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Old 06-12-2010, 01:32 AM   #61
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Not necessarily. A large cut that moves you from Point B to Point A is revenue neutral, according to the graph. I think that's what we did in the 80's.
Of course!
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That would also explain the big swings in revenue from both the Clinton increases and the Bush cuts (whereas a move along a horizontal line would produce little change in revenues). Judging from the impact recent tax changes have had on receipts, it seems we're on a very steep, upward sloping point on the curve. That means we should have little economic cannibalization of tax increases from current levels.
Would you explain? I don't understand what economic cannibalization is.
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Old 06-12-2010, 07:49 AM   #62
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I don't understand what economic cannibalization is.
I used the term "economic cannibalization" to reference the degree to which higher taxes discourage economic activity. It's the basic mechanism by which the Laffer Curve comes into existence. If tax increases cause the economy to shrink, then there is less overall income to be taxed, and the new higher rates may generate less revenue then the older, lower rates. It can be said that because of the resulting lower economic activity, higher tax rates actually "cannibalize" some of the tax revenue.

There is probably some cannibalization going on at all tax levels, as highly marginal investments are abandoned by even the slightest change in economics. But because those highly marginal investments are not expected to generate large amounts of income, and therefore taxes, killing those projects doesn't hurt government revenue or GDP that much. It's only when projects that would be reasonably profitable if not for taxes get killed off by even higher taxes that both the economy and government revenues suffer. So the tax level needs to be relatively high for that to happen.

But nobody knows what "relatively high" is, precisely. One crude way to judge is to look at how government receipts respond to changes in taxes. If a 1% increase in taxes results in a 1% increase in revenues, then we know the negative impact on the economy (the economic cannibalization) is small. If that is the case, you can raise taxes to some degree without much fear of harming the economy. If, on the other hand, a tax increase causes revenues to decline, then the amount of economic damage done to the economy is large, and the best course of action is to cut taxes (this is always, and everywhere, the default position of "Supply Siders" but, as you can see, it is only conditionally true).

In short, if there is direct positive correlation between tax rate changes and revenue, then we are to the left of the kink in the Laffer Curve, and if there is an inverse relationship, we are to the right of the kink. As the last two large changes to the tax code have had a demonstrably positive correlation with revenue, it seems very likely that we are to the left of the kink . . . and perhaps meaningfully so (in other words, modestly higher taxes should not significantly harm economic activity).
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Old 06-12-2010, 02:34 PM   #63
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I used the term "economic cannibalization" to reference the degree to which higher taxes discourage economic activity. It's the basic mechanism by which the Laffer Curve comes into existence. If tax increases cause the economy to shrink, then there is less overall income to be taxed, and the new higher rates may generate less revenue then the older, lower rates. It can be said that because of the resulting lower economic activity, higher tax rates actually "cannibalize" some of the tax revenue. (snip)
Aha! So economic cannibalization is what is also sometimes called "killing the goose that lays the golden eggs".
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Old 06-12-2010, 02:54 PM   #64
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One crude way to judge is to look at how government receipts respond to changes in taxes. If a 1% increase in taxes results in a 1% increase in revenues, then we know the negative impact on the economy (the economic cannibalization) is small. If that is the case, you can raise taxes to some degree without much fear of harming the economy. If, on the other hand, a tax increase causes revenues to decline, then the amount of economic damage done to the economy is large, and the best course of action is to cut taxes (this is always, and everywhere, the default position of "Supply Siders" but, as you can see, it is only conditionally true).

In short, if there is direct positive correlation between tax rate changes and revenue, then we are to the left of the kink in the Laffer Curve, and if there is an inverse relationship, we are to the right of the kink. As the last two large changes to the tax code have had a demonstrably positive correlation with revenue, it seems very likely that we are to the left of the kink . . . and perhaps meaningfully so (in other words, modestly higher taxes should not significantly harm economic activity).
If only it were possible to have real "control conditions" in the field of macroeconomics, it would surely be more of a science. In the real world, when tax rates change and government revenues go one way or the other, economists argue for decades about the underlying causes. Without accurate models (i.e. ones that respond as the real world does) or the ability to control other variables, things will always be murky.
I think many folks arguing for lower taxes aren't motivated by a desire to increase overall government revenue through greater economic activity. They would probably say that anyone trying to increase the absolute amount of money the government takes from the economy is on a fundamentally different quest than they are. Yes, reduced tax rates can sometimes increase government revenues, but the overall performance of the economy (as measured by higher growth rates) is the more important metric if we want to know if our lot is improving.
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Old 06-13-2010, 06:39 AM   #65
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They would probably say that anyone trying to increase the absolute amount of money the government takes from the economy is on a fundamentally different quest than they are. Yes, reduced tax rates can sometimes increase government revenues, but the overall performance of the economy (as measured by higher growth rates) is the more important metric if we want to know if our lot is improving.
I guess my point is that these two things are related. The degree of "economic cannibalization" is a function of how much tax increases negatively effect the economy. If cannibalization is small, then the economy isn't much effected by changing taxes - higher or lower, at least within some tolerance. In other words, if we're far to the left of the kink on the Laffer Curve, the "Supply Side" impact of tax policy is small. Many seem to think the impact is a constant (and constantly large), but that reflects linear thinking in a non-linear situation . . . it isn't called the Laffer Curve for nothing.

And while I'll agree that we can't run control studies and achieve scientific precision, we can actually use data to inform our opinions.
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Old 06-13-2010, 09:07 AM   #66
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But nobody knows what "relatively high" is, precisely. One crude way to judge is to look at how government receipts respond to changes in taxes. If a 1% increase in taxes results in a 1% increase in revenues, then we know the negative impact on the economy (the economic cannibalization) is small. If that is the case, you can raise taxes to some degree without much fear of harming the economy. If, on the other hand, a tax increase causes revenues to decline, then the amount of economic damage done to the economy is large, and the best course of action is to cut taxes (this is always, and everywhere, the default position of "Supply Siders" but, as you can see, it is only conditionally true).
I agree with this in principle, but I also don't see that the "top" of the curve is static in all situations. It also doesn't account for the cyclical nature of the economy, where an increase in boom or bust may have been starting anyway, regardless of tax rate.
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Old 06-13-2010, 02:59 PM   #67
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It also doesn't account for the cyclical nature of the economy, where an increase in boom or bust may have been starting anyway, regardless of tax rate.
I don't think this is much of a problem because large tax changes happen so infrequently. It certainly is possible to compare the Clinton tax regime and the Bush tax regime over two complete business cycles.
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Old 06-13-2010, 10:08 PM   #68
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I fully agree with this.

Given that the budget of the Federal government is made up mostly of SS, Medicare, Medicaid, and the Defense budget, which of these four areas would you like to make very large cuts to?


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IMO, taxes don't need to go up. Spending needs to go down. Taxpayers should not be subsidizing the health care costs of able-bodied "multimillionaires" who choose not to work. But that's just me.
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Old 06-13-2010, 10:33 PM   #69
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I fully agree with this.

Given that the budget of the Federal government is made up mostly of SS, Medicare, Medicaid, and the Defense budget, which of these four areas would you like to make very large cuts to?
As I understand it, the US Defense budget is about equal to the combined defense budget of the next ten Major countries ( That is China + France+ UK+Germany+Russia etc) If that is in fact so, and just to be fair, what if we propose that the US defense budget be equal to say the next 5 countries?
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Old 06-14-2010, 07:35 AM   #70
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Given that the budget of the Federal government is made up mostly of SS, Medicare, Medicaid, and the Defense budget, which of these four areas would you like to make very large cuts to?
We've had this discussion on this forum before. It went something like this . . .

"We don't need to raise taxes, we should cut spending"
"What specifically would you like to see cut?"
"Waste"
"But what specifically"
"Waste"
"You understand that we have a $1.3 Trillion deficit? That's a lot of waste to cut. Could you identify some specific things. It seems like with that much waste, we should be able to come up with some biggies."
"Cut waste."

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As I understand it, the US Defense budget is about equal to the combined defense budget of the next ten Major countries ( That is China + France+ UK+Germany+Russia etc) If that is in fact so, and just to be fair, what if we propose that the US defense budget be equal to say the next 5 countries?
That would save about $300B (which is a pretty good start). But we still have about $1 Trillion to go . . .
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Old 06-14-2010, 09:01 AM   #71
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That would save about $300B (which is a pretty good start). But we still have about $1 Trillion to go . . .
Piece of cake. Cut military expenditures as explained above. Increase SS retirement age to reflect expanded lifespan and remove limit on earned income. Eliminate Medicare and Medicaid as separate health care cost reimbursement programs and start a comprehensive single payer system in the manner of the Canadian system (but allow for continuation of private medicine option), return tax rates to Clinton era levels. Voila budget deficit resolved. Next question?
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Old 06-14-2010, 09:15 AM   #72
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As I understand it, the US Defense budget is about equal to the combined defense budget of the next ten Major countries ( That is China + France+ UK+Germany+Russia etc) If that is in fact so, and just to be fair, what if we propose that the US defense budget be equal to say the next 5 countries?
Well, if those countries would EVER step up in conflicts around the world, we could. However, those countries have sat on their hands and let us do the dirty work for years.

Cutting national defense has not worked well in the past. maybe the retired vets on here can comment on this?
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Old 06-14-2010, 10:31 AM   #73
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Piece of cake. Cut military expenditures as explained above. Increase SS retirement age to reflect expanded lifespan and remove limit on earned income. Eliminate Medicare and Medicaid as separate health care cost reimbursement programs and start a comprehensive single payer system in the manner of the Canadian system (but allow for continuation of private medicine option), return tax rates to Clinton era levels. Voila budget deficit resolved. Next question?
I believe that Gone4Good's point was that we can't balance the budget by cutting "waste".

Your a approach of cutting defense spending, cutting SS benefits, raising SS taxes, introducing a new tax to fund a single payor health plan, and reversing the Bush era tax cuts seems like it should work (in the sense that the numbers add up).
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Old 06-14-2010, 11:04 AM   #74
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I believe that Gone4Good's point was that we can't balance the budget by cutting "waste".

Your a approach of cutting defense spending, cutting SS benefits, raising SS taxes, introducing a new tax to fund a single payor health plan, and reversing the Bush era tax cuts seems like it should work (in the sense that the numbers add up).
You're right. Gone4Good point is good and well stated. Waste is a few pennies on the deficit dollar at best. But in the spirit of solving the problem, let's cut waste too and that way along with my other proposed changes we'll generate a surplus! Now thats a legacy to leave to future generations
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Old 06-14-2010, 11:08 AM   #75
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Given that the budget of the Federal government is made up mostly of SS, Medicare, Medicaid, and the Defense budget, which of these four areas would you like to make very large cuts to?
I suggest we maybe give priority to functions that are explicitly mentioned in the Constitution as being the responsibility of the federal government. That's not a guide to how much to spend, per se, but it might be a guide to what should be considered "Job 1."
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Old 06-14-2010, 11:15 AM   #76
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I suggest we maybe give priority to functions that are explicitly mentioned in the Constitution as being the responsibility of the federal government. That's not a guide to how much to spend, per se, but it might be a guide to what should be considered "Job 1."
Agreed. And while it would likely cause state taxes to rise, one thing I would do is stop the "federal funding" of so many state and local programs. I think this allows the federal government to get around the 10th Amendment and meddle in state and local affairs by getting states addicted to "federal funds" and then coercing them to pass state by state laws in order to keep receiving them. It also encourages political careerism in Congress by allowing someone to keep "bringing home the bacon" to gain reelection. It's a nice, slick trick to get around the Constitutional limits on federal power in state and local matters and keep entrenched incumbents in office. Sleazy as heck, but slick and creative.

If the federal government has enough money to give back to state and local governments, that's money they shouldn't be collecting in the first place. Let the states decide if they want to raise taxes for the things "federal funds" provide in their states.
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Old 06-14-2010, 11:17 AM   #77
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I suggest we maybe give priority to functions that are explicitly mentioned in the Constitution as being the responsibility of the federal government. That's not a guide to how much to spend, per se, but it might be a guide to what should be considered "Job 1."
You mean as in section 8 (Regarding the powers of Congress) "...provide for the common Defence and general Welfare of the United States". I totally agree
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Old 06-14-2010, 11:23 AM   #78
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You mean as in section 8 (Regarding the powers of Congress) "...provide for the common Defence and general Welfare of the United States". I totally agree
Written before the 10th Amendment clarified federal power in state and local matters -- and also so vague as to be useless. You can justify anything by claiming it is "for the general welfare."
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Old 06-14-2010, 11:42 AM   #79
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From the June 2010 AARP Bulletin: "To close the (budget) gap this year would require the entire Department of Defense to shut down - two wars and 150 overseas military operations notwithstanding - and also put a stop to all Social Security payments. Ad do the same thing next year. Put another way, the budget deficit would be closed if the federal government stopped paying veterans benefits, interest on the debt, Medicare, Medicaid, public school costs, foreign aid, and farm subsidies, and stopped financing space flights, the EPA, Congress and the White House."
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Old 06-14-2010, 11:46 AM   #80
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From the June 2010 AARP Bulletin: "To close the (budget) gap this year would require the entire Department of Defense to shut down - two wars and 150 overseas military operations notwithstanding - and also put a stop to all Social Security payments. Ad do the same thing next year. Put another way, the budget deficit would be closed if the federal government stopped paying veterans benefits, interest on the debt, Medicare, Medicaid, public school costs, foreign aid, and farm subsidies, and stopped financing space flights, the EPA, Congress and the White House."
Unfortunately, the unstated message here seems to be: "Therefore, the only solution is to keep borrowing from our grandkids and raise their taxes -- but leave us alone."
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