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The Conspiracy Letters
Join the fray! Email us at letters@poorandstupid.com. We reserve the right to publish all letters with authors' names, unless specified as not for publication or for publication anonymously. Letters may be edited for clarity and brevity.
Wednesday, July 13, 2005
SO WHERE'S THAT REVENUE GOING TO COME FROM? Krugman reveals, once again, that he is not a serious or competent economist ["Tax Attacks" 7/11/2005]. His assertion (Asia Times, May 19, 2005) that "We should be running surpluses...We should be getting 28% of GDP [gross domestic product] in revenue. We are only collecting 17%" is utterly preposterous. Luskin’s chart (Monday, June 11, 2005) showing Federal tax receipts is extremely informative, but stops short of showing just how ridiculous Krugman’s assertion is.
Figure 1 shows greater detail of the components of Federal tax revenues as a percentage of GDP since the end of WWII. The four major components of Federal tax revenues are individual (personal) income taxes, social insurance payments, corporate income taxes, and excise taxes. Other taxes such as estate and gift taxes, custom duties, and other miscellaneous categories comprise a very small fraction (less than 1%) of GDP.
Since WWII, individual income taxes as a percent of GDP have averaged 8% and have fallen in a relatively narrow range from a low of 5.7% in 1947 to a high of 10.3% in 2000 (the only year in which they exceeded 10%). Corporate income taxes as a percent of GDP have averaged 3% and have also fallen in a relatively narrow range from a low of 1.1% in 1983 to a high of 6.1% in 1952. Corporate and individual income taxes combined as a percent of GDP have averaged 11 percent and, similarly, have fallen in a narrow range from a low of 9.2% in 2003 to high of 14.1% in 1952. Social Insurance has grown steadily as percent of GDP from 1.4% in 1946 to 6.8% in 2004. In contrast, excise taxes have fallen relatively steadily as a percent of GDP from 3.1% of GDP in 1946 to just 0.6% in 2004.
Largely as a result of the increase in Social Insurance, total Federal revenues as a percent of GDP have grown very slightly since WWII, but have averaged 17.9% and have largely fluctuated between about 17.5% to just under 20% of GDP. Only ONCE, when they reached 20.6% in 2000, have Federal revenues exceeded 20% of GDP.
So how does Krugman propose raising Federal revenues to 28% of GDP, or by 56% of the average revenues (17.9%) collected since WWII? By raising tax rates, of course!
Figure 2 reveals just how absurd it is to suggest that Federal government could rise to 28% of GDP! Figure 2 shows the highest personal ordinary income tax rates, personal capital-gains tax rates, and corporate tax rates as well as total Federal revenues and total individual and corporate income taxes as a percent of GDP since 1946. After World War II, until the time President Kennedy encouraged Congress to cut tax rates in 1962, the highest effective marginal individual tax rate was over 90%. Congress cut the top tax rate to 70% and it essentially stayed there until 1982 when President Reagan sponsored legislation cutting the top rate to 50%. Effective in 1986, the top tax rate was cut again to 28% (with a “bubble” rate of 33%). In 1991, President George Bush sponsored legislation raising the maximum rate to 31%. Under President Clinton, in 1994 Congress raised the top rate once again, to 39.6% (actually higher, because of the phase-out of personal exemptions and itemized deductions). Finally, in 2001, under President George W. Bush, the top tax rate was cut by one percent to 38.6% and further reductions were scheduled to be phased in over a number of years bringing the top tax rate down to 35 percent. Congress accelerated the scheduled tax cuts into 2003.
In the meantime, the capital-gains-tax rate has ranged from as high as 49% to as low as 15% (or even 5% for taxpayers in the 15-percent or lower ordinary income-tax bracket). Furthermore, tax regimes have had as many as 15 tax brackets and as few as three, investment tax credits and other tax credits have come and gone, and a host of other tax deductions and incentives as well as surtaxes have popped into and out of the tax code.
Despite quite radical changes in tax rates and other features of the tax code (we have had three entirely different tax codes since 1946 -- the 1936 tax code, the 1954 tax code, and the 1986 tax code), Figure 2 shows that total tax revenues and individual income tax revenues to the government have been almost constant as a percentage of GDP. In other words, there is no relation between tax rates and the amount the government collects in tax revenue as a percentage of GDP!
However, tax-rate levels are negatively correlated with the growth rate of GDP. In other words, as tax rates have come down, the rate of growth of GDP has gone up. Since 1946 the growth rate of nominal GDP has averaged 7.3%. For the years in which tax rates were being cut, starting in 1962, when the top tax rate was first cut from 90% to 70%, and ending in 1990, just before the top tax rate was increased from 28% to 31% and then increased again in 1994 to 39.6%, nominal GDP grew at an average annual rate of 8.25%, or about one percentage point above the overall average.
For the years before 1962, when the top tax rate was 90%, and after 1990, when the top tax rate was increased from 28% to 39.6%, the average annual growth rate of nominal GDP was 5.8%. This growth rate is about 1.5 percentage point below the average growth rate for the entire period since 1946.
In real inflation-adjusted terms the results are not so pronounced, but they are still in the same direction. Real GDP grew at an average annual rate of 3.5% over the entire period. During the period when the top tax rates were being cut from 90 percent down to 28 percent, from 1962 through 1990, the real growth rate of GDP averaged 3.6 percent. During the years from 1946 through 1961 and from 1991 through 2000, the real growth rate of GDP was only 3.4%.
This makes intuitive economic sense. When tax rates are cut, the value of an additional hour of labor and the cost of an additional hour of leisure go up. In other words, if tax rates are cut, an additional hour of leisure is more expensive, since a person must give up a more valuable hour of labor to enjoy an hour of leisure. Similar to other economic goods, if the price of an hour of leisure goes up, people will demand less of it and will work more, on average. Similarly, if the after-tax return on investment goes up because tax rates on investment income decrease, people will tend to invest more. In both cases, the effect is to stimulate additional growth in the economy.
Bob Doyle
Posted by Donald L. Luskin at 10:50 PM | link
Tuesday, July 12, 2005
THE FRENCH CONNECTION Do you think our boy Paul ["Paul Krugman is a Big Fat Hypocrite" 7/9/2005] has managed to connect the success of our generational anti-smoking campaign to increased weight? Certainly, those who need to do something with their hands and mouths are not all munching on celery sticks. In Europe a decrease in smoking seems to have resulted in more fat people. Paul has a hard time with the dynamics of human behavior. His isoquants have no time dimensionality.Interestingly, Bernard-Henri Levy, the French savant, in a multi-part article in Atlantic Monthly, noted that he did not see the expected numbers of fat Americans that are played up in the Euro press. Indeed, he remarked that what he saw was not really different from the normal distribution in France outside Paris. Having dated a French woman years ago, I can tell you it is not the walking that does it. Rather it is the coffee and cigarette diet that keeps Parisians slim, if not healthy. Just like fashion models.
Warning: my wife hates the thesis that follows and kicks me under the table whenever she thinks I am about to launch into this one in public, but I suspect that you are made of sterner stuff. The interesting, if morbid, outcome of growing obesity is the likelihood that a good number of these fat people will not make it to the age of hip and knee replacements, cataract surgery and all the other joys of Medicare and Social Security. Just as smokers are perfect citizens from the viewpoint of the Social Security actuaries (work until you are 65, collect SS for a couple of years and die relatively quickly), so many of our obese confreres may also be playing a constructive fiscal role. Maybe Paul should get one of his grad students to take a look.
Donald I. Hertzmark
Posted by Donald L. Luskin at 10:43 AM | link
GOLDBERG VARIATIONS Your post on Bernard Goldberg ["And Speaking of Screwing Up" 7/9/2005]took me back to 1995, when I was a freshman at a high school near Omaha and Goldberg did an overhyped CBS "report" on supposed criminal incidents regarding football players at the University of Nebraska. I noticed a whole bunch of errors in the story, and a few days later the Omaha paper devoted most of their editorial space to a long list of things Goldberg had gotten wrong (a number of NU officials swore they told him certain facts and he ignored them). I stress that these were factual errors, and not just differences of opinion -- although the story was certainly slanted as well as factually incorrect.
I remember thinking: "If I spot this many errors in a media report about a football team, just how badly are these guys biffing stories about really important subjects like politics or the economy?" I've never trusted the media since then.
Matt Murphy
Posted by Donald L. Luskin at 1:15 AM | link