Tax revenues surging, deficit shrinking, yet tax rates are lower. Now just reign in

[jon]

It was a farcical argument made back when there was a push for the current tax cuts, i.e. that tax cuts were just another form of government spending. Spending? Where did the money come from? Taxpayers. It is their money, not the government’s, yet that simple precept is glossed over daily in Washington DC. The Feds told us they needed a lot more money to pay for all of their spendthrift ways and hiked our taxes in the mid-1990’s. Turns out they got a lot more money than they intended because the boom that started in the 1980’s was not over. Yet when revenues surged past anyone’s expectations, instead of giving the excess back they kept it. They took more of our money than they said they would need and the refused to give it back. The rhetoric regarding the tax cuts was incredibly bitter (e.g., ‘welfare for the rich’) when you consider who paid the money in the first place. It is the same as a contractor saying he will charge you actual costs and gives you an estimated amount for the job; if it is less you will get the excess back. It costs less but he blows you off and pockets the extra to pay for his own lifestyle.



Beyond being downright absurd the argument was wrong. If it was spending we would simply be further in debt with a few more boondoggle programs to show for it. What has happened, however, is that the money that was given back to the consumers and entrepreneurs was invested in the US and fueled the economic recovery. Some still deny the economy has recovered even as GDP has come in well above what the Fed views as its potential; at a minimum the critics find several faults with the recovery.



Sure it is not perfect, but we have been saying all along that the recovery was demand led, and that has given us the less than perfect inflation picture right now. Even with that, however, the economic and fiscal posture is vastly improved. Tax revenues are up 29% over 2004. In that year the deficit was 3.6% of GDP. This year the deficit has dropped to a projected $395B down from $427B in 2004. That is down to 3.2% of GDP. The oft referred to ‘nonpartisan’ Congressional Budget Office now projects the deficit will fall below 2% of GDP in 2007. That puts it below its 40 year average in relatively short order.



So much so that the April to June quarter is expected to turn an expected $12B deficit into a $42B surplus. That is on top of a $30B surplus for the first quarter. Lower tax rates = rising economic activity = higher tax revenues. The data shows that tax revenues related to the dividend tax reductions and cap gains tax reductions have leapfrogged tax receipts on those assets. Lower rates but more revenues. More dividends are being paid out because the rates are lower. The individual investor benefits in getting the dividend and at a lower tax rate. That money goes back into the economy as opposed to sitting in the corporate treasury. Lower capital gains taxes unlock money stashed away in investments hiding the money from being taxed. Lower rates pry open the wallets and get money circulating in the economy; that is the lifeblood for economic growth.



How this works: toss out the Phillps Curve and start ‘Laffing.’



Tax revenues don’t rise unless there is more money in the pockets of citizens and corporations. Moreover, a lot of the revenues are coming from dividend and capital gains taxes. But those were lowered along with income taxes. That can only mean that there is a lot more economic activity to generate more tax revenues than higher rates were able to do. That is the history of tax cuts.



The Laffer curve states that at lower tax rates economic activity expands to such an extent that tax revenues actually increase. Raise taxes too much and tax revenue falls because of lack of investment. You can also lower them too far and revenues will drop as well due to diminishing returns (you get less bang for each $1 taxes are lowered). Here in the US we have successfully shown what rates will lead to falling economic investment and lower tax revenues. We have yet to find how low they can go before tax revenues fall off. This last reduction has produced a surge in economic activity and jumped tax revenues, so it is clear we have not reached the equilibrium point where economic growth is maximized and tax rates are at the minimum levels. In other words, we can cut taxes further and still generate more economic growth.



Given that demand is still outpacing supply and thus causing the inflation we are seeing now, it would behoove our leaders to cut taxes more and thus generate more supply and fuel further economic growth. Tax revenues would rise further and go toward cutting the deficit. It is the best of both worlds, but in Washington political careers and indeed political parties are staked against this historical concept. Thus reality denial will continue.

[VJW]

Re: Tax revenues surging, deficit shrinking, yet tax rates are lower. Now just reign in

Turns out they got a lot more money than they intended because the boom that started in the 1980’s was not over.

What "boom" ? The 'Standard of Living' of the vast overwhelming majority of American workers went backwards by close to 20% during the 12 years of Reagan/Bush.

2004 … In that year the deficit was 3.6% of GDP.

You're incorrectly calculating the Social Security/Medicare surpluses in with the federal deficit numbers. The federal budget deficit in 2004, according to the CBO, was $567.4 billion, or 4.9% of GDP. That does not include the hundreds of billions for Iraq/Afghanistan and other off-budget spending.

http://www.cbo.gov/showdoc.cfm?index=1821&sequence=0

This year the deficit has dropped to a projected $395B down from $427B in 2004.

Projected ? Yeah, right. This administration has PROJECTED rosy-scenario federal budgets every year, and every year the federal deficits have grown ever larger, to the largest on record.

Lower tax rates = rising economic activity = higher tax revenues.

It's never happened.

Lower capital gains taxes unlock money stashed away in investments hiding the money from being taxed. Lower rates pry open the wallets and get money circulating in the economy; that is the lifeblood for economic growth.

Myth.

Actually, the last time the Capital Gains tax rate was raised from 20% to 28% (during the 1986 'tax reforms'), new business incorporations held steady at about 680,000 annually for the following several years, according to 'Small Business Administration' figures.

Businesses are started for reasons that have very little to do with tax rates.

Besides, why should capital deserve a more favorable tax treatment than labor ?

Tax revenues don’t rise unless there is more money in the pockets of citizens and corporations. Moreover, a lot of the revenues are coming from dividend and capital gains taxes. But those were lowered along with income taxes. That can only mean that there is a lot more economic activity to generate more tax revenues than higher rates were able to do. That is the history of tax cuts.

You would benefit from a class in remedial history.

This last reduction has produced a surge in economic activity and jumped tax revenues.

Wrong on both counts. Federal income tax revenues have plunged so dramatically, they account for the smallest proportion of GDP since 1959, according to the Treasury Department.

it would behoove our leaders to cut taxes more and thus generate more supply and fuel further economic growth. Tax revenues would rise further and go toward cutting the deficit.

Federal budget deficits would merely balloon ever larger, as they have every time that federal income tax rates have been cut.

Thus reality denial will continue.

Indeed.
.

[jmjj215]

Re: Tax revenues surging, deficit shrinking, yet tax rates are lower. Now just reign

Federal budget deficits would merely balloon ever larger, as they have every time that federal income tax rates have been cut.

I am certainly not on the up-and-up with the economies of taxation. One way governments could shrink the deficit would be to spend less...instead of worrying so much about how much they're making.

I'm for lower taxes because I think that money in the hands of americans is better-spent than money in the hands of bureaucrats. If even just looked at from an efficiency stand-point.

My two small pennies of thought.

[VJW]

Re: Tax revenues surging, deficit shrinking, yet tax rates are lower. Now just reign

I am certainly not on the up-and-up with the economies of taxation. One way governments could shrink the deficit would be to spend less.

Exactly where would you suggest we cut spending ? Currently, more than two-thirds of every federal income tax dollar you pay goes just to fund the Military industrial complex and the interest on the Reagan/Bush federal debt.

Other than the MASSIVE amounts we spend on the Military Industrial Complex and Corporate Welfare, SPENDING is not the problem, REVENUE is the problem. As I previously posted, federal income tax revenues, thanks to the massive tax cuts by this administration which flowed primarily to the Rich & Corporate, are down to 1959 levels. How do you fund a 2005 government with 1959 level revenues ?

Another large problem is INEQUITABLE TAXATION REVENUE:

* Percent of general fund tax collections from corporate taxes:

1940s - 33%
1950s - 31%
1960s - 27%
1970s - 21%
1980s - 15%
1990s - 16%
2000s - 11%

* Percent of general fund tax collections from individual income taxes:

1940s - 44%
1950s - 49%
1960s - 57%
1970s - 66%
1980s - 72%
1990s - 71%
2000s - 76%

[Internal Revenue Service]

I'm for lower taxes because I think that money in the hands of americans is better-spent than money in the hands of bureaucrats.

I'm all for lower taxes on working families as well, as long as the wealthy and corporations pay their fair share, which they are not.

In recent report released by the Government Accountability Office (the investigative arm of Congress), in the year 2000 alone, 94% of all U.S. corporations paid less than 5% of their total income in corporate taxes. Among the largest corporations - the 1% of all corporations that own 93% of all corporate assets - 82% paid less than 5% of their income in taxes. It's only gotten worse since then.

http://moneycentral.msn.com/content/Taxes/P80242.asp

.

[jmjj215]

Re: Tax revenues surging, deficit shrinking, yet tax rates are lower. Now just reign

I personally would like to see a flat tax, for both individuals and corporations - with a possibly higher tax rate being for corps than individuals. I have done little to no research on the subject.

I don't care if you make $1,000 or $100,000 per year, I don't think you should have to pay a higher percentage of taxes on your income. So if there were a flat tax of 10%, you'd pay 10% regardless of your income. (Because of highly-skilled tax attorneys/accountants, many of the rich pay a smaller percentage of their income - their effective tax rate - than the poor - making less than $27,000 per year, the flat tax would ideally solve this problem).

What are your thoughts on a flat tax? You seem like you know quite a bit on the subject of taxation.

[VJW]

Re: Tax revenues surging, deficit shrinking, yet tax rates are lower. Now just reign in

Frankly, a "Flat Tax" would be an unmitigated disaster.

It would bankrupt the Middle-class and lord knows what would happen to the working poor. The originators of the misleadingly termed 'Flat Tax' plan, Professors Robert Hall and Alvin Rabushka, freely admitted in the 1983 edition of their book, that a Flat Tax would be "a tremendous boon to the economic elite from the start". In an appendix to their book, Hall and Rabushka estimated that their flat tax proposal would increase the tax bill for the lowest income families by 78 percent, and decrease the tax bill for the very richest families by 41 percent.

Throwing money at the Rich & Corporate has never worked economically.

Not to mention that a Flat Tax would not be revenue neutral. The '17% Flat Tax' that was proposed years ago by then Congressman Dick Armey was scored by the U.S. Treasury as coming up hundreds of billions of dollars short annually. In order to be revenue neutral, the rate of a Flat Tax would need to be 35% - 40%, which would devastate the Middle-class, as almost 80% of taxpayers currently only pay about 5% of their income in federal personal income taxes.

A 'Flat Tax', or a 'National Sales Tax', or the so-called 'Supply-side Tax Cuts' for the Rich & Corporate, are all merely different fronts in the same effort to shift the burden of taxation from the wealthy and the corporations onto working people.

[jmjj215]

Re: Tax revenues surging, deficit shrinking, yet tax rates are lower. Now just reign

VJW,
I obviously need to do some studying. What do you propose would be a fair an equitable taxation system?

[VJW]

Re: Tax revenues surging, deficit shrinking, yet tax rates are lower. Now just reign in

The progressive income tax served both the American people and the American economy very well prior to the push to make taxation more regressive. Sales taxes and property taxes are inherently regressive, yet we have seen the rates of both pushed higher and higher, while the income tax has been made less and less progressive.

As just one example, the poor pay 5 times as much of their earnings in sales taxes, proportionally, as the wealthy, while the Middle-class pays almost 3 times as much of their earnings in sales taxes, proportionally, as the wealthy.

Of course the siren song of the phoney "Supply-side Economics" merely compounded the problems, producing declining Standards of Living, wider gaps between the rich and poor, higher unemployment, and massive deficits and debt.

[jmjj215]

Re: Tax revenues surging, deficit shrinking, yet tax rates are lower. Now just reign in

In order to be revenue neutral, the rate of a Flat Tax would need to be 35% - 40%, which would devastate the Middle-class, as almost 80% of taxpayers currently only pay about 5% of their income in federal personal income taxes.

Where did you get the 35-40% range? I just can't fathom that being accurate. I remember hearing that John Kerry's (only using this example for a wealthy person) effective tax rate (taxes actually paid/total income) was something like 11%. Since I'm in school working part-time, I make an extremely small amount of money so I fall under an effective tax rate of...2% with a quick and dirty calculation. It seems like boosting the flat tax to 35% - by flat I mean the effective tax rate - you would definitely bankrupt me and you'd get a whole ton of money from John Kerry. I can't imagine that percentage would be revenue neutral, seeing how it would extract more money from both me and the rich.

How do the author's come up with these rates? What is the rate applied against? Are there any types of standard deductions taken in a flat tax that I'm not aware of?

As just one example, the poor pay 5 times as much of their earnings in sales taxes, proportionally, as the wealthy, while the Middle-class pays almost 3 times as much of their earnings in sales taxes, proportionally, as the wealthy.

Now this type of comparison I don't think is fair. If I make $30,000 and hypothetically spend all $30,000 on sales-taxable goods, I would pay $1,875 in UT, or 6.25% of my income in sales tax. However, if I made $50,000 but lived below my means and still only spent $30,000 as above, I would only pay 3.75% of my earnings in sales tax. However, if I did not live below my means and spent all $50,000 I would be right up there with the 30k income individual as far as a percentage of my earned income that is paid toward sales tax.

I think a lot of times these comparisons try and give the wealthy a black eye - but why are they wealthy in the first place? I for one hope to earn, save, and invest wisely, lots of money during my lifetime. I hope to retire with a passive income of at least $100,000 in today's dollars. In order to do this, I really need to live differently than most people live these days. In 40 years, when I'm retired and making $100k passively, will I also be given this black eye b/c my earned income is so much greater than "poor" people? I should hope not. I think a lot of times we have negative and unvalidated feelings toward the wealthy in america because it somehow seems unfair. If you have person A and B who work at the same job and earn the same amounts of money but simply save or spend it differently, your end result could be very different. A could be wealthy and B could still be poor. I don't see the unfairness in that. I guess that's the reason I think A and B should be taxed at the same rate.

I'm anxious to hear your response VJW - thanks for discussing with me.

[VJW]

Re: Tax revenues surging, deficit shrinking, yet tax rates are lower. Now just reign in

Where did you get the 35-40% range?

The U.S. Treasury Department. They scored the 'Flat Tax' in 1981 and again in the early '90s.

I just can't fathom that being accurate. I remember hearing that John Kerry's (only using this example for a wealthy person) effective tax rate (taxes actually paid/total income) was something like 11%.

I wasn't referring to 'Revenue Neutral' to todays 1959 level of taxation revenues, but more like the year 2000.

Since I'm in school working part-time, I make an extremely small amount of money so I fall under an effective tax rate of...2% with a quick and dirty calculation. It seems like boosting the flat tax to 35% - by flat I mean the effective tax rate - you would definitely bankrupt me

Exactly.

and you'd get a whole ton of money from John Kerry.

He (and the rest of the wealthy) would pay less than they were in 2000.

Now this type of comparison I don't think is fair. If I make $30,000 and hypothetically spend all $30,000 on sales-taxable goods, I would pay $1,875 in UT, or 6.25% of my income in sales tax. However, if I made $50,000 but lived below my means and still only spent $30,000 as above, I would only pay 3.75% of my earnings in sales tax. However, if I did not live below my means and spent all $50,000 I would be right up there with the 30k income individual as far as a percentage of my earned income that is paid toward sales tax.

The comparison is faulty. The working poor spend almost their entire income on necessities, whereas the wealthy spend a tiny fracture of their income on necessities. Further, the incomes for such a comparison would be between $360,000 of AGI and up, versus under $20,000.

I think a lot of times these comparisons try and give the wealthy a black eye - but why are they wealthy in the first place?

Well, 86% of the time it is either from inheritance or by benefit of a wealthy family.

I for one hope to earn, save, and invest wisely, lots of money during my lifetime. I hope to retire with a passive income of at least $100,000 in today's dollars. In order to do this, I really need to live differently than most people live these days. In 40 years, when I'm retired and making $100k passively, will I also be given this black eye b/c my earned income is so much greater than "poor" people?

The wealthy are classified as being in the top two percent of tax payers, close to ten times that level of gross income.

I think a lot of times we have negative and unvalidated feelings toward the wealthy in america because it somehow seems unfair.

Is it "negative" and "unvalidated" to want the wealthy to pay their fair share of the tax burden as Americans ?

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[jmjj215]

Re: Tax revenues surging, deficit shrinking, yet tax rates are lower. Now just reign in

Is it "negative" and "unvalidated" to want the wealthy to pay their fair share of the tax burden as Americans ?

What is the fair share that these top two percent people should pay?

[VJW]

Re: Tax revenues surging, deficit shrinking, yet tax rates are lower. Now just reign in

That would depend upon where the mix of other taxation resided. What rate of Capital Gains taxation ? Is the Estate & Inheritance Tax reinstated ? What about the Alternative Minimum Tax ?

It depends.

However, keep in mind that during the two greatest periods of economic prosperity in the 20th Century, taxes on the Rich & Corporate were at their highest:

* In the 1960s, the top income tax BRACKET was 70%.

* From '93 to '2000, the period of greatest economic prosperity in our nation's history, taxes were increased on the top 1.2% of taxpayers, with the top income tax BRACKET at 39.6% and the Corporate Income Tax was also increased.

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[paulmish]

Vjw

You Rock!!

Isn't it frustrating how so few people understand the simple (but progressive) facts you are very eloquently stating? The most common myth is that Welfare is draining taxpayers when Corporate Welfare is three times as much.

Some thoughts:

What's wrong with a social safety net? European countries have it, and they are thinner, healthier, and far less stressed than Americans. I for one am not religious, but shouldn't we help people, especially children, in need? These children are not going to disappear - someday they will be your children's contemperaries - think about it.

I would love to pay far more in taxes, but not fear that one illness, coupled with a layoff/loss of medical insurance, would ruin me financially. I refer to this system as the "lions in the den." After the victims are eaten, the rest can take their stuff. People refer to long waits in countries with socialized medicine - DUH! - that's because everyone gets to see the doctor! Imagine everyone in your town suddenly gets health insurance - you would immediately have a waiting line for your doctor, right? The number of doctors never catches up, because federal funds only go so far. However what is available is shared (I know, that's positively Un-American).

The American Middle Class came into existance becaue of ... Unions. Before unions, 3 and 4-year old children died under machines, and people routinely starved because they were paid less than what is cost to feed them. Think those days are over? If so, it would be the first time in 5000 years of history that those in power did not take advantage of those with none. Unions are under attack from... rich people (current administration). Beware.

Basically, the battle between rich and poor has been going on forever. The fight is never fair in pure Capitolism, because the poor have no leverage, whereas the rich can deprive them of their livelyhood on a whim (or an offshore...). The poor only strike back when they unite, and then become a middle class. The danger now is that we are in a re-capitolism cycle, because most of the middle class thinks that their membership is all but guaranteed, as long as they "do the right thing." They are very mistaken.

Greed is wrong, but all we do is fight it.

[jmjj215]

Re: Tax revenues surging, deficit shrinking, yet tax rates are lower. Now just reign

Very interesting post.

I think insurance companies are more to blame for the rising health care costs than anything else - but for that we should probably start another thread?

VJW,
How do economists ascertain the correct cause of an effect? '93-'00 was the greatest prosperity, and you are assigning, at least partially, higher taxes as one of the causes. I've heard people say that the "Boom" to quote the thread-starter, was a result of Reganomics - which you obviously TOTALLY disagree with!

I would love to know the answer. I've heard it both ways. What facts have you looked at that helped you draw the conclusion that it was NOT the previous economic policy of Regan that contributed to the awesome economic growth during those 8 years? Certainly economic policy takes a bit of time to really settle into the system?

paulmish - I have such a hard time with welfare not because I don't think we should help people (I'm very religious ) but because I see the system abused so much. At my current station in life I'm exposed to it very, very often. It's really made me despise it. So much of what you said I totally agree with though. Unions really did empower the worker, was a great example.

[paulmish]

Re: Tax revenues surging, deficit shrinking, yet tax rates are lower. Now just reign

Jesse,

I really appreciate the opportunity to discuss these things! As a Mom in an affluent suburb, I'm "supposed" to be against things like low-income housing, welfare, etc., anything that upsets the entitlement applecart. However, my husband and I have been studying world politics, not just US politics, and the view is very different. For example the US contains 6% of the world's population but uses 80% of the world's energy. That is so wrong, and it really makes me angry because I despise greed, and I live in the middle of it.

Let me clarify - I grew up struggling to hang onto middle class - my parents split and we had a home and food, but we scrounged for everything. I didn't always have the things I needed, let alone fit in with the average lifestyle around me. So I grew up determined to make money. I waited tables and spent nothing on luxuries in order to get a Bachelor's - the first in my family. Then I started working,and never took more than vacation or maternity leave for 16 years. I had a increasingly comfortable lifestyle, but I was sort of confused about the people around me who were struggling. I used the "what they did wrong" game - they had kids too soon, too many kids, didn't go to college, had a one-income family, etc. But eventually I realized that there was some luck involved in my success. I was born with alot of drive. I didn't have alot of money, but I did have room and board at home while I attended college. I never got so sick that I couldn't get work, and I never got laid off. That realization changed me forever.

I'm still a yuppie (I have 70 pairs of shoes!), but now greed pops out at me, instead of going over my head. I think SUV's are ridiculous, and people like "Ahhhhhhnold" who endorse them should stick to other things, like abusing women. Gasoline is actually one of the smallest budget items for many people (for me, it's approx 3% of our monthly income after taxes), but they complain! I love to stay close to home - I have made more friends in town, and I would rather spend the money heating the pool for company.

Please bear with me for one moment regarding welfare. Don't you think that there is knee-jerk distaste for poor people? Many people find them disgusting, so welfare is a great target. Jesse, everyone abuses their "system." When I was working in IT, I was making 60K, and doing almost nothing expect drinking coffee and chatting. Isn't that just as bad? Seniors with plenty of money rip off Equal and put buffet food in their pockets (My mom tells me the stories!). Corporations pay far less then their share of taxes - isn't that the worst abuse of all, since it is by far the greatest loss of funds? Isn't it ethically worse for a rich person to steal than someone who uses every dime for necessities? As far as you seeing the abuse, cops see law-breakers, teachers see rowdy teens (not me, I love teens), etc. - so everyone has their own personal vision of who's "screwing things up."

It's arrogant to tell others to read a book, I think, but if you read "Being Nickled and Dimed in America," I think you would see another side to the issue.

Thanks - man, I talk too much!!
Michelle