Cut taxes to raise revenues

[Texsox]

THE three republicans in my county all happen to be friends of mine and last night they all tried to explain why if we cut individual taxes, Washington gets more money. We were discussing why George W likes to spend money and cut taxes.

 

They tell me it works something like this:

 

Individuals will take their $1 saved from taxes and spend it. The shop keepers will make more money and either:

 

hire more people or reinvest it.

 

Now we've taken 1 dollar away from Washington (increasing the defecit) and bought donuts. How does that $1 multiply so it becomes $1.20 in income tax? If you hire someone with the profits from that $1, I'll use .50 as an example. That person would pay $.13 in taxes. Seems like we lost .87 to fund the military, social security, the war on drugs, the war on terrorism, etc.

 

Looks like Washington gives up $1 and gets back less. I do not see anyway for that $1 to magically become two dollars.

[mreye]

I know what I want to say, but I don't know how to put it in words. I found this, though:

 

When their tax rates fall, the rich will increase their investments. For example, a restaurant owner might decide to build a larger kitchen if she gets a big refund check. Then, she'll have to hire more workers to staff that kitchen, and so employment goes up, indirectly because of that original tax cut.

 

A lower tax rate on wage income should increase the labor supply. Given the labor demand function, this increase in labor supply will increase employment, reduce the pre-tax real wage and increase the post-tax real wage.

 

Now turn to saving. We would expect lower taxes on interest and capital gains, as well as tax-sheltered saving plans like IRAs and 401(k) plans, to make saving more attractive and lead to an increase in savings. In equilibrium, this will lower real rates of interest as more saving flows into capital markets, and raise investment. Over time this investment leads to higher capital, more productive labor, and higher output and wages. (This is the long-run dynamics effects of this policy change).

[Texsox]

A couple holes. Why would the restaurant owner build a bigger restaurant if they have the same number of customers? It's like the Blackhawks building a bigger stadium.

 

It still comes down to the same number of people in the US sending money to Washington. We have about 6% unemployment. If I spend a dollar, how does another person send in $1.20 in taxes?

[mreye]

She may build a bigger kitchen because she will have MORE customers because more people can go out to eat with more money in their pocket.

 

She may hire two or three more people, instead of the one in your example.

[Texsox]

OK she takes the $1.00 and spreads it between three people. How will those three wind up paying $1.20 in taxes? It is still only a $1 going in.

 

If we send $1 to Washington, doesn't Washington spend that $1? Why is it different if the government spends the $1 or me? Besides it makes me feel better.

 

If Washington spends a $1 on buying food for a deserving family, wouldn't the store increase their sales and it would have the same economic benefit?

[mreye]

Also,

More people are inclined to begin new businesses which are taxed and hire employees which pay taxes, etc, etc, etc.

[Texsox]

mreye, I'm not trying to be a dick, but I've ben hearing this for years and no one has been able to explain it. Why do republicans keep repeating this cut taxes to raise revenues, yet have no idea how it works? It seems to me, and using a rather unflattering label, that Tax and Spend Democrates seem more honest in their approach than cut taxes and spend Republicans.

 

On one hand one group is saying "if we want these programs we have to increase taxes to pay for it". The other side seems to be offering "we can have these programs -and- cut your taxes".

 

I would love for that to work, but I do not want a huge deficit for my kids to pay off.

[Queen Prawn]

I think I understand the theory, but does it actually work?

 

Back in the 80's the gov gave US Steel money to infuse into the Southeast Plant in Chicago. It was a grant and supposed to be used to improve the plant and keep it open. They didn't and the gov never went after them for the money since it wasn't used for what it was designated.

[Texsox]

Also,

More people are inclined to begin new businesses which are taxed and hire employees which pay taxes, etc, etc, etc.

But how does the $1 multiply? The owner gets a dollar, builds kitchens, hires people, and send $1.20 to Washington?

 

Using a 20% tax rate, the payroll will have to increase $5 for every dollar we take out of the system. Why does payrolls increase 5x for every $1 the shopkeeper gets? Where does the other $4 come from?

[mreye]

If Washington spends a $1 on buying food for a deserving family, wouldn't the store increase their sales and it would have the same economic benefit?

No, because the Goverment will buy it from a supplier and pay way too much for it. Ever seen the govt walking through Jewel? When people have more money there is also less need for the govt to feed the needy. Charity contributions go up, not just because of less taxes, but because someone that wasn't working now is and is able to now help out people that are in the same boat he used to be in.

[mreye]

I think I understand the theory, but does it actually work?

 

Back in the 80's the gov gave US Steel money to infuse into the Southeast Plant in Chicago.  It was a grant and supposed to be used to improve the plant and keep it open.  They didn't and the gov never went after them for the money since it wasn't used for what it was designated.

That happens Waaaaay too often.

[mreye]

But how does the $1 multiply? The owner gets a dollar, builds kitchens, hires people, and send $1.20 to Washington?

 

Using a 20% tax rate, the payroll will have to increase $5 for every dollar we take out of the system. Why does payrolls increase 5x for every $1 the shopkeeper gets? Where does the other $4 come from?

You have to think bigger. Not just one employer, buy 1000s and there are other factors, like decreased spending in Washington. Created business that were never paying taxes in the first place, the tax on the wages of the emloyees, the increased revenue for the restaurant owner because of more people eating out and wanting to see her newly renovated business, the increased property tax on the restaurant because it is now worth more.

[Texsox]

No, because the Goverment will buy it from a supplier and pay way too much for it. Ever seen the govt walking through Jewel? When people have more money there is also less need for the govt to feed the needy. Charity contributions go up, not just because of less taxes, but because someone that wasn't working now is and is able to now help out people that are in the same boat he used to be in.

I thought profit was the key. If the shop keeper makes more profit doesn't he have more to invest?

 

Actually I've been a supplier to many different government agencies and they pay some very cheap prices. The expenditures that everyone points to is usually military and those parts are built to much higher specks than civilian. I remember the infamous $1000 coffee pot. That was going on a spy plane and needed zero electrical emmisions so it would not be detected by the enemy. Nothing like a $40 Mr. Coffee kicking on and every tracker in Russia pointing and saying "there it is". And before someone asks why they need a coffee pot, that crew was typically on duty for up to 24 hours.

[Texsox]

You have to think bigger. Not just one employer, buy 1000s and there are other factors, like decreased spending in Washington. Created business that were never paying taxes in the first place, the tax on the wages of the emloyees, the increased revenue for the restaurant owner because of more people eating out and wanting to see her newly renovated business, the increased property tax on the restaurant because it is now worth more.

Ok we cut taxes by $1,000,000,000. How does $1,000,0000,001 get back to Washington?

 

If we cut everyone's tax rate, who pays the increased taxes to have more money in Washington?

 

Do shopkeepers pay more in taxes? So if shopkeepers all get the $1,000,000,000 is their tax rate 105%?

 

If we take the 5% of Americans who are unemployed and give them the $1,000,000,000 is their tax rate 105%

[mreye]

I'm not explaining real well. Maybe SS2K4 can. I see he's looking at this right now. Try this, though:

 

Supply-Side

[Texsox]

I'm not explaining real well. Maybe SS2K4 can. I see he's looking at this right now. Try this, though:

 

Supply-Side

And that is the beauty of this plan. No one without a degree in econ can explain it. So the GOP says trust us, it works. And if anyone says it doesn't, they are part of the liberal media and cannot be trusted.

 

It also makes people feel better that they can keep more of their money and the government will have more money too! Wow, isn't that wonderful. The citizens and the government all get more money. We can have our cake and eat it too. There is a free lunch.

 

If we cut everyone's taxes to $2 per year, we would have so much money to run the government we couldn't spend it all.

 

I would love to be convinced this works. It still seems to me if I was scheduled to pay $5000 in taxes and now I pay $4000 someone else needs to pay at least my $1000 for the system to break even. If everyone's rates are cut we need new people (Someone who was scheduled to pay $0 now pays $2000) to begin paying or someone who was scheduled to pay $1000 now pays $2000 (that sounds like an increase).

[southsider2k5]

*in steps resident economist*

 

The biggest difference in private sector spending versus government spending is the ineffeciency of government. That is why tax cuts are more effecient to sparking an economy than more government spending (or higher taxes) Government waste is estimated at 10-12% of its budget. In other words of all of the taxes you pay only about 88-90% goes to actual use. This is because the government doesn't have any profit motivation like the private sector does. If the gov loses money, it doesn't matter. If a private company loses money it goes bankrupt. This has led to so much waste and duplicity in government that never gets fixed because they don't have any motivation to do so.

 

If you guys want me to expound on the multiplier affect and money acceleration I can.

[mreye]

If everyone's rates are cut we need new people (Someone who was scheduled to pay $0 now pays $2000)

There's your answer. There are NEW employees that were unemployed previously and were scheduled to pay $0 and are now paying $2000 or even $3000 to "make up" for your $1000.

[cwsox]

you are right that tax and spend is the honest way -

 

spend and borrow is the way to 1/2 trillion dollar deficits

 

the proof is in reality - when in the last 50 years did we have surplus and when did we have deficits and when is the deficit at the largest level by far it has ever been

 

these deficits mean that interests are going to eventually fly up because of all that borrowing and a lot of that will be taken up (is taken up) by foreign investors -

 

these huge deficits also mean that as Greenspan and Biush both said last week and widely ignored here that to make up the deficits, social security benefits will have to be cut

 

I am not willing that my working class social security benefits be cut so that wealthy people can have bigger tax breaks - not at all - those who have more, and who have gotten more in corporate tax breaks, etc. can pay more - because they have gotten more and have access to all kinds of tax advantages that a low income worker does not have - don't believe, call a tax or estate planning attorney and ask -

 

less taxes paid by anyone does not mean more investment, etc. because everyone does not run out and invest that extra buck. And why would they? what is the current interest rate paid on a savings account or certificate of deposit for example? The incentive for savings is gone except for the wealthiest. More consumption is not the answer when it means greater waster of resources. So tax cuts means the rich have more lavish parties - wow that helps the economy.

 

all theories must be tested against reality - the Bush theory has very pointedly not worked - factor in anything you want and the lavish spending has put this country's deficit at danger levels regardless of what else one factors in

 

the former Republican mantra of run government like a business does not work always but they don't say it anymore because no business, no family, could continue on this massive credit spree, deficit spending

 

and of course chariutable giving is at all time lows right now and futrure Bush tax plans have everyone convoincved int eh world of non progfits that it will fall even further - mcuh charitable giving has bene predicated on the the tax avoidance prospects for huge incomes and estates. Eliminate the obligations of each American, the wealthiest Americans, to financially pay for the services they want (another phrase for taxes) and charitable giving will plummet even more than it has in reality

 

A way to test the emptiness of the rhetoric is to take all the things that Reagan and Bush 1 said about deficits and spending in 1980 and say those things today and see who is judged by that.

 

We could eliminate all taxes. We don't need meat inspections, highways, police and fire, a military, public schools, any of that s***.

 

Of course if we do, how then do we pay for it? Taxes are the way we pay for the things we want and need as a country.

[Texsox]

There's your answer. There are NEW employees that were unemployed previously and were scheduled to pay $0 and are now paying $2000 or even $3000 to "make up" for your $1000.

mreye, where did the $20,000 to pay that new employee come from? If it was my $1000 plus 19 other taxpayer's $1000 we just took $20,000 out of taxes and this person will only pay $4,000. Sounds like a $16000 loss in revenue.

 

SS2k4 yes, please please explain how it multiplys.

 

If a government worker cashes her paycheck and goes to the grocery store, does it have less of an impact than if you or I cash our paychecks and go to the grocery store?

 

If the government builds a new building how does it have less of an impact than if you or I build a new building?

 

I am not necessarily conceeding the point that the government is less wastefull than say a private company like Enron or K-Mart. But for the sake of debate, let's assume they are. If spendable income sparks the economy then wouldn't a company that is making 15% from a government job hire more people than someone who is making 10% from a private sector job? Wouldn't they pay their workers more money, so they could buy more stuff and return more money to Washington?

[southsider2k5]

OK the multiplier affect....

 

Say that someone gets $100 in a tax cut. According to the national savings average they will go out and spend 98% of that. So that $98 goes onto the next person as income. They pay their 20% in taxes leaving them roughly $80. Once again assuming savings rate the spend $78. The third person recieves that $78 as income. They pay about $18 in taxes (I am doing some rounding to make is easier) This keeps repeating and breaking down through the economy until the money is negligable. The math gets funky, (some calculus functions I don't have at hand) but added up the $100 ends up returning more in revenue than it would have as government spending, assuming the 10-12% waste factor. It also contributes a small amount to national savings (usually invested into stocks or bonds) and ends up being a much larger amount GDP because you add up all of the levels of income to get that number(ie the $100+98+78+...).

 

Does that make any sense?

[southsider2k5]

If the government builds a new building how does it have less of an impact than if you or I build a new building?

 

I am not necessarily conceeding the point that the government is less wastefull than say a private company like Enron or K-Mart. But for the sake of debate, let's assume they are. If spendable income sparks the economy then wouldn't a company that is making 15% from a government job hire more people than someone who is making 10% from a private sector job? Wouldn't they pay their workers more money, so they could buy more stuff and return more money to Washington?

The productivity is what loses out. If you give the government $100 and a private company $100 it both gets spent. But the private sector gets more productivity out of it. The government would get a hammer for its $100, but the private sector would go down to lowes and get 10 hammers for the same price. More productivity, that is the key difference. More people are employed because you need to make 10 hammers instead of one, etc.

 

Does that make sense?

[Texsox]

OK the multiplier affect....

 

Say that someone gets $100 in a tax cut.  According to the national savings average they will go out and spend 98% of that.  So that $98 goes onto the next person as income.  They pay their 20% in taxes leaving them roughly $80.  Once again assuming savings rate the spend $78.  The third person recieves that $78 as income.  They pay about $18 in taxes (I am doing some rounding to make is easier)  This keeps repeating and breaking down through the economy until the money is negligable.  The math gets funky, (some calculus functions I don't have at hand) but added up the $100 ends up returning more in revenue than it would have as government spending, assuming the 10-12% waste factor.  It also contributes a small amount to national savings (usually invested into stocks or bonds)  and ends up being a much larger amount GDP because you add up all of the levels of income to get that number(ie the $100+98+78+...).

 

Does that make any sense?

Thank you, we are getting closer. And thank you for taking us one step at time.

 

I built a quick spread sheet. Starting with $100 and using an 20% tax rate and $0 into savings at the 27th level 99% of the money is returned. So I will conceed that we may approach a 100% payback. (I won't bring up interest) But how does $100 less to Washington ever add up to $101 later being returned?

 

In other words how can the GOP say if we cut taxes $X dollars we will get something like $X+ back?

[southsider2k5]

Thank you, we are getting closer. And thank you for taking us one step at time.

 

I built a quick spread sheet. Starting with $100 and using an 20% tax rate and $0 into savings at the 27th level 99% of the money is returned. So I will conceed that we may approach a 100% payback. (I won't bring up interest) But how does $100 less to Washington ever add up to $101 later being returned?

 

In other words how can the GOP say if we cut taxes $X dollars we will get something like $X+ back?

It doesn't stop at the 27th level, and that is using $100 as an example. When you start adding zeros and make it billions instead of hundreds, it works better.

 

There are ineffeciencies that don't get factored in, but in theory it works. There is still a pretty big disagreement amongst economists on how well it works, and if the real life things affect it enough to not make it worth while. Personally I believe against government waste, and if you factor in controling government spending it does work better than the government spending the same amount of money. But in real life it is murky at best.

[Texsox]

The productivity is what loses out.  If you give the government $100 and a private company $100 it both gets spent.  But the private sector gets more productivity out of it.  The government would get a hammer for its $100, but the private sector would go down to lowes and get 10 hammers for the same price.  More productivity, that is the key difference.  More people are employed because you need to make 10 hammers instead of one, etc.

 

Does that make sense?

Again, I am not conceeding that government waste is anywhere near that high. What waste I've seen is brought on by excessive laws regarding specifications, the biggest one is buy American. So if we are that ineffective, we need to push our elected officials to improve.

 

However, for the sake of debate I will agree. I then ask isn't it true that the company that is making more profit can pay their people better and those people will spend more at the local restaurant? I thought we were trying to get money into peoples hands?

 

If the owner of the hammer company that is supplying to Home Depot is squeezed for profits how does he expand? And wouldn't there be a bigger risk of him building the hammer in China? At least with the US Government buying the hammer we know it is Americans that will be employed. Or is that even a factor in thuis model?