing a debt spiral (which is inherently unsustainable), then that’s potentially a meaningful “political-economy” argument.

    Perhaps some/most of the above is obvious, but I thought I’d offer it anyway.

  30. comment number 30 by: AMTbuff

    That’s an excellent summary, Brooks. Thanks for taking the time to write it.

  31. comment number 31 by: Brooks

    Thanks AMT. Wish I had more time these days to join you guys. I read (the posts and comments) more often than I write lately.

  32. comment number 32 by: Arne

    “which means *quadrupling* the deadweight cost of tax collected ”

    Where did this calculation come fom?

  33. comment number 33 by: Jim Glass

    “which means *quadrupling* the deadweight cost of tax collected ”
    Where did this calculation come fom?

    From any Public Finance textbook. As Mankiw put it:

    “if we double the size of a tax, the deadweight loss increases four-fold; if we triple the size of the tax, the deadweight loss increases nine-fold.”

    Here’s a technical explanation. And I already linked to Feldstein’s paperf estimating it today for US income tax at 76 cents per marginal tax dollar.

    The deadweight cost of taxes is *much* more important for policy than that silly, tautological Laffer curve.

    The deadweight cost of taxes is the real harm imposed on the economy — on people, how people are hurt — at any level of taxation. And why that harm increases as taxes go up.

    Moreover, its “rises by the square of the increase in the tax rate” nature shows the importance of collecting any given level of revenue by using…

    (1) the lowest tax rates possible on the broadest possible tax base (as per TRA ‘86); instead of being forced to use high rates by having a tax base riddled with deductions, exemptions and tax expenditures, and

    (2) multiple low-rate taxes instead of a single high-rate tax.

    The Laffer curve is useless for anything other than figuring the maximum amount of the economy the government could seize via taxes for its own sake — and who would want that other than an olde-style unreconstructed socialist? And for the dimwitted argument that increasing general revenue taxes from today’s level would reduce revenue and vice versa. Which even Bush’s own Treasury denied.

    But the Laffer curve can be drawn on a napkin, so that’s what everyone talks about.