Dan Gross has written what is likely the most informative and intelligent thing you will read about the tax cut expiration debate this entire year.

I want to excerpt all 5 bullet points — but I would end up posting the entire piece. Points 1, 2 and 3 are the most informative, but point 4 is the most amusing — so that’s the one I will excerpt here:

4) The bold and confident assertions made about the links between tax rates and economic growth, market performance, and prosperity are almost certainly wrong.

Turn on CNBC or look at the Wall Street Journal op-ed page these days, and you’ll learn that we must keep tax rates on capital gains, dividends, and income precisely where they are because shifting them to different levels will retard economic growth.

Keep this in mind: The people who designed the current, unsustainable tax system promised us that lower marginal rates, and lower taxes on capital and dividends, would boost the economy, promote investment, create jobs, spur market performance, and raise everybody’s income. They were wrong. (It’s no coincidence that these same people also warned us that raising taxes in 1993 would kill market returns and the economy. They were wrong then, too. They’re pretty much always wrong.)

As I’ve pointed out, the years under the current tax regime have been a lost decade. Pick your metric—median income, employment, stock market returns, economic growth—the low-tax ’00s sucked. Yet proponents of keeping the tax cuts persist in making the argument: To avoid a repeat of the past decade, we must have the exact same tax policies as we did for the past decade.

Shorter version: You suck now, you sucked then, you are highly likely to suck in the future, too!

>

Source:
Taxing My Patience
Five points to keep in mind as Congress debates the Bush tax cuts.
Daniel Gross
Slate, Sept. 16, 2010
http://www.slate.com/id/2267681/

Category: Financial Press, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

47 Responses to “About Those Expiring Tax Cuts . . .”

  1. Sircornflakes says:

    Amen.

  2. JustinTheSkeptic says:

    Tax the f out of the rich. I mean take it all from them so that they don’t have time to think- let’s call it the flash-tax! Then let them work their big asses off to supply us with more! Problem solved.

  3. drewburn says:

    Agree with Barry, perfect, simple and succinct. And funny. Read the whole thing. Cutting taxes for the wealthy under Reagan made sense; rates were dramatically higher. The Bush II cuts were stupid and idealistic. If taxing the wealthy less were the secret to economic growth, why would we tax them at all?

  4. IS_LM says:

    I think I weakly prefer Bruce Barlett’s apostacy. One wonders how soon Greg Mankiw or John Taylor will link to it.

  5. DL says:

    “The people who designed the current, unsustainable tax system promised us that lower marginal rates, and lower taxes on capital and dividends, would boost the economy, promote investment, create jobs, spur market performance, and raise everybody’s income. They were wrong”.
    . . . . . . . . . . . .

    Politicians of all stripes have to engage in hyperbole in order to get bills passed. Obama said that if the Congress passed his so-called “stimulus” bill, the unemployment rate would never get above 8%. He was obviously wrong. So what does that prove?

    I actually don’t think it’s really possible, using historical data to prove that a given tax structure (at least in the U.S.) causes the GDP growth rate to be higher or lower. I would challenge anyone to come up with methodology that would prove that (a) lower taxes increase GDP growth, or that (b) lower taxes fail to increase economic growth. There are just too many other economic factors.

    But I would pose the following question: if you owned a small business, how high would your marginal tax rate have to go before it would cause you to undertake efforts to minimize taxes or defer income?

    ~~~

    BR: So if its just hyperbole, why should anyone listen?

  6. WFTA says:

    If I have not made that point here in the last month or two, I meant to.
    Have a nice weekend.

  7. drey says:

    “I would challenge anyone to come up with methodology that would prove that (a) lower taxes increase GDP growth, or that (b) lower taxes fail to increase economic growth. There are just too many other economic factors.”

    Indeed – there have probably been thousands of studies/doctoral dissertations done on this topic attempting to prove causation/correlation, in vain, yet govt decisions tend to be made as though the connection were a given….

  8. Apinak says:

    If Democrats were smart (a big if), they would rebrand extending the tax cuts for the rich as TARP II, they will cost more (ignoring all the other bailouts), do little for the economy, and the money will go to many of the same people.

  9. Chief Tomahawk says:

    Good thing the Kudlow show appearance is in the rearview mirror and not on tonight’s docket…

  10. Brett Tibbitts says:

    The reason we had a lost decade is not because of tax policies. The reason we had a lost decade is because we had two bubbles that very few in the country wanted to do anything about. Far too many people were worried about getting on board the stock market bubble and housing bubble while they were going. Dems can say it was all Bush’s fault through lack of regulation, but I don’t remember ANY prominent politician of either party fighting hard to stop either bubble. Bubbles have consequences and we are now experiencing those consequences. But tax policies did not cause those bubbles. Human greed, emotions and government’s absolute efforts to avoid the consequences of those bubbles have lead to our current problems.

    ~~~

    BR: Dan isn’t saying that was why we loss the decade — but its funny that the prescription remains the same no matter what !

  11. Apinak says:

    I would also add that too much of the tax cuts for the rich don’t go into job creation, they go into subverting the political process so they can get even more money. http://www.nytimes.com/2010/08/29/opinion/29rich.html

  12. VennData says:

    DL,

    “…Obama said that if the Congress passed his so-called “stimulus” bill, the unemployment rate would never get above 8%. ..”

    Obama never said that. You’re parroting right wing media nonsense.

  13. DL says:

    There is another point to be made about the taxes on the wealthiest 2%. I keep hearing about how the joint committee on taxation estimates that raising marginal rates on the wealthiest 2% will yield $70B per year in revenue. Yet, if you go to their website ( http://www.jct.gov/ ) they admit upfront that their model uses “static” assumptions. They admit that the model assumes that taxes have not effect on economic activity, no effect on hiring, no effect on investment; they also imply that higher marginal tax rates will not result in the creation of more tax loopholes.

    I find this $70B number highly dubious. I think the real number is more like $35B/yr (it’ll depend a lot on GDP growth rates). As it happens, this number ($35B) represents about 1% of the Federal budget.

    All of this “hemming and hawing” over an amount of money that represents 1% of the Federal budget.

    ~~~

    BR: Please make the US Treasury check for 1% of the budget to “Barry Ritholtz.” I promise I won’t deposit it til Jan 1.

  14. IS_LM says:

    I actually don’t think it’s really possible, using historical data to prove that a given tax structure (at least in the U.S.) causes the GDP growth rate to be higher or lower. I would challenge anyone to come up with methodology that would prove that (a) lower taxes increase GDP growth, or that (b) lower taxes fail to increase economic growth. There are just too many other economic factors.

    I would suggest you read the Bruce Barlett piece to which I linked. Barlett provides greater context of the economic arguments being made at the time than does Gross, as well as their ultimate refutation.

  15. TripleSigma says:

    If anyone thinks tax policy is what put us in this recession, you are a child and your opinion does not matter.

  16. IS_LM says:

    I find this $70B number highly dubious. I think the real number is more like $35B/yr (it’ll depend a lot on GDP growth rates). As it happens, this number ($35B) represents about 1% of the Federal budget.

    So your dynamic scoring method involves taking a static score and dividing by two?

  17. obsvr-1 says:

    They were designed to expire, so they should expire, where is the discussion on the lack of discipline in congress to follow their own rules.

    Congress (both dems and reps) have already spent us into a huge hole and they keep digging. The debate and 100% of the energy should be redirected to what to CUT from of the budget.

    If the tax system is not scrapped in favor of an alternate simpler and better system, like a consumption tax, and we are forced to keep the mountains of tax code full of social and elitist engineering then more tax brackets should be added. The argument focused on the 250K threshold is ridiculous, the fact that someone making 250K is taxed at the same rate as someone making 1M or 10M or 100M is crazy. But before this is even considered how about having those that make enough to be in the top bracket, pay the top bracket rate on their income – get rid of the loopholes for the elite and root out all of the tax evaders.

    I would favor directing Billions to enforcement to go after tax evaders (especially egregious when the rich are the perpetrators), and to root out fraud and corruption. There are 100′s of Billions in lost revenue and fraudulent enrichment metastasized throughout the system which would more than pay for the enforcement expenses. This would also stimulate new jobs in enforcement to recover the ill gotten gains and stolen funds that ultimately come from the taxpayer.

  18. VennData says:

    DL says “…I find this $70B number highly dubious. I think the real number is more like $35B/yr…”

    DL doesn’t believe the numbers he “feels” something else.

    Hey Mama Bear, stick with the numbers, OK? Are you “feeling” that tax cuts always pay for themselves? Been there, tried that, twice once under Reagan, once under Bush, it failed both times. That “Mama Bear knows” / women’s-intuition stuff doesn’t work in a spreadsheet.

  19. VennData says:

    DL,

    $70B is 3% of the Federal tax take $2T. If you think it’s so small, then let’s just go ahead and raise the tax, … I mean , since it’s so small.

    Your Supply Side tax cuts for the rich failed, twice. That’s the cause of the vast majority of the current debt, not Obama.

  20. DL says:

    VennData,

    Hey baby bear, I’m not saying that tax cuts pay for themselves. I’m just saying that “static assumptions” produce erroneous results.

  21. Brent_in_Aurora says:

    Solution = Ad Valorem tax system, but based upon income.

    Why not just have everyone pay a flat tax of whatever % is necessary? Take all of the government spending and apportion it as a tax rate over all income from whatever source. If there is less collected, the unpaid taxes are sold to the highest bidder, who then gets to take whatever they can from the deadbeat in civil court. New jobs will be created by all of those for profit tax collectors and the whole system will be more efficient and fair.

    As an added bonus, we will all be more keenly aware of government spending.

  22. JustinTheSkeptic says:

    I guess it is my age but I am totally filled to the brim with politics and the never ending, always promising, and their never ending slap on the ass who ever feels like they are going to do the most for me supporters, this time around politicians. Perhaps this is why the Founding Fathers never wanted a true democracy. Ironically, they realized that in the end it is just another game won by Big Business – let the little peons think what they like we’ll use marketing to control them!

  23. dc20008 says:

    Can someone please fax these 5 points to the White House and tell them to USE THEM!!!!!!!!

  24. cdosquared5 says:

    Barry, the point you excerpted is moronic and idiotic. Can we avoid quoting individuals who have zero understanding of correlation and causation? And can we agree that anyone who even mentions stock market returns during a ten year time period as an argument for or against the policies of the period has zero understanding of the discounting mechanism of the market and is an idiot? I mean the low tax 90s were higher growth on all those metrics compared to to the high tax 70s… wow, what sophisticated analysis! Ass clown

  25. DL says:

    IS_LM @ 1:24

    Do you have a number? If $70B/yr is the correct number based on “static assumptions”, then where would you place the actual number given the “real world” of tax avoidance as it is?

    (One of the underlying questions here would be, which of us has the “burden of proof”).

  26. Fred Flintstone says:

    If anyone thinks tax policy is what put us in this recession, you are a child and your opinion does not matter.

    I’ll take that side of the argument that the 2001-2003 tax cuts were directly contributory to the 2002-2005 housing bubble.

    Real estate is not any other economic sector, its relatively fixed supply in time and space means that our entire producer surplus goes into competing with each other in chasing up land value.

    The middle class tax cut was around $3000/yr. Coupled with lower interest rates this naturally provided buy-side pressure on home values, pressure that was admittedly increased with subprime, and the various “Alt A” loan products that greatly increased home buying power, if only for a year or five until the teaser rate ended or the 120% LTV cap was reached and the loan was recast to fully amortizing.

    But with after-tax mortgage rates at 3.25% in the 2001-2003 period, that extra $3000/yr could support the annual interest on $100,000 in principal.

    There’s (part of ) your boom.

    The stupid thing is that because real estate (buying and renting) is such a large part of the economy, tax policy effects it first and foremost.

    If we were to double taxes on everyone, rents and home values would adjust downwards and life would go on much as it is now WRT our standard of living. Very few people understand this basic relationship.

  27. bman says:

    I Agree with Justin,
    @DL we can eliminate static assumptions. Non static Taxes on the rich, make it like an inverse lotto, today you lose all of your wealth, homeless shelter is down the block… Tomorrow, you might only lose half.
    Now get back to work! You never know what might happen tomorrow!

  28. subscriptionblocker says:

    Courage – you have it.

    Even bringingthis up gets you labeled a heretic.

    So I’ll do my part to hit em again :

    “The mortage interest deduction is the dumbest public policy decision ever made!”

    They’ll crucify one of us – but I’m counting on being faster than you :) :) :)

  29. DL says:

    VennData,

    FWIW, I’m not affected either directly or indirectly by what happens with the top tax bracket.

    My interest is in trying to understand how behavior changes when tax rates are changed.

  30. subscriptionblocker says:

    Slightly different subject – same tune.

    *Everyone* needs sanctuary – a place to rebuild.

    So why don’t we have *national* homestead and personal property exclusion laws?

    In Texas, no one can take your paid off house or paid off car. Except the gubmint :(

    A national homestead law would encourage young people to buy and own a fixer-upper as soon as practical. If/when they join the ranks of unemployed – they at least have shelter (until the tax man kicks them out).

  31. jlj says:

    Wait a minute. GB gave us tax cuts of $1mm and created 1T+ jobs. O wait, again, I think I got that backwards…… nevermind!!!

    Vote for the TeaBaggers and KochHeads!

  32. USSofA says:

    I keep seeing mention of making Bush tax rates permanent. What does that mean? How permanent is anything in Washington? 2 weeks, maybe a month, a year?
    Look at how often the INCOME tax schemes have changed since it was created. PERMANENT. HA HA.

    http://www.taxfoundation.org/publications/show/151.html

  33. willid3 says:

    not sure. but the only way to judge how some thing works or not is by the results. otherwise we will never ever get any where. we had lots of tax cuts in the last decade how did that work out? did we get large job growth as promised? did incomes of workers go up? no.
    and the 90s i am guessing had higher taxes that we had in the 2000s. or how else would you get a tax cut and end up higher than before?
    and as i recall it there was a lot hoopla about these ‘tax’ cuts. but i am still waiting for mine. never did see much difference.
    but i suppose if we just must have these tax cuts extended (for jobs? nope)
    then lets pay for them with the elimination of the tax credit for foreign labor.
    and no more bailouts of the rich with more tax cuts just for them?

  34. hoosierdjb says:

    Hmm. What changes were afoot in 1993? Clinton raised taxes a little, Hillarycare failed (adding some certainty to healthcare delivery and payment for the foreseeable future), and Clinton ended welfare as we know it.

  35. ella says:

    Bush promised that his tax cuts would create jobs and increase revenues. They did neither.

    http://blogs.wsj.com/economics/2009/01/09/bush-on-jobs-the-worst-track-record-on-record/

    One can not seriously argue that budget deficits are important while they are trying to reduce revenue. Both sides of the balance sheet must be considered.

    Let all of the tax cuts expire.

  36. d4winds says:

    CNBC & WSJ stances on tax rates on capital gains & dividends have everything to do with stock/bond ownership rah-rah & nothing to do with the economy. Both were also prime movers in the rah-rah for TARP as a pure give-away program. They are just incessant beggars for money.

  37. willid3 says:

    Tom K I think its the corporate party that does that.

  38. Tom K says:

    DL’s first post is 100% on the mark.

    @BR, apparently you didn’t comprehend point 4 at all. If there isn’t a causative link between tax rates and GDP growth, why don’t we cut tax rates further? And points 1 & 2 of this article are outright lies. The sunseting provision was included because they wouldn’t have gotten the votes without it:

    “In the Senate, 12 DEMOCRATS VOTED FOR THE BILL, as did 45 Republicans and newly independent Sen. Jeffords of Vermont. Republican Senators McCain of Arizona and Chaffee of Rhode Island joined 31 Democrats in voting against the bill.”
    http://usgovinfo.about.com/library/weekly/aa052701a.htm

    @VennData, who says tax cuts pay for themselves? The Heritage Foundation doesn’t say that. The Cato Institute doesn’t say that either. But it must be fun knocking down straw men.

  39. radiowave says:

    I will admit to harboring an unsophisticated, non-economist perspective on this. But I don’t quite understand why Congress — after having voted to put $700B into play via the stimulus — would then turn around and take the same amount back out via higher tax rates. Seems a bit … peculiar.

  40. DeDude says:

    “tax policies did not cause those bubbles”

    I beg to differ on that one. If you tax the sh!t out of the rich they don’t have enough money to speculate and create bubbles.

    “If there isn’t a causative link between tax rates and GDP growth, why don’t we cut tax rates further?”

    Because it is immoral and insane to pass the cost for spending binges of current generations on to the next generations. With over 12 trillion in accumulated debt and our current taxes covering less than 70% of our spending we have no right to discuss any taxcuts that are not clearly giving a boast to the economy. The only taxcuts that fit that describtion are the once directed at the consumer class.

  41. Patrick Neid says:

    Daniel Gross shouldn’t gets his hopes too high.

    http://politicalticker.blogs.cnn.com/2010/09/15/more-democrats-break-with-obama-on-tax-cuts/

    Arguing dubious partisan economics can be very entertaining but shouldn’t be taken seriously. It never helps your market vision.

  42. Broken says:

    @cdosquared5

    The “low tax 90s” did not have greater growth than the “high tax 70s”.

    Inflation adjusted, the growth rates were 37% for the 70s and 34% for the 90s. (BEA data)

  43. farmera1 says:

    Bush cuts taxes, gets us into two wars and expects good things to happen to the economy. You have got to be kidding. No sane person could believe this is a prescription for anything good.

  44. Joe Friday says:

    drewburn,

    “Cutting taxes for the wealthy under Reagan made sense”

    No it didn’t.

    Federal income tax revenues dropped down to 1940s levels resulting in massive federal deficits and debt, and GDP tanked after the massive tax cuts for the Rich & Corporate were retroactively enacted late 1981.

    ~

    “rates were dramatically higher”

    And ?

    The two greatest periods of prosperity in this country during the 20th Century were when tax rates on the Rich & corporate were either at their highest or after the rates had just been raised on the Rich & Corporate.

  45. Joe Friday says:

    DL,

    “Obama said that if the Congress passed his so-called ‘stimulus’ bill, the unemployment rate would never get above 8%. He was obviously wrong. So what does that prove?”

    To beware the revision.

    They had made their calculations based upon the data and projections the CBO gave them at the time, but then the CBO subsequently revised everything massively downward, as everything was much worse than anyone ever imagined. Everything was revised downward again earlier this year to indicate that what everyone thought was the worst economy since the Great Depression, was even worse than we all thought.

  46. Patrick Neid says:

    The often mentioned Bruce Bartlett has a different take on this.

    http://www.thefiscaltimes.com/Issues/Taxes/2010/09/17/Bush-Tax-Cuts-No-Economic-Help.aspx

  47. victor says:

    BR graet job but, as an engineer not an economist, I’m confused: isn’t ANY form of taxation (needed or not) a drag on economic activity from a purist’s point of view? Isn’t the quest for the ideal tax rate(s) for the economy of a country as ephemeral as the effort of a blind man to to define the shape a snow flake? he cannot see it but if he wants to feel it, it melts in his hand. And by the way, how can you lower taxes without due attention to balancing the budget with corresponding spending cuts, unless of course you believe in miracles (was it Laffer?). Clue: The ratio of the two would be the snow flake as imagined by our blind man.