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The idea that tax cuts produce economic growth has been drilled into the minds of many Americans. Many hear this nonsense and ask will the deficit not explode because of the lack of revenue? Think tanks, pundits, and politicians across the country have been claiming that the increased economic growth will lead to more government revenue. Romney even ran on further tax cuts which he claimed would boost the economy. Fortunately a majority of Americans were able to see through this non-sense and keep Romney out of the White House, but even Obama wants to extend tax cuts for the first $250k of income. Certainly further tax cuts like the Republicans want are fiscally irresponsible, but is it even reasonable to keep the Bush tax cuts for Americans “who need it” as Obama says? That is what we are going to explore here.

First let’s imagine a government that is trying to maximize its revenues. If the government had a 100% income tax and redistributed everything in the way it saw fit, perhaps people wouldn’t be motivated to work hard. Lets then imagine the government implemented an 80% tax, so now people took home 20% of what they were paid. It is reasonable to assume that people may become more motivated to work hard because if they do so, they may take home more pay than their lazier counterparts and thus work harder. This boosts the economy enough so that the government takes in more revenues than it did when it was taxing everyone at 100%. The government then gets the idea that tax cuts increase revenue so they cut taxes to 0% and wonder why the government no longer has any revenue. There will be a certain sweet spot where taxes have to be in order to maximize government revenue. In economics, this is called this the Laffer curve peak and it is much higher than taxes have been for a long time. Academia claims this number is quite high, but let’s take a look at the facts and judge for ourselves.

Reagan, who is hailed as a god-like figure by conservatives, implemented tax cuts and increased military spending which created record setting deficits. Reagan’s tax cuts may have spurred some economic growth, but even he understood that he went too far and had to raise taxes because he was accumulating too much debt. George H.W. Bush, who followed in the White House after Reagan, famously said “Read my Lips: No new taxes” at the Republican convention in 1988, but then raised taxes as president. Bush knew that going against his word could mean a one term presidency, but it was important for the country, so he did it anyways. Then Clinton was elected and proposed raising the top tax rates to 39.6% to tackle the Reagan/Bush deficits. The Republicans spat out the usual routine “job killer” babble and claimed the tax increases would hurt the deficit. Every single Republican in the house and senate opposed him. It is clear that the Republicans were just flat out wrong about taxes because in his second term, Clinton went on to do just what he said; raise taxes and balance the budget.

Bush then defeated Al Gore in a very controversial election. Clinton had left Bush with a successfully balanced budget. In fact, the CBO had projected a $5.6 trillion dollar surplus over the next ten years. That year, President Bush announced changes to the tax code which would become known as the "Bush Tax-Cuts." A basic idea in Keynesian economics is to pay off the debt when the economy is "booming" and to increase spending when the economy is "busting" or hard economic times. This is supposed to stabilize the economy. During the press release when Bush announced these cuts, he went on to talk about how the money belongs to the people and it is only right to give it back to them. Unfortunately, the national debt was completely ignored. In 2002, Dick Cheney famously claimed that “deficits don’t matter” since Reagan had tripled the national debt and won a second term. Of course we all know that Bush doubled the debt and left the next president with an unprecedented $1.3 trillion dollar deficit.  

When President Obama took office, the country was bleeding jobs and in the beginnings of one of the worst recessions since the great depression. Obviously revenue goes down in a recession and the first priority was to stabilize the economy. Obama has reduced the deficit slightly, but more drastic action must be taken now. The Republicans have irresponsibly advocated for tax cuts and many have pledged never to increase taxes. Now that Obama has been elected for a second term, he wants to keep the Bush tax cuts for the first 250k of income and let them return to Clinton-era rates for the rest. The CBO says this will not negatively affect the economy. The non-partisan Pew Charitable Trust said in 2010 that making the tax cuts permanent for all taxpayers, regardless of income, would increase the national debt $3.3 trillion over the next 10 years. Limiting the extension to individuals making less than $200,000 and married couples earning less than $250,000 would increase the debt about $2.2 trillion in the next decade. It seems that the Republican ideas are terrible, but extending tax cuts for everyone is also a bad idea if balancing the budget is a priority.

If we could just continuously cut taxes and economic growth expanded enough to produce more revenue for the government, that would obviously be a win-win scenario. Unfortunately as the tax rates stand now, it is not like that and hasn’t been like that for a long time. Now that we have established that tax rates are far lower than they could be in order to maximize government revenue, should the government actually do something about this and implement much higher taxes? Not necessarily. It is not the job of the government to maximize revenue. It is the job of the government to do what people want and if people in a democracy vote to have higher taxes and more government services, then that is their right to do so. What has to stop is voting for lower and lower taxes when the deficit is huge and further cuts will lead to more debt in the future. If the people do want a small government with low taxes, pay off the debt and cut spending first and then you can have that debate. Right now these guys are just completely out of touch with anything resembling fiscal responsibility.

Poll

Which party is more fiscally responsible?

75%41 votes
24%13 votes

| 54 votes | Vote | Results

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Comment Preferences

  •  From the net results, JFK and Clinton would be (0+ / 0-)

    the only examples of Democrats with positive balance sheets.
    There is no evidence the current President is fiscally conservative at this point.

  •  I've noticed that there is a considerable cohort (0+ / 0-)

    of kossacks who don't want tax increases on the less than rich, and a considerable number of them don't even think the debt is a problem. And forget about the fiscal cliff.

    I think we have all had our views on this distorted by decades of drumming on the right about the evil of taxes.

    Maybe its just that being in my 60s I have lived through times when taxes were much higher than they are now and the economy was much better than it is now, but I think that just about the worst thing that has happened to this country was having a golden opportunity to balance the budget snatched away while the people applauded.

    To me, that was Bush's Watergate. The astounding thing is that so many people are so against letting those evil tax cuts expire. It's like they were born yesterday or something.

    Moderation in most things.

    by billmosby on Sun Nov 11, 2012 at 07:03:00 AM PST

  •  I just commented on debt, especially national debt (0+ / 0-)

    here. The gist was that national debt, like private or corporate debt, is essential to economic health and growth, and managed well and for productive reasons, and paid for with reasonable taxes, can and should be perpetual.

    We basically NEVER have to pay down the debt.

    "Liberty without virtue would be no blessing to us" - Benjamin Rush, 1777

    by kovie on Sun Nov 11, 2012 at 07:03:55 AM PST

    •  Taxes don't fund government spending for the US (0+ / 0-)

      or any other monetary sovereign.

      They're essential in creating a fair distribution of national wealth.

      •  Not sure what you mean here (0+ / 0-)

        That taxes don't directly pay for government spending as it's being spent, which they generally don't, or that they don't pay yesterday's debt as it becomes due, at least in part.

        "Liberty without virtue would be no blessing to us" - Benjamin Rush, 1777

        by kovie on Sun Nov 11, 2012 at 09:24:43 AM PST

        [ Parent ]

        •  Taxes merely destroy dollars. Take them (0+ / 0-)

          out of circulation.  They aren't necessary for the US to pay it's obligations in any way.

          The US issues dollars, makes them -- out of thin air.  If  you had a money making machine you wouldn't need to tax or borrow to pay your obligations.  Neither does the US.

          That's the beauty of a  fiat (as opposed to a commodity_ money system.  Dollars are no longer a thing, they're merely a unit of account, like inches.  We never run out of inches.

          •  What are you talking about? (0+ / 0-)

            We can indefinitely print money to pay yesterday's debt without devaluing our currency and creating hyperinflation to the point where no one wants to do business with us anymore? You want us to become Weimar Germany?

            Do you have any serious economic theory to back this up that isn't the LW equivalent of Lew Rockwell or Ron Paul?

            "Liberty without virtue would be no blessing to us" - Benjamin Rush, 1777

            by kovie on Sun Nov 11, 2012 at 09:52:30 AM PST

            [ Parent ]

            •  Lol. Pointing out that taxes don't fund gov (0+ / 0-)

              spending says nothing about how many dollars ought to be in circulation.

              And also, the US and Wiemar are not in the same position.
              Among other things, Germany owed debts in foreign currencies.  Not the US.

              Also, the war had destroyed Germany's productive output, thus there were too few goods for too much money to buy.
              The US, however, has unused capacity.

              Ron's a gold bug.  I don't think we'll go back to digging rocks for our currency.

              And like it or not, cuz it's not theory, we have a fiat monetary system.

              •  You seem blithely confident of what you say (0+ / 0-)

                Like it's so self-evident, you literally can't believe no one else doesn't see it too, as obvious, even though what you say is far from accepted wisdom. Then what is your response to actual economists who say that what you say is nonsense, like Krugman or Stieglitz? Put another way, where are they wrong, and what makes you so sure of it? What are your sources? Are you an economist?

                Whenever I come across anyone as casually dismissive as you seem to be of current mainstream economic thinking, and lacking doubt in their own views, red lights go off in my head. Are you an actual socialist or communist? I ask that not dismissively or contemptuously, but to know where you're coming from since it goes against most of what people here seem to believe, even solid progressives.

                "Liberty without virtue would be no blessing to us" - Benjamin Rush, 1777

                by kovie on Sun Nov 11, 2012 at 11:11:32 AM PST

                [ Parent ]

                •  Actually, Stiglitz accepts the fundamentals (0+ / 0-)

                  of the school of economics called Modern Monetary Theory, MMT for short.

                  Krugman does too and has debated MMT on his blog.

                  He accepts:

                  We have a fiat currency.

                  The US is sovereign over it's currency (unlike Greece, which uses a foreign currency, the Euro, ie, it can't create the Euro).

                  That the dollar freely floats, isn't pegged to another currency.

                  That the US creates dollars from thin air.

                  That the US owes all it's obligations in dollars, which it can create out of thin air.

                  That all dollars are both a public liability and a private asset.  Thus, the deficit equals dollars being saved in the private sector.

                  Search Dkos MMT, there were two good diaries yesterday, lots of links in the comments.

                  I'm in no way an economist, but have really enjoyed learning over the last couple of years.

                  •  Of course we have a fiat currency (0+ / 0-)

                    But that doesn't mean that the value of dollars is meaningless and that printing more of it than is warranted by current and projected economic realities doesn't devalue it. There is obviously a lot more flexibility in our ability to print our way out of near and even mid-term financial difficulties than right-wing economists like to claim, as it's impossible to determine exactly how many dollars should be in circulation and the economy can certainly absord an influx of new ones not necessarily backed by new underlying value or economic expansion. But this doesn't mean that the dollar has infinite expansionary capacity. At some point, dollars begin to be worth less, and you need more of them to pay for what you want to buy, and printing yet more of them just continues this trend, which defeats the purpose of printing more of them.

                    I think you may be confusing our effectively unlimited ability to borrow existing dollars than what you seem to believe is our effectively unlimited ability to print new ones. We actually can't do the former, either, but there's a long way to go before we start hitting some walls. Actually, I agree that the money we borrow is money we create out of thin air, which each new Treasury issue basically is. But as with rising housing prices, this can't go on indefinitely. At some point we have to start paying this down, or the currency and financial markets will crash the economy again as this manufactured money bubble bursts.

                    "Liberty without virtue would be no blessing to us" - Benjamin Rush, 1777

                    by kovie on Sun Nov 11, 2012 at 11:58:02 AM PST

                    [ Parent ]

                •  BTW, I agree with you, the debt never has to be (0+ / 0-)

                  paid.  

                  If the US were one person, then the deficit would be just like me owing myself money, and also owning the money making machine that creates my money.  Lol.

                  Anyway, we agree, though we might agree for different reasons.  But Stiglitz agrees with MMT.

                  Krugman, a little less, but mostly about more granular stuff.  He does, however, realize that the US can never go broke and can always pay all it's obligations.

                  •  The debt never has to be paid (0+ / 0-)

                    But except in exceptional times such as now or in the Great Depression or WWII, it should be kept within certain prudent limits in terms of the percentage of GDP or outstanding currency or some other such benchmark, or else it can and will have undesirable effects like excessive inflation or ruinous speculation. And even large deficits can be sustained for a time, especially when interest is very low, or when crises make its effects secondary. But they too have to be reined in and kept within prudent levels eventually or bad things happen--some of which are social or political and can be very devastating, e.g. Weimar Germany (and I'm not arguing that we are or are anywhere near there yet, but it is a cautionary tale we'd do best to heed and not tempt fate with).

                    I think we both agree that Paulians and even many mainstream conservatives simply do not understand how modern economies work, in terms of being utterly debt-based, and that their policies are stupid, unnecessary and ruinous even if they sound good from a certain anal-retentive, simplistic, Puritan perspective.

                    "Liberty without virtue would be no blessing to us" - Benjamin Rush, 1777

                    by kovie on Sun Nov 11, 2012 at 12:15:46 PM PST

                    [ Parent ]

                    •  Interest? No problem, we have that dollar (0+ / 0-)

                      making machine.  We can always pay all obligations, no matter how large.

                      Weimar?  1) It owed debts in foreign currencies, like Greece does today (Greece doesn't make the Euro, and Weimar didn't make Dollars, though owed debts in Dollars, as well as Pounds.)  2)  The productive capacity of Germany was destroyed, so when they printed, there were too few goods to buy, thus they got hyper inflation.

                      US owes all it's debts in dollars, which it creates at will.

                      US has loads of unused capacity.

                      How large shoule the deficit be?  As small or large as the real economy needs it to be.  Are we at full employment?  Would be one bench mark.  Who cares about percentages of GDP?  Japan's at 200%.  

            •  It's called Modern Monetary Theory (0+ / 0-)

              And it is quite a bit more reputable than Ron Paul or Lew Rockwell.  

              We have a fiat currency.  Its value per unit is not fixed to any given quantity of some uniform commodity, like gold, but is a function of its supply, over the general demand for currency.  This currency is produced through borrowing, and consumed through paying back debt.  The federal government runs a federal bank, which is the bank's bank.  

              Some very simple accounting principles dictate that as long as the domestic economy is running a trade deficit, then if the public sector tries to run a balanced budget or achieve a current account surplus to pay down previously acquired debt, the private domestic sector must be in net deficit, taking on more debt over time.  The capacity of the private domestic sector to carry debt is limited, and excessive private sector debt leads to periodic financial crises and under-utilization of productive capacity.  As debts become large, demands for money become large, which increases the value of money relative to goods and services, otherwise known as deflation.

              So if the domestic private sector has room to grow, and the economy as a whole is running a trade deficit, then the public sector should be running a net deficit as well, to prevent the domestic private sector from going into net debt and allowing that debt to create financial crises and depress productivity.  This is especially true as long as the private domestic sector has room to grow, for then the new quantity or quality of production will require an increase in either the amount or speed of transactions of money to prevent deflation as well.

              And the main reason for thinking that the ongoing accumulation of debt by the public sector is no big deal is that the Federal Bank buys Federal Debt from the private sector, as part of its normal and extraordinary operations in an effort to control the bottom of the interest rate window.  As it buys up Federal Debt, that's just the Government owing itself, and that's an obligation that can be rolled over indefinitely.  

              That's the way the public sector runs a net deficit, by borrowing from the domestic private sector and the foreign sector, and they in turn borrow from each other and the public sector to generate the currency they need to fund the public sector's debt.  They then sell that debt to each other and back to the public sector via the Fed's open market operations, to get the money they need to pay back the debt they generated in order to buy the public sector's obligation to begin with.  

              Taxes are an important part of the story in that they are an additional stimulus to the demand for currency.  You can't pay your taxes in chickens.  So you'll want to sell something or have to borrow money to pay your taxes.  And ultimately, as much as I agree with the theoretical underpinnings of MMT, this is where I think we are right now.

              The public sector has been in deficit for years now, a very large, though not historically unprecedented deficit.  It did run a surplus for a year or so, and ultimately I believe that was responsible for the following tech and housing bubbles, but this is different than a mere bubble bursting.  Every day we hear stories about how companies are flush with cash, and none of them want to borrow any money to expand.  Exorbitant CEO and VP salaries all around as well.  These guys have so much money, and potential access to so much more, they don't know what to do with it all.

              On the other hand, you have their employees, or the millions of small business owners trying to do their thing and provide a valuable good or service to their fellow Americans, who have to take on proportionately massive amounts of debt just to survive, who don't have a level playing field with some of the big-boy competitors, and who have to pay a proportionally larger share of their income in taxes, as well as insurance and compliance costs.  Our problem now is not that there's not enough money in the economy to stimulate growth.  It's that the supply and demand of money is radically unequal.

              And the solution to massaging the demand of money is to increase taxes in some areas and lessen them in others.  The solution to massaging the supply of money is to increase public spending in some areas, and reduce it in others.  My suspicion is that taxes alone will prove far more stimulative than many suspect, even if we continue to fail to spend entirely appropriately.

              From such crooked wood as that which man is made of, nothing straight can be fashioned. -Immanuel Kant

              by Nellebracht on Sun Nov 11, 2012 at 11:46:27 AM PST

              [ Parent ]

  •  There IS no freakin' "debt crisis," as Krugman, (2+ / 0-)
    Recommended by:
    dfarrah, Gary Norton

    Baker, et al. keep pointing out ad nauseum, aside from the ridiculously high costs of our health care (sic) system that are due to the rentiers who control the system -- the docs and the insurance and pharmacy companies.  Progressives shouldn't reinforce the Rethug/corporatist lie-meme (lieme?) to the contrary by even uttering or writing the phrase "debt crisis" except when it's perfectly clear they're doing so to debunk the concept.

    •  The word "deficit", for a monetary soveriegn of (0+ / 0-)

      a fiat currency like the US is merely an accounting/math term.

      We could also call it "all dollars in the private sector being saved".

      This is the reason that there is no debt crises.  Or in other words, there's no "too much private savings crises".

  •  Medicare cliff (0+ / 0-)

    I would like to see more attention to the Medicare cliff we have faced for years.

    There is a lot of misinformation regarding this issue.  The right is placing a lot of the blame on "OmamaCare".  Unfunded Medicare Part D and Part C is a major reason that the gap between revenue and expenses has grown so fast.

    This issue is a major concern to me and should be to everyone on, or nearing, Medicare.

    Unfunded Medicare Part C and Part D is not only a Medicare problem, but one of the 3 major causes of the current deficit.  These two Medicare bills were passed by the Republican controlled congress during the Bush years and the "automatic cuts" to providers when the gap reaches certain levels was passed by the Republican congress during Clinton's second term, I believe.

    I would also like to see more attention given to how inefficient Part D and Part C are as compared to government run programs.

    •  Part C (0+ / 0-)

      What is Medicare Part C, Advantage?  I've never heard of anything referred to as Part C.

      Government can't restrict free speech, but corporations can? WTF

      by kyoders on Sun Nov 11, 2012 at 01:26:58 PM PST

      [ Parent ]

    •  Google (0+ / 0-)

      Never mind, I got unlazy and looked it up.  It is indeed Advantage, the overpayment of private insurers to do what Medicare A & B (and often D) already do.

      Government can't restrict free speech, but corporations can? WTF

      by kyoders on Sun Nov 11, 2012 at 01:31:24 PM PST

      [ Parent ]

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