Game theory is but one of the many things at which I am no good. But it's all I can think about when I look at something like this:
This graphic from the Washington Post is oversimplified but illustrates the basic dilemma of modern American politics. For an honors class I am teaching this semester, the class project is to balance the budget. While I'll let the class feel their way through the process without any commentary from me, when the President or Congress sits down and looks at the budget the ground rules are pretty clear.
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But aside from that, have at it! The only way to "win" this game from the standpoint of a politician who wants to keep his or her job is…to not play. In practice, they nibble at the margins ("Let's freeze discretionary non-military spending and save $100 billion over 4 years!") and print more money. They do the latter because while deficits are unpopular it is the least damaging choice.
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The class, to my expectant horror, to a person decided that the first thing we need to do is cut taxes. As I am in Georgia and these are 18 year old freshmen this is hardly a surprise. I assume they have been raised on an ideological diet of supply side economics and Glenn Beck.
But more to the point, this is no different than Congress's response to the problem over the last three decades. Start with cutting taxes, say some shit about cutting spending, and borrow once we realize that nobody actually wants anything cut.
Cutting taxes is the knee-jerk reaction to all problems economic because it is the only move that elected officials can make without raising howls of blood-curdling rage from the public. When one realizes that only one course of action is politically expedient, it is not difficult to talk oneself into a bunch of half-assed rationalizations – "Cutting business taxes will spur economic growth!" or "Cutting taxes means people will invest more!" Humans are outstanding at convincing themselves that the easiest and/or only course of action also happens to be the best. So while some elected officials are motivated by ideological fondness for tax cuts or clientelism for their plutocratic backers, the majority of them (especially Democrats) go for tax cut after tax cut because they lack a plausible alternative.
The other alternatives are raising taxes or cutting a meaningful amount of spending (not trimming "earmarks" for show to the delight of teabagging rubes). Both would require a person with considerable political power telling the public to grow the fuck up and make some tough choices. We are a nation of ancestor worshippers in love with our own tales of sacrifice – how we marched through the snow to beat the hated Redcoats, tightened our belts to survive the Depression, or buckled down to arm the world and win WWII on our own. Our bold, self-congratulatory talk belies the fact that we appear completely incapable of actually making decisions that involve anything short of immediate personal gratification. The America we live in demanded tax cuts during a war – and got them. We couldn't tighten our belts if our lives depended on it. If Congress asked the country to make sacrifices we'd stare at them with the bewilderment reserved for watching a speech delivered in Mandarin Chinese.
I'm reminded of the apocryphal tale of Henry Ford promising that consumers could have a car in any color they desired as long as it was black. We elect people with the explicit understanding that we will follow them anywhere as long as it involves cutting our taxes and not touching our cherished military and entitlement programs. And then we wonder why every solution, from a freshman political science class up to the White House and Federal Reserve, sounds remarkably familiar.
Crazy for Urban Planning says:
Ed – you just articulated a boiled down version of the problem we have been repeating in America over and over for as long as I've been around here. While I have lost my faith in the supply side of tax theory, I am in the minority because people still eat it up. What to do about the quagmire? What solutions can I constructively offer? Let me try for a moment:
1) It is possible to articulate valid justifications for increasing our gasoline tax.
2) Local governments have been successful at creating districts of economic development where the businesses agree to pay a slightly higher amount of taxes for better services (e.g. sidewalks and historic preservation). – But that isn't a Federal tool.
So I can come up with one idea. We are doomed.
The reason tax cuts work so well is that people like them anyway – if someone is pre-disposed to feel a certain way it is easy to manipulate them.
Comrade PhysioProf says:
Shorter Ed: "We're dead."
Wauwatosa Whacko says:
To basically repeat what CFUP said, you just wrote what I've been thinking for a long time.
John says:
Also interesting to note in this chart is how Estate taxes — what the right pisses and moans about as "the death tax" — is such a tiny portion of the government's income that it's almost invisible on this graph.
But it's VERY important that we eliminate it entirely, because, hey, think of all the suffering millionares.
Right-wing economic rhetoric depends quite heavily on their constituents not understanding this graph. They have the rubes going to teabagger parties and screeching that government needs to stop all this wasteful spending, and yet if you touch any of the vast majority of government spending, they start screeching that you're making America weak or pulling the plug on grandma.
Prudence says:
It´ll never happen, but I´d personally like to invest several million dollars of federal funds on making a large number of (young?) Americans from all walks of life leave the fucking country and visit, say, Europe, just to show them that we´re not all living in Potemkin villages with death panels on every corner waiting to murder Grandma.
Crazy for Urban Planning says:
Prudence is spot on. I was a Peace Corps Volunteer in Bulgaria and it dramatically changed my world view. For ten thousand dollars I was shown what the world was supposed to look like – it is awesome – every resident of America should have to live abroad (and learn a new language) for at least a year. It is a whole lot cheaper than the hundred grand we invest in each GI Joe in Afghanistan. More to the point, Afghans and Americans would actually benefit from the experience.
Kevin says:
Honest question that I'd ask if I were in the class working on this project:
Hasn't it been demonstrated historically that reducing the tax RATE in many cases causes the total tax DOLLARS collected by the government (i.e. the left side of the picture) to increase?
Ignoring whatever differing philosophies we have on tax fairness, on the righteousness of highly progressive rates, etc., if our goal is to increase tax DOLLARS, isn't it reasonable to at least consider that a decrease in tax RATES might have that effect? Having the discussion doesn't seem knee-jerk to me, given the data I've seen that appears to be objective.
Kulkuri says:
When it comes to economic theory, I don't think "Trickle Down" (Pissing on us) ever worked. We need Percolate Up to improve the economy. If lower income people had more money, they would spend it because they have to to make ends meet. The rich and corporations just sit on the money or invest it in stocks that are going up because they are downsizing the workforce. How many times does it have to be proven that tax cuts only benefit the rich and don't do anything to raise the economy????
What I don't understand is those that don't have a pot to piss in or a window to throw it out of being for eliminating the Estate Tax. How many millions does one have to have for their estate to be taxed?????
Crazy for Urban Planning says:
Kevin: "Hasn't it been demonstrated historically that reducing the tax RATE in many cases causes the total tax DOLLARS collected by the government (i.e. the left side of the picture) to increase?"
I'd like to ask Kevin if what he said is true. I'm all for increasing the amount of money coming into the government, if cutting taxes accomplishes that goal I am all for cutting taxes. Based on the deficits that developed under President Reagan and Bush after major tax cuts – I would like to see evidence of this assertion.
skyskier says:
"Kevin Says:
February 11th, 2010 at 11:27 am
Honest question that I'd ask if I were in the class working on this project:
Hasn't it been demonstrated historically that reducing the tax RATE in many cases causes the total tax DOLLARS collected by the government (i.e. the left side of the picture) to increase?"
Kevin, Kevin, Kevin. You silly jester. Yes, supply-side economics has been thoroughly and viciously proven to be an hoax. Thanks for calling.
Kevin says:
Urban Planning:
Can't spend too much time on this, but I did a quick Google search and there are all kinds of policy papers (i.e opinions), but here's one piece of data I found on the top page of the search. The source is the Heritage Foundation website, but they cite OMB data so I'll for the moment assume they couldn't play with the raw numbers too much.
Between the early and late 80's, the top marginal personal income tax rate was reduced from 70% to about 30% — that's a big reduction, especially if a relatively small segment of earners is making a disproportionate share of the income. I don't think anyone's income tax rates went up. But income tax receipts stayed in the range of 8.5% to 9% of GDP. With annual GDP growth of about 4% during the 80's, then I think the math requires that actual income tax collections by the goverment had to increase?
Again, ignoring the "fairness" discussion for now, doesn't this example at least allow for the challenge that improving the left side of the picture can be achieved with lower rates?
(skyskier, thanks for the stimulating contribution to the discussion.)
Crazy for Urban Planning says:
Thanks for at least trying. Without even reading it I am pre-disposed not to agree with anything the Heritage Foundation says… but I don't want to be small minded about this. The tax rate wasn't really 70% back in the 1970s, rich people had even more ways to jump through loop holes than they do now.
If you could just explain the deficits that followed cuts in the tax rate I would be pleased. Is it because they didn't cut spending (they dramatically increased it)? I'm open-minded here, but I just I have told myself to never buy anything the Heritage Foundation sells.
Web Dunce says:
How about pay your taxes out of your paycheck and walk away. No returns, no itemized deductions. Have a formula for tax deductions based on income and dependents. And if you don't make enough to pay taxes you don't pay any. I can't tell you the number of people I know who get $$thousands back when they didn't pay nearly that into the system. This on top of Medicaid for them and their multiple children. I'm not saying to end programs – clearly these people need the assistance and I personally don't mind paying extra taxes to fund programs like Medicaid and Head Start. However, I do have a big problem with these hefty "tax refunds" that people get who don't even pay taxes, or who happen to have dependents and can use them as write offs to get more money. This for individuals. I can't speak to businesses and corporations because I don't understand their tax structure, but something tells me it could be dramatically simplified.
Crazy for Urban Planning says:
i agree with web dunce. end this system where no one feels smart enough to fill taxes and go to h and r block or some other crazy place.
OneMadClown says:
It´ll never happen, but I´d personally like to invest several million dollars of federal funds on making a large number of (young?) Americans from all walks of life leave the fucking country and visit, say, Europe, just to show them that we´re not all living in Potemkin villages with death panels on every corner waiting to murder Grandma.
I'd have jumped at that opportunity. You never would have gotten me to come back home though.
Kevin says:
Urgan Planning:
Fair enough — you don't have to trust Heritage. That's why I laid it out there. But, Google "annual federal spending" and in the top 3 or 4 results you'll find a link to a Heritage chart of (citing OMB) that seems like a straightforward plot of revenue vs. spending over the years. Except for a few years — yes, Clinton years — it's very clear that government spending has continued to grow faster than revenues.
For this discussion, it doesn't really matter where that extra spending went (e.g. how much was defense?) but the data seems to say that the big deficits were because the government just kept on spending more and more, regardless of how much came in the door. Which brings us back to Ed's post — fixing that problem ain't easy. My assertion: there's plenty of knee-jerking on both sides.
Your turn to dig up data if you think I'm wrong.
OneMadClown says:
Hasn't it been demonstrated historically that reducing the tax RATE in many cases causes the total tax DOLLARS collected by the government (i.e. the left side of the picture) to increase?
What is the mechanism that would generate the greater revenue if the rates actually went down? I'm not trying to flame your question Kevin, it just seems counterintuitive at first glance, and I have no background in economics. History does seem to invalidate the premise as well.
Ed says:
The correlation between tax cuts and economic growth is exceptionally weak. Bordering on nonexistent. If you cut taxes during a period of growth, revenues increase. If you raise taxes during a period of growth, revenues increase.
Our fundamental problem is that our tax rate is continually manipulated downward to create the illusion of growth where none exists. Soon we'll have painted ourselves into the same corner as the Fed has done with interest rates – once you take them down to zero, where can you go from there?
Given our levels of spending, mandatory or discretionary, our tax rates are ludicrously low. And the economic argument to support tax cuts isn't there. To vastly oversimplify it, 5% would be a phenomenal growth rate in the GDP, right? 3% is more normal. If we cut taxes 10% to achieve the higher growth rate, explain to me in what world that could make sense. Which is greater: 40% of 100 or 33% of 105?
Kevin says:
Mathematically, total taxes received by the government equals "income" times the "tax rate".
To generate greater revenue from lower rates, you have to believe that the lower rate will cause people (meaning the population generally) to create lots more income by investing more, selling stuff and paying taxes when they otherwise would have held on to it, and by just generally "doing more business" because they won't have to give as much of the "reward" (income) to the government.
There are competing theories about whether and to what degree this is true; what I'm saying is that there are some historical examples that credibly support the idea that lower tax rates motivate enough "new business" to more than make up for the loss.
Andrew says:
Kevin:
Even if what you're saying is true, it can't be true continuously. Because otherwise, we'd be able to cut taxes to 0% and tax dollars would increase to infinity!
It is probably true that there are certain classes of tax cuts that will increase dollars collected, because some tax cuts have a greater stimulative effect than others (ref. Krugman). It is also possible that cutting taxes on one sector will increase revenues from other sectors (say, cutting payroll taxes increases sales tax revenue because people have more money to spend).
However, for those cases, you'd have to justify each and every tax cut on its own merits, and that's not what you're saying; you're saying tax cuts have a universally revenue-increasing effect.
The problem is the Laffer curve (http://en.wikipedia.org/wiki/Laffer_curve). The assumption is that no matter what, we're on the right hand side of the graph. It might be true at a 90% top marginal tax rate, but it's certainly not true at a 30% top marginal tax rate, and no one has ever tried to quantify the Laffer curve – no one has any theoretical or economic evidence that it works the way it's claimed to! The one sole, solitary piece of evidence is the revenue increase during Reaganomics – which isn't even directly attributable to the tax cuts, but rather making the remaining taxes more effective – that is to say, with a good accountant, the "70%" top marginal tax rate was probably effectively 15% or lower; making it an effective 30% couldn't help but increase tax revenues. The "40%" top marginal rate cut that Reagan presided over was a "phantom" cut, made possible by an ineffective tax code – political sleight-of-hand that we're still paying for because it seemed to validate Laffer's cocktail-napkin scribbling.
Additionally, you're wrong about the GDP growth during the 80's – it wasn't 4%, it was 8-9% Real GDP was 4%, but that's a different measure than straight-up GDP and changes what the meaning of your math.
Andrew says:
Another problem is that tax cuts may have a stimulative effect that you describe, but there's no evidence that the stimulative effect always covers the lost revenue. Again, the one historical example is counteracted, in my mind, by the remainder of history leading to today, and particularly the last ten years.
Desargues says:
God forbid anyone, even a liberal, would suggest that spending 900 billions a year on military stuff, could be a really fucked up thing to do. Maybe a second graph is needed, to show how much America's military budget is as a slice of the global pie. [Hint: it's a slice big enough to make you throw up, hate yourself, and swear off pizza for the rest of your life.]
Then there's a lot of hand-wringing about a bit of a red herring — correlation between tax rates and tax revenues. But how about some sober discussion of the fact that, as more and more Americans get old rather than die off, increased levels of expensive health-care (and retirement checks) will be needed.
Military budgets can be cut. Clinton did it, and a more pugnacious Obama could do it too — he has Gates to handle that. Getting the fuck out of hell holes in the Muslim Crescent would save everybody money. Rationing end-of-life care for terminal but very expensive treatments would save some money, too. Increasing taxes is inevitable — at this point, it's only a matter of who's going to do it first (just wait till the creaky, rusting infrastructure in America really starts to collapse). Eliminating subsidies for "farmers" would also help (it could be turned into a deft political maneuver, if the will was there; but I guess the DINO senators from rube states won't put up with that). Closing loopholes in corporate taxation would also increase central revenues; so would punishing corporations that ship jobs abroad. In addition, Americans will have to start retiring a few years later than they're used to — we all need to get older before we start collecting retirement benefits.
Granting some legal status to 10 million immigrants off the books in this country would open the door to taxing them too. That could be decent money in the Fed's coffers.
Crazy for Urban Planning says:
Here is one thing I don't understand about the whole discussion about Social Security and Medicare lacking funding. In the last ten years the U.S.'s immigrant population has grown at a pretty steady percentage. The U.S. right now has plenty of people, not to mention the illegal immigrants who aren't getting taxed. Aren't we going to be fine in ten years when these kids start working?
Ed says:
Working where?
Desargues says:
What a silly question, Ed. Mowing our lawns, where else. Also, if we cut taxes some more, there's all these great jobs that'll be created. Meg says so; therefore, it must be true.
RosaLux says:
Really, this is all just a branding problem.
Consider: modern conservatism is still in the thrall of the thoroughly debunked supply-side economic theories of the Reagan-Bush years (see: Laffer Curve, efficient markets hypothesis). But these theories, like the unimpeachable economic wisdom of cutting taxes or the unimpeachable efficiency of the free market, these have a certain simplistic elegance to them. And because theiy are simple, clean, they sell. Even in the face of an avalanche of countervailing evidence. In the same way that consumers buy the brand name products instead of generic alternatives, even though they can see on the boxes that the ingredients are the same. Branding.
Free market fundamentalism sells well. Liberalism, in the last 20 years, has not. Liberals have not made the case for the necessity of government regulation of industry, a strongly progressive tax structure, an anti-imperialist foreign policy. And it's not merely an economic case liberals are failing to make, it's also the moral case for justice, fairness, and social equality. Liberalism seems to have lost its moral center.
MLK preached it:
"A nation that continues year after year to spend more money on military defense than on programs of social uplift is approaching spiritual doom."
Crazy for Urban Planning says:
Bravo RosaLux. Earlier in the comments Kevin tried to cite the Heritage Foundation as a reputable and objective source! The sole reason for existence of that institution is to provide people with something to cite to say how great supply side economics is! Can you think of an institution like that for liberals? Liberals can't say the same thing 7 days a week – we are too wishy washy and willing to shift our ideas given new facts. I wouldn't really want to be beholden to some Rush Limbaugh or Heritage Foundation, but it is a great way to convey information (propaganda).
Desargues says:
Does it sell because it's well-branded or because it's the perfect product for the asshole in each of us? Liberalism needs cooperation, work and solidarity to support it; "free"-marketeerism sells itself, because it has a ready audience: it encourages you to be a doucher while patting you on the back reassuringly — it's OK, because nobody else deserves your hard-worked tax money anyway, so why let the government collect it from you in the first place?
It's the worthy successor — or monozygotic twin — to the kind of fascist Christianity that also sells well in America: the demented ideology that allows barbarians to support the bombing of innocents in the confidence that they're on God's side, hence can never be wrong. It's made for the sadistic, fearful child in all of us, and thus a lot easier to embrace than the hard task of thinking for yourself.
SeaTea says:
And THAT, my dear friends, is the real root of the problem. We'll buy any evidence, no matter how tenuous (or even fabricated) that allows us to be self-centered destructive assholes and still sleep the sleep of the righteous. Examples are legion.
Prudence says:
The Heritage Foundation as a source, ha! Whatever next, Fox News? World Nut Daily?
Neal Deesit says:
"The modern conservative is engaged in one of man's oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness."
John Kenneth Galbraith
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