Tax Cut? What the hell does that mean anyway

[rasilio.livejournal.com]

So, there has been quite a bit of wank around here because "teh ebil Republicans" ^tm won't play nice with the Democrats and raise taxes. Then on the other side people are all like "ZOMG taxes are teh ebil and will destroy us all".


There is one little problem with all of this however. What do you mean when you say tax cut or tax increase? Is it a punitive measure to punish those you don't agree with ideologically, or is it the impact on government revenues that you are trying to get to.

If it is the first, then it is a straight forward craft to design a punitive tax measure that will make a certain group of people pay a higher percentage of their income as taxes. However there is no guarantee and not even much evidence that there is a possibility that this will lead to an actual increase in revenues, forget revenues matching what is expected by the change in rates.

If you are actually concerned with the revenues then you have an even bigger problem. None of you here, and not even any of the "Experts" out there has the slightest clue how to raise taxes right now. Even in a relatively normal economy the actual revenues have barely a 50% correspondence with supposed tax cuts or tax increases, that means that if you "cut" taxes you have just about a 50% chance of tax revenues increasing or decreasing and if you raise taxes your odds are about the same, and the amount of the deviation never bears any resemblance to the amount of the supposed cut/increase. However with the entire global economy balanced on the precipice of so many debt induced collapses even those normal rules don't apply.

So if you are relying on tax increases to "balance the budget" even in part how can you possibly achieve your goals? There is absolutely no way that you can predict what the revenue impact of a tax increase of X% will be.

Even relying on experts is problematic, especially in light of some of the more recent research on predictions...

http://www.cato-unbound.org/2011/07/11/dan-gardner-and-philip-tetlock/overcoming-our-aversion-to-acknowledging-our-ignorance/

"In the most comprehensive analysis of expert prediction ever conducted, Philip Tetlock assembled a group of some 280 anonymous volunteers—economists, political scientists, intelligence analysts, journalists—whose work involved forecasting to some degree or other. These experts were then asked about a wide array of subjects. Will inflation rise, fall, or stay the same? Will the presidential election be won by a Republican or Democrat? Will there be open war on the Korean peninsula? Time frames varied. So did the relative turbulence of the moment when the questions were asked, as the experiment went on for years. In all, the experts made some 28,000 predictions. Time passed, the veracity of the predictions was determined, the data analyzed, and the average expert’s forecasts were revealed to be only slightly more accurate than random guessing—or, to put more harshly, only a bit better than the proverbial dart-throwing chimpanzee. And the average expert performed slightly worse than a still more mindless competition: simple extrapolation algorithms that automatically predicted more of the same."


In fact it is even worse, the Krugmans of the world who like to tell you with absolute certainty how their preferred policy actions will bear out tend to be the absolute worst at actually predicting such things...

"One group of experts tended to use one analytical tool in many different domains; they preferred keeping their analysis simple and elegant by minimizing “distractions.” These experts zeroed in on only essential information, and they were unusually confident—they were far more likely to say something is “certain” or “impossible.” In explaining their forecasts, they often built up a lot of intellectual momentum in favor of their preferred conclusions. For instance, they were more likely to say “moreover” than “however.”

The other lot used a wide assortment of analytical tools, sought out information from diverse sources, were comfortable with complexity and uncertainty, and were much less sure of themselves—they tended to talk in terms of possibilities and probabilities and were often happy to say “maybe.” In explaining their forecasts, they frequently shifted intellectual gears, sprinkling their speech with transition markers such as “although,” “but,” and “however.”

Using terms drawn from a scrap of ancient Greek poetry, the philosopher Isaiah Berlin once noted how, in the world of knowledge, “the fox knows many things but the hedgehog knows one big thing.” Drawing on this ancient insight, Tetlock dubbed the two camps hedgehogs and foxes.

The experts with modest but real predictive insight were the foxes. The experts whose self-concepts of what they could deliver were out of alignment with reality were the hedgehogs."

This means that the more certain that any particular pundit is in his rhetoric the less likely he is to be correct in prediction the outcome of any particular policy. To make matters worse, any one of us is almost as likely to be right as one of those so called experts...

"We call this phenomenon the diminishing marginal predictive returns of knowledge.
In political and economic forecasting, we reach the inflection point surprisingly quickly. It lies in the vicinity of attentive readers of high-quality news outlets, such as The Economist. The predictive value added of Ph.Ds, tenured professorships and Nobel Prizes is not zero but it is disconcertingly close to zero"

Of course the spending side of the debt question does offer some similar problems because cutting spending may result in further reductions in revenue leading to yet more cuts being necessary, and again, no expert out there can tell you with any certainty which cuts will be the most or least damaging, they can't even tell you whether the spending cuts will be more effective at reducing the deficit than revenue increases because of this. However since you could confiscate 100% of all income over $500,000 a year and assume no change in behavior as a result and still not get to the necessary 23%+ of GDP in government revenues that current budgets have us spending basically in perpetuity revenue increases alone to close the deficit would mean disastrously large tax increases on the middle class and poor and so as a practical matter some spending cuts will be necessary.



In the end though please stop with the wank about it. The Republicans are not evil and the Democrats don't have your best interests at heart and nobody, not Obama, not Pelosi, not Krugman, not even the Austrian Economists I prefer really has any clue what the best path forward to prevent a catastrophic economic collapse is. Both sides are doing what they believe to be the right course of action and yes, being politicians are slimeballs looking out for their own interests before the countries or anyone else's (that goes for all of them) but that doesn't make them evil and the faster you pull your collective heads out of your asses and realize this the faster we can start having a real dialogue about real critical issues that we need to address.

Comments

Spoilsport

[geezer-also.livejournal.com]

Isn't wank what it's all about????

(excellently put as usual, by the way)

[enders-shadow.livejournal.com]

cut defense spending
close corporate tax loopholes

[jazznut85.livejournal.com]

Agreed. My solution would be this:

Cut defense spending, apply this to the problem, use it to fund Medicaid/Social Security.

Cut funding for the Space Program. This is such a cash cow that is so irrelevant to the current state of things. Why spend millions on a bunch of people drinking Tang on Mars, when we could use that to strengthen sorely needed aforementioned programs, education, whatever.

Impose an excise tax on non-essentials in life, excessive assets. Like, you don't NEED a car and can take public transport. You don't need seven houses, or don't NEED a house worth over a million dollars. Tax these people who have such things. I especially am fond of this one, especially since I have seen vital services in infrastructure, such as public transportation being slashed severely over the years, and nothing being done to expand it.

These are just my thoughts.

[malakh-abaddon.livejournal.com]

You're mean. Those multi-million/billionaires need those seven houses. They cannot sleep in the same bed/room/house twice in the same week. They also need those seven cars, because well, they cannot drive the same car twice in a week.

Alright being serious, I have no problem with some of these excise taxes on non-essentials. While a car is a luxury for some, it is a necessity for others, how would you propose enforcing a tax on personal vehicles? Would everyone be allowed one car, or anything over two cars per household be included in this excise tax? I agree that cutting NASA is needed, but not entirely, as it is still relevant, as we have several hundred thousand rocks that may or may not impact our little shit hole, and ruin it for all life, like we aren't already. Cutting defense spending is good, but I would draw back large amounts of foreign aid, along with closing all these nice little loop holes. There is also withdrawing from many of these free trade agreements, and forcing companies to come back to the US.

[kylinrouge.livejournal.com]

I think a luxury tax was proposed by the House Progressives, maybe Barney Frank as well, that was only applied to spending in excess of $500k for the year. Yachts, houses, and such would fall under that. It would pretty much only affect millionaires.

[rasilio.livejournal.com]

Have you actually looked at the numbers to see just how much of this is feasable?

Cut defense spending by how much? How many jobs will be lost as a result?

Then there is NASA. Do you realize just how small the NASA budget is?

In 2011 it is 19 Billion, the Deficit this year is over 1.5 Trillion, that means if we just eliminate NASA, no space program at all, we cut the deficit by 1.3%, it isn't even pocket change. Talk about cutting the NASA budget is like owing $10,000 and looking for loose change in your couch as a solution.

"Impose an excise tax on non-essentials in life, excessive assets. Like, you don't NEED a car and can take public transport. You don't need seven houses, or don't NEED a house worth over a million dollars. Tax these people who have such things. I especially am fond of this one, especially since I have seen vital services in infrastructure, such as public transportation being slashed severely over the years, and nothing being done to expand it."

Who decides what is non essential? You say a car is non essential? Let me guess, you live in New York, Boston, or DC right? Try moving out to a small rural town somewhere and say that a car is non essential, hell try moving to a mid sized city and say it is non essential. Further more, an excise tax on cars will depress car sales even further, were we not told just 2 years ago that the automotive industry was critical to our national survival? Do you think the already battered car companies can really survive another permanent 10% cut in car sales?

Then houses, we're gonna tax all of the houses worth more than a million a year and anyone who has multiple houses, well gee, that is gonna depress housing prices even further as everyone looks to get out of second homes and really high value homes which will throw even more people underwater leading to even more foreclosures and another economic crash.

Finally for things which there is little doubt are non essential, perhaps you should do a little research on the Yacht tax...

http://watchingamerica.com/News/94396/u-s-luxury-tax-%E2%80%94-a-total-failure/


"The lesson learned in this period has been written into U.S. economic textbooks. The “luxury tax” fundamentally violates economic principles and market theories. Under supply and demand, the demand of luxury goods is quite elastic. In other words, the luxury tax imposed on certain goods will prompt the rich buyers to seek alternatives. They may find other entertainments than buying yachts, perhaps flying to Panama for a vacation and buying a yacht there.

The elasticity of supply for luxury goods is rather inelastic. Can yacht producers easily switch production to alternative products? Can yacht workers easily find new jobs? These problems can’t be easily handled.

More importantly, problems slowly emerge from the shortfall of luxury tax collection, and the the yacht industry took an unexpectedly hard hit. Within a year, sales plunged 70 percent, and many firms had to lay off workers and even declare bankruptcy. Large numbers of workers lost their jobs. In Florida, 13,000 yacht workers were unemployed, and related industries were also affected. The impact was significant.

Ironically, the largest shortfall was in the tax revenue. After the luxury tax introduction, the 5-year tax revenue was estimated to be $9 billion. However, in its first year, the tax revenue was only a few tenths of a million dollars. In addition, the government also had to pay unemployment benefits. "


And this is exactly what I am talking about. Luxury taxes are just about the dumbest idea you could propose to cut the deficit because even when you properly identify a luxury item the elasticity of demand for those items is far greater than the elasticity of supply and you don't end up hurting the rich buyer, you end up hurting the poor schmuck making $30,000 a year manufacturing the product, and even if you do actually manage to collect a small amount of the tax, you're gonna be paying out 10x that amount in unemployment benefits.

[jonathankorman.livejournal.com]

Crazy talk.

[rasilio.livejournal.com]

And you've just fallen victim to what I am talking about.

How do you know that "Cutting Defense spending" will actually reduce the deficit? I mean I believe it will too but there is a whole body of economic thought that see's that defense spending as nothing more than another form of government stimulus and therefore cutting it will reduce net GDP by more than the amount of the cut and therefore reduce tax reciepts, possibly by as much or even more than the amount you cut.


As far as closing corporate tax loopholes, none of those so called loopholes were created as a loophole, every single one of them was created as a way to encourage companies to behave in ways that were publicly beneficial. They get tax credits for green energy investments, for hiring minorities or those who were formerly on welfare, etc. Eliminating those so called loopholes basically eliminates the incentive for corporations to do those "good" things. Plus, again, cutting corporate loopholes means raising corporate taxes, even if the corporate tax rate is not itself raised, raising taxes on corporations can lead to reduced hiring as companies have less money to start new business lines which leads to lowered GDP and lower revenues, possibly lower than if you had done nothing.

[enders-shadow.livejournal.com]

fun fact: GE had negative job growth in the US the same year it paid under 10% in taxes while raking in over $5B


and dude, i'm sorry, you seem to just be throwing your hands in the air and saying: "nobody knows anything about economics! it's black-magic and we cannot ever know what will happen!"

but that's utter crap. if your post included STRICTLY economic questions and STRICTLY economic "experts" and still concluded that they were only slightly better than a chimp throwing darts then maybe you'd have a point, but as plenty of others have pointed out, that's NOT what your post explains. economics is merely part of the predictive arts your post talks about.

i'm not an economic expert, but you seem to disagree with the very notion of such a person existing, without providing evidence that such a person cannot exist.

you are taking data points and drawing a conclusion from them that does not follow

[underlankers.livejournal.com]

Because it, Medicaid, Medicare, and Social Security are the four biggest chunks of the budget. You can gut the entirety of the rest of it and leave those four alone and not make a scratch.

[nevermind6794.livejournal.com]

That seems like a silly study, and it doesn't seem applicable to economic policy preferences, which are typically subject to historical study and empirical statistical analysis. There's no way to statistically analyze the probably of war, or short-term inflation, given how subject they are to chaos.

On the other hand, while it is true that other chaos can overwhelm policy efforts, that does not necessarily diminish the effect of economic policy prescription.

What is your source for the 50% correspondence claim?

[rasilio.livejournal.com]

A post I made several months ago where I did an analysis of major tax change legislation in the US over the last 50 years and what actually happened to government revenue immediately following them.

IIRC there were 13 major tax changes, half were supposedly cuts and the other half increases and following each half the time revenues went in the direction expected and half the time it didn't.

If I get time I may go back and try to find the actual post but I can't remember if it was an OP or a comment so probably not and I'm way too busy right now to spend an hour going back to the primary sources.

[pastorlenny.livejournal.com]

politicians are slimeballs looking out for their own interests before the countries or anyone else's (that goes for all of them) but that doesn't make them evil

Actually, that does seem quite non-good -- and contrary to both the letter and the spirit of the Constitution.

And while it would certainly be inappropriate to make statements about Republicans generally, it seems reasonable to criticize someone like Mitch McConnell for essentially saying it is not even possible to negotiate with "this President."

[johnny9fingers.livejournal.com]

Sh!
Noticing partisanship is partisanship.

Especially when we've had a post like this that reaches across the divide to make out that all of the folk involved in the process equally good/bad/indifferent.

even when it's clearly not a draw

[enders-shadow.livejournal.com]

[rasilio.livejournal.com]

non good <> evil.

Selfish and amoral are both non good but neither are evil.


Finally yes, criticizing individuals as evil is far more acceptable than criticizing all members of a group as being evil because then you can look at their individual character to make a decision as opposed to a caricature of them based solely on their group affiliation.

As far as Mitch McConnell, I don't like him, outside of social conservative ideologies like Bachman and Santorum he is just about the worst kind of republican I can imagine but I don't think I'd go so far as to say he is evil.

[kylinrouge.livejournal.com]

The claim that a tax increase wouldn't result in increased government revenues from that source is ridiculous and has zero supporting evidence.

[rasilio.livejournal.com]

Classic ad hominim, you don't need to refute the argument because of it's source.

Of course that source is not making any such claim regarding tax increases in this article, the article does not even reference taxes. The article is about the difficulty in making predictions of chaotic systems like economies, I then took that and expanded it to the realm of taxes on my own. However even there I did not claim that tax increases cannot increase revenues, I said that there is no real way of knowing which tax policy actions will increase them because for every expert who says action X will increase revenues there is an expert who says it will reduce them and both experts are just as likely to be right.

[the-rukh.livejournal.com]

Its BS to claim that "normal rules don't apply" now suddenly when its convenient to claim. And yes, one main thing is major loopholes need to be closed so that people are actually paying the tax rate. Our tax rate is incredibly low. It's not about punishment, it's about putting the burden on those who have benefited the most and can afford it the easiest.

[anfalicious.livejournal.com]

Will inflation rise, fall, or stay the same? Will the presidential election be won by a Republican or Democrat? Will there be open war on the Korean peninsula?

Only one of those questions is about economics, so why would one expect economists to do better on it than others?

[rasilio.livejournal.com]

Did you miss this line...


"These experts were then asked about a wide array of subjects."

the list of questions which follows are merely presented to show examples of the types of questions.

[underlankers.livejournal.com]

Evidently it means no student loans.

[underlankers.livejournal.com]

And the only way to cut the deficit is to simultaneously cut Defense, Social Security, Medicare, and Medicaid *and* raise taxes. Cutting spending on three of the big four and not raising taxes or only raising taxes and never cutting spending aren't going to do it. Unfortunately the GOP will never cut the pork in the defense budget. Half of them would be unemployed if they did.

[eracerhead.livejournal.com]

Remember that we had a surplus after Clinton. This whole debt situation we are in was caused by the Bush administration and the congress that allowed us to get into foreign wars without raising taxes to pay for them, keeping the costs off-book to hide them and telling the general public they need not be involved. Calling them evil is kind, because the alternative is calling them retarded.

Here's what to do. Fence off the entire cost of the conflicts in Iraq and Afghanistan, then set up a separate war tax to pay it off. List it as Iraqtax on tax returns as a separate line item and exempt military personnel.

But that won't happen because both parties seem to like playing with their toy soldiers.

[rasilio.livejournal.com]

"Remember that we had a surplus after Clinton"

No we didn't.

Here is the Gross Public Debt by year during the Clinton Years...

1993 4351.04
1994 4643.31
1995 4920.58
1996 5181.46
1997 5369.21
1998 5478.19
1999 5605.52
2000 5628.70
2001 5769.89

You will note, that every year the debt is higher than the year before. How can we have a "surplus" if we go deeper into debt? Oh that's right, creative accounting tricks.

Even to the extent that it is true that the Deficit was cut at the end of the Clinton Presidency it was largely a mirage created by runaway capital gains earnings caused by the unsustainable Dot Com Bubble and once that bubble popped (conveniently just in time for the blame to fall on someone else) revenues came crashing back to earth.


"This whole debt situation we are in was caused by the Bush administration and the congress that allowed us to get into foreign wars without raising taxes to pay for them, keeping the costs off-book to hide them and telling the general public they need not be involved."

Um, no there is simply no economic truth to this. Even using the most wildly inflated long term costs of the Iraq and Afghanistan wars of 3 Trillion dollars you have still only accounted for a 3rd of the growth in the debt since the end of the Clinton Presidency. Throw in the supposed lost revenue from the Bush Tax Cuts and you have another 3rd

Remember, in FY01, the last budget that Clinton was responsible for, the national debt stood at $5.7 trillion. Today it is over $14.5 trillion and the two things that people try to use to blame it all on Bush, the wars and the tax cuts between them account for far less than the $8.5 trillion difference. Realistically, they account for far less than half that amount but even taking the most wild estimates from Bush's enemies you still don't come near it.