Deficit Watch thru Feb 2008

There's nothing optimistic about the latest deficit numbers.  The economy's slowdown has caused receipts and outlays to diverge at a quickening pace.  The only half-decent news is that the deficit, at 1.9% GDP, is just about right for keeping the debt/GDP ratio level, for whatever that's worth.

Food for thought: It's obvious that the slowing economy is causing tax receipts to slow down, even with no change in tax rates.  Question for fiscal pundits: What would seem likely to happen to the economy, and therefore tax receipts, if tax rates were allowed to increase in 2010?   Question for political pundits: When do you think we'll start hearing about that from more than one of the three presidential candidates?

Comments

[KR]

Imagine what will happen to the stock market if rates on dividends go from 15 to potentially 35.

[Matt]

Here is what I have a hard time imagining: The euro is stronger than the dollar, and the Eurozone now has a higher GDP than the US. The Eurozone is comprised of countries/governments with MUCH higher taxes than the US, to the extent of almost pure socialism. So why are they stronger than the US, where we have lower taxes? If low taxes = strong economy, then how is it that high taxes = stronger economy?

[Steve]

Corporate taxes in the Eurozone are significantly lower than in the USA.

[Matt]

Ohhhh, so the key to a strong economy is low corporate taxes, and high income taxes? Interesting.

[Steve]

Am I detecting sarcasm, Matt?

What do you advocate, and why? For example, should we mimic Europe's high gasoline taxes (regressive)?

[Boghie]

Matt,

I am just a normal Joe at a normal job. I make more than that average, but I live in California.

California is a high tax state. California is a high regulation state. Many things are much more expensive in California than in most places. Taxes, fees, and regulations do play a major role in that. See gasoline prices.

Now, how do you adjust to higher taxes. If you can move, you move. That is one option. The other is to skimp on things that are not taxes - say the purchase of a car or an appliance or a couch. How does that affect the economy.

Why am I not purchasing anything right now? Why am I paying down my personal debt? It is because I full expect to pay about $200 - $300 more a month in Federal taxes starting on 2009/01/01 - and, yup they will be retroactive.

So, Matt, how are you going to adjust?

[Joe C.]

Matt,

The EU is 27 countries with a total GDP slightly larger than the US, but a per capita GDP about a third less than the US. Also the increased growth is mostly due to the newer entrants post-Soviet demise that have low tax rates (income and corporate) that is inflating the total. The Western socialist, high-tax countries are as weak as ever. They are also getting a boost from the currently relatively strong euro/weak dollar.

We are approaching the Western Europe high-tax, low productivity stagnation for the past decade because of our high-tax, anti-growth policies. Also, the EU would be much worse off if it wasn't free-riding on our military for its defense, and pharmaceutical industry for R&D/innovation.

[Matt]

Hey Steve,

My intent was to start a conversation about something that I genuinely do not understand. I truly appreciate the responses as they have shed some light on this subject.
My main source of confusion is that I so often hear that taxes are the number one factor in determining economic growth. At present, we have relatively low taxes compared to our own history, and the rest of the world. Yet, our currency is being outperformed by the Euro which represents governments with excessively high taxes. Further, we have had eras of solid economic growth in which taxes were MUCH higher than now. So what gives? Will a 1-2% increase in personal income taxes really spell doom and damnation for our economy?

[Lazaro]

I don't know how genuinely low, historically speaking, US tax rates are. For more than 1/2 of US history, there was 0% federal income tax, 0% federal social security tax, and 0% medicare tax.

That is significantly lower than today.

[LJ]

here was a good article that discusses spending rates in europe and the us compared to GDP growth. I see it as spending and tax rates are corrollary but this still was informative to me.

http://www.americanthinker.com/2008/01/nyts_paul_krugman_sees_europe.html

[Dan]

Matt,

Alot of the answer has to do with what the govt. does with the taxes it receives.

If it takes money away from productive people and productive sectors of the economy and redistributes it to less productive ones, then, yes, that spells doom from an economic perspective.

The government is notorious for investing in things that no sane person or company would invest in. A few things are worth it - like military spending, safety net programs, etc. -- but expanded entitlements, etc. will only increase costs, decrease efficiency, and in the long run, rob our economy of a lot of wealth that could have existed (if the money were used for economically-viable projects).

The government wants people to believe that its programs are essential and wanted by the people -- but from my experience, the "essentials" are taken care of by the free market. (Aside from a few obvious things, which the Constitution allows for in Article 1, Section 8).

If something is a REAL NEED, the market will find a way to fulfill it. Taxes take money out of the market of REAL NEEDS and uses that money to feed IMAGINED NEEDS, or more precisely, bureaucratic attempts at meeting REAL NEEDS that would be far better met by private industry.

Another point: increasing taxes on the rich means that the rich (people who are generally smart with money) are robbed and the poor (those generally not as smart with money) are blessed, right? But its a catch 22 -- the rich are the ones who provide jobs to the poor, so, do we really want to fleece them? Wouldn't it make more sense to lower tax rates whenever possible, so that rich and poor alike have opportunity for advancement?

A good book is "Basic Economics" by Thomas Sowell -- puts all this stuff in layman's language.

[Boghie]

Matt,

Maybe a graceful increase in taxes throughout the income band might have some benefit.

But, we would have to be confident that the Federal government could out-perform our businesses and our charities and our more local government entities. Otherwise, the assets should be placed in the hands of our businesses, our charities, and our more local government entities.

Now, let us look at ‘fair’ Federal taxation. The average family of four makes something like $45,000 in America. How should that ‘middle class’ income be taxed. If you are in San Francisco, New York, Boston, San Diego, Los Angeles, and soon Dallas, Houston, etc. you will not be able to own a two bedroom condominium with that salary. See the current housing ‘crisis’. Is not owning your house a measure of the middle class. How do you tax $45,000 in Salt Lake City and New York City? Is someone making $80,000 in NYC paying high state taxes and high city taxes and high fees richer than some chap making $40,000 in a low tax, low fee state like Kansas? All these lifestyles are choices (but job availability does actually play a role), but so is our tax code. Personally, I think it would be funny to allow the AMT to bite into more ‘middle income’ folks. Then those folks would realize they voted themselves into the poor house. It’s the take home pay that makes you middle class – not the gross income.

So, I don’t think the Federal government out-performs any element of our economy other than areas that cannot be competitively bid on = such as national defense, a basic safety net, freeways and roadways. I also don’t think anyone should be able to vote themselves resources without providing assets to the base. There should be no bread and circuses with my contribution. Would you contribute to a charity that used a large chunk of its funding for parties, parades, and boondoggles?

Thus, I have no confidence that a graceful increase in taxes will be used properly.

And, the Clinton/Obama tax increase will not be graceful.

It will be ignorant.

[Gilleland]

Matt,
Podcasts at EconTalk and the National Economists Club are great sources of on-going education and insights into a wide variety of economic issues, problems, breakthroughs, etc. These would be a nice supplement to the Thomas Sowell book.

[rg]

Dan,

Quote: "The government is notorious for investing in things that no sane person or company would invest in."

Quote: "A few things are worth it - like military spending ... "

Quote: "If something is a REAL NEED, the market will find a way to fulfill it."

Do I see some contradictions here?

Why would no sane person or company invest in "military spending"? After all, you say if there is a REAL NEED, the market will find a way to fulfil it.

rg

[em butler]

""What do you advocate, and why? For example, should we mimic Europe's high gasoline taxes (regressive)? ""

there is a problem with gasoline(or oil) ...we need to import it..
and we can only pay with gteen chits,not real production

cutting gas usage is important
I suggested for the last two years ,a fed tax of 2 dollars a gallon and a tebate of most of it at the rate of 500 gallons a year..
you use less gas,you get a raise..
what is your opinion??

[Charlie]

"What would seem likely to happen to the economy, and therefore tax receipts, if tax rates were allowed to increase in 2010?"

Are you implying that we are on the wrong side of the laffer curve now or will be in 2010? That's pretty hard to imagine, and it certainly isn't a notion held now by the CEA or CBO of this administration. If there is an evidence that raising taxes in 2010 will lower tax revenue, I would certainly be interested in seeing it.

It goes without saying March 2008 is not the time to be raising taxes. Today is not a day for worrying about outstanding entitlement liabilities, long-term debt obligations, or even global warming. Today is a day to worry about a financial crisis. Any tax increase when the Fed is potentially close to a liquidity trap is certainly a bad idea and dangerous. Hopefully, 2010 will not be a similar day, or else it will probably not be a pleasant time to be an American.

Matt,
Your intuition that tax cuts good/ tax raises bad is far too simplistic is dead on. Many details are relevant to the appropriate tax policy of a country, and many details unrelated to tax policy explain economic growth.
I will say though that tax rates are probably not a big part of the decline in the dollar, though tax policy national debt/trade deficits certainly play a role. Many other things also play a role though and arguably a much bigger role. In general, though, the strength of a countries currency should not be taken as a measure of the strength of the economy. The exchange rate is just a price of how much the world wants our currency compared to how much we want their currency. Many things can affect this price.

[Boghie]

EM,

Great idea. But, I see a few flaws that have to be worked out...

My scenario.
I drive a Honda CIVIC
I use about 12 gal/week
My commute is 18 miles each way

Nothing out of the ordinary, eh. So, here goes:

I currently pay about $42 / week in gas
I currently pay about $170 / month in gas
I currently pay about $2,000 / year in gas

Under your plan:
I will pay about $66 / week in gas
I currently pay about $260 / month in gas
I currently pay about $3,100 / year in gas
And, will get a refund of $1,000 back!!!!!!!!

So, I will get hammered each and every month for an additional $90. Then I can submit for a refund in April of each year for some of that money back. That money, in the meantime, will be invested in a Social Security Like LockBox. Yuk. Yuk. Confidence inspiring.

Do you think either Senator Stevens or Senator Kennedy will keep your money in a safe place? Or, will they spend it on big digs and bridges to nowhere. And, then tell us we only get a portion of the money refunded because their really must be some federal funding of busses or something.

Just some questions.

[em butler]

dear bog
the point is to cut down on the use of gasoline...you can either ration it thru cards or price
those who drive less will get a raise in pay...those who drive more will pay more..

[Joe C.]

How 'bout just drilling for the hundreds of billions of barrels of oil we have in the U.S. - Alaska, the outercontinental shelf, and Gulf - thereby increasing supply and decreasing prices that way. The first product could be on-line in 5 years, and in 10-15 we could tell the Middle East to suck off. Between Canada and Mexico, with the increased US production, we could have an oil free-trade zone, then only supplement with oil from Russia and Saudi Arabia. That's what we'd be doing now, including nuclear power and coal, if it weren't for ecoterrorist legislation over the past 4 decades.

[Boghie]

Joe,

There are no easy answers.

Let us say that ARCO drills for the zillions of barrels of oil found in ANWAR.

Why do you think ARCO will sell us the oil? Maybe they will get a better price in Japan... It will, however, help at the margins.

EM,

I simply don't trust the government to:

1. Save my $1,000 in a lock box without spending it on farm subsidies or something. Ever see Senators Stevens and Byrd around a pot of money!!!

2. Give me back the $1,000 they promised. There are poor people everywhere. There are good causes everywhere. They will spend and borrow to cover the hole.

And, EM, I drive a car that gets 35 real mpg. I can't get much better than that, eh.