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Jon Kyl gives away the game on deficits

"[Y]ou should never raise taxes in order to cut taxes," Jon Kyl said on Fox News Sunday. "Surely Congress has the authority, and it would be right to -- if we decide we want to cut taxes to spur the economy, not to have to raise taxes in order to offset those costs. You do need to offset the cost of increased spending, and that's what Republicans object to. But you should never have to offset cost of a deliberate decision to reduce tax rates on Americans."

What's remarkable about Kyl's position here is that it appears to be philosophical. "You should never have to offset cost of a deliberate decision to reduce tax rates on Americans," he said. Never! This is much crazier than anything you hear from Democrats. Imagine if some Democrat -- and a member of the Senate Democratic leadership, no less -- said that as a matter of principle, spending should never be offset. He'd be laughed out of the room.

Back in the real world, tax cuts and spending increases have the exact same affect on the budget deficit. This sort of comment is how you tell people who care about the deficit apart from people who are interested in exploiting fears of the deficit to shrink the size of government. It's also the sort of comment that makes clear that the deficit commission's work is doomed, even if they do go with three-quarters spending cuts. Democrats won't accept an unbalanced product and Republicans won't accept a balanced product.

By Ezra Klein  |  July 12, 2010; 12:55 PM ET
 
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Comments

"even if they do go with three-quarters spending increases. Democrats won't accept an unbalanced product and Republicans won't accept a balanced product."

Did you mean to say "three-quarters spending decreases"?

The 75% spending cuts and 25% in new revenue sounds like a reasonable compromise to me.

For what it's worth, I'd be willing to pay somewhat more in taxes to reduce the deficit in exchange for two things:

1. Tax simplification and rationalization so the "cost" of paying taxes in time and money is reduced and so there is less gaming of the system through things like S corporations versus sole proprietorships and "carried interest" versus regular income.

2. Everyone has to pay more, not just some people. If reducing the deficit is a National priority, then everyone should have to pay something, otherwise it's just an excuse for income redistribution.

Posted by: jnc4p | July 12, 2010 1:02 PM | Report abuse

When congress dares to limit its imposition on Americans (i.e. surrender liberty to the people) there is no need for a justification.

If your employer were to grant you time off, should they need to justify why?

But if they suddenly were to require more of you in order to win some deal that would eventually pay off for the corporation (and implicitly offer you some perks along the way, if nothing else security) then one might expect the employer to justify this new imposition....

Liberals don't understand that it should not be a given that the tax collector knocks on your door demanding a share of your earnings.


We specifically rebelled from the King of England when he started taking for granted his imposition.


To not believe this is to adhere to the rigid ideologue that you work for the government instead of the other way around.

Posted by: FastEddieO007 | July 12, 2010 1:15 PM | Report abuse

This is probably the single most frustrating aspect in politics for me right now. There *are* good intentioned and good faith conservatives out there, but they're all too often too hard to distinguish from guys like Kyl who are clearly not serious and are only in this for the politics.

Posted by: MosBen | July 12, 2010 1:19 PM | Report abuse

Thanks Ezra for this post....Jon Kyl is proving some big points lately.

Between whistleblowing Obama's petty immigration politics and this, Jon Kyl may have a few busy months in Iowa in his future!


To believe that decisions to take less money from Americans demands as much justification as decisions to commit more of the tax payer's money to Nancy Pelosi's cause-du-jour is an indication of the fundamental philosophical rift in our nation!

Posted by: FastEddieO007 | July 12, 2010 1:20 PM | Report abuse

Right-wing psychos may very well win this battle, perhaps permanently damaging the US economy.

Just because they are Right does not mean that are correct!

And FastEddie's lies about the American rebellion is just a minor absurdity. The revolution was not about "taxation" (the right-wing's f-word) but "taxation without representation."

Obama won the election in 2008, unlike the victory achieved for baby Bush by the Republican members of the Supreme Court.

The issue is REPRESENTATION, not taxation, stupids!

The minority Repubs are just so upset that the American people decided that the Repubs should not represent them in 2008. And they are determined to lie and steal from the American people, just like in 2000!

Posted by: jkrogman | July 12, 2010 1:27 PM | Report abuse

Mr Klein, what is wrong with shrinking government? You mock Kyl's assertion as being unsupported by anything but philosophy, but your own comments seem to indicate a fairly philosophical objection to the concept of shrinking government.

Can you honestly say that our federal government is so efficient that there is nothing to cut? That every tax dollar is used so well that nothing can go, and so we must impose more taxes - and that anyone who insists on cutting fat before adding more tax burden is somehow not living in the "real world?"

Posted by: evil_tendencies | July 12, 2010 1:33 PM | Report abuse

The long term budget is now in a rough balance. The deficit commission, which was a kick-the-can thing anyhow, ought to be declared obsolete. If Kyl wants tax cuts, then he must propose spending cuts in the same package. Then the rest of us can discuss it. No more of this falsehood that tax cuts pay for themselves.

Posted by: Lee_A_Arnold | July 12, 2010 1:35 PM | Report abuse

"To believe that decisions to take less money from Americans demands as much justification as decisions to commit more of the tax payer's money ..."

That's a defensible statement as a general philosophical approach, but it's inconsistent for a politician who claims to be concerned about the deficit to make it. If the deficit is really your focus, an unoffset tax cut is as much of a problem as an unoffset expenditure. If you don't care as much about the unoffset tax cut, you don't really care about the deficit, either.

Posted by: zimbar | July 12, 2010 1:38 PM | Report abuse

Several people here are ignoring the redistributive nature of the Bush tax cuts. The taxes on the wealthy were slashed by the rate cuts and then the cuts to the rate paid on dividends and, to a lesser extent, long-term capital gains, also cut in the the estate tax. These cuts were paid for by NOT lowering the taxes of the upper middle and middle class. (The lower quintile got the higher zero bracket and expanded EITC, but those from about 90% to 30% got the least.)

Meanwhile, the very rich got favorable regulatory treatment and corporate welfare that enabled them to enjoy a very steep rise in income. If that isn't redistribution, I don't know what is. And think how much of corporate profit is really redistribution in the form of nickel-and-diming people on bank fees and charges, usurious interest rates on credit cards, mortgage fraud and the like.

So take your "redistribution" and shove it. All Obama is trying to do is correct the excesses of the Bush years and get us back where we were the last time the country enjoyed real prosperity in the '90s.

Posted by: Mimikatz | July 12, 2010 1:41 PM | Report abuse

"Mr Klein, what is wrong with shrinking government? "

Nothing. It's a debatable issue but a side issue for this post. What's on topic is the fact that when the strategy to shrink the government includes shrinking revenues faster than you shrink expenditures, (that's what "you never pay for a tax cut" amounts to), claims that you are concerned with the deficit are revealed as hogwash.

Posted by: zimbar | July 12, 2010 1:44 PM | Report abuse

Why would anyone expect anything else from Kyl?

Here's his entire career: 20 years as an Arizona state legislature lobbyist, followed by 24 (so far) years in Congress.

He's the hack of hacks.

Posted by: misterjrthed | July 12, 2010 2:15 PM | Report abuse

@FE007: If kyl is making a philosophical argument about cutting taxes to make govt smaller, then it is his responsibility to show what spending should be cut to make the tax cuts revenue neutral. Since he hasn't done this, it is just cynical political posturing on his part and shows that he has no credibility on deficit reduction (or anything else, but that is another matter)...

Posted by: srw3 | July 12, 2010 2:21 PM | Report abuse

Ezra,

In conservative shorthand, I believe this used to be called "starving the beast". Well, at least they're being consistently irrational.

Posted by: Jaycal | July 12, 2010 2:21 PM | Report abuse

If your restaurant wanted to lower the price on a steak, do you need them to tell you why?

One must assume that the restaurant is maximizing its revenues and has determined that its future is most promising in the long term with the lower priced steaks.

Whether it is to raise tax rates, or to justify not lowering tax rates, it is not enough to simply argue that more money is needed, but to PROVE that overall taxes collected will actually go up at that rate over time. A higher rate might increase revenue for one year, but with more money pulled out the economy each year it will grow less and less over time such that years later the increased rate is yielding a smaller and smaller return to the government.

It is a no-brainer to conclude that the economy grows more when taxes are lower just as a restaurant can expect more customers if the price of their food is lower.


This is not rocket science.

Posted by: FastEddieO007 | July 12, 2010 2:47 PM | Report abuse

Let's remember that investments paid by taxes in education, infrastructure, research and development and subsidies are what enable business to create wealth.

We've had TEN years of tax cuts, it hasn't worked out very well. During the Clinton years before the tax cuts businesses were doing quite well.

And if they are not renewed remember that these cuts were passed using reconciliation, without a public mandate and will sunset as they were designed to do by a Republican congress and President.

Posted by: JRM2 | July 12, 2010 2:48 PM | Report abuse

Let's remember that investments paid by taxes in education, infrastructure, research and development and subsidies are what enable business to create wealth.

We've had TEN years of tax cuts, it hasn't worked out very well. During the Clinton years before the tax cuts businesses were doing quite well.

And if they are not renewed remember that these cuts were passed using reconciliation, without a public mandate and will sunset as they were designed to do by a Republican congress and President.

Posted by: JRM2 | July 12, 2010 2:48 PM | Report abuse

There should be offsetting spending cuts, not offsetting taxes. We just can't trust these guys with our money- on either side of the fence they are too willing to incur debt to the benefit of current voters at the expense of the future voters. Give them less, get less. Death to voodoo econ, we want a surplus.

Posted by: staticvars | July 12, 2010 2:51 PM | Report abuse

I am an engineer. This is a very predictable mechanism.

There is an optimum rate to set taxes at that can be supported by an economy. Period.

Tax rates cannot be increased beyond that optimum point in order to provide more revenue to the government without sacrificing growth. And it cannot be cut so much such that growth can be increased beyond some "thermal" limit.

The truth is, the only varying of tax rates that out leaders should ever consider should be based on the tradeoff of economic growth vs. maximizing today's revenue.

If we were a very intelligent society we'd leverage the principle of negative feedback such that as the economy shrinks we automatically and proportionally lower tax rates----but conversely as economic growth appears maximized, we should increase taxes.

Ironically our democracy has come as close to this more optimum model by using election cycles to impose a slower but similiar effect. It is just oh so painful to watch though!

Posted by: FastEddieO007 | July 12, 2010 2:56 PM | Report abuse

Reagan at least (supposedly) thought that his tax cuts would pay for themselves (remember the Laffer Curve). When they didn't, they ran the deficit up, but they also prevented much new spending (someone was acting half responsibly).

If Kyl doesn't even believe that tax cuts will pay for themselves, he has to propose the spending cuts that would allow the tax cuts, or else he is just pandering.

tax cuts of course can't pay for themselves unless we have so mis-set the tax rates that we are past the peak revenue that an optimum (just from a strictly revenue generation perspective) rate would generate, such that there's a rate on the other side of the peak that would generate the same revenue. I haven't heard anyone make a case that that's so, and only Rush would suggest that Congress is deliberately foregoing the additional revenue that lower rates would generate (that they could spend on stuff that would make their donors happy) in order to increase dependence on the government.

Posted by: JoeT1 | July 12, 2010 2:57 PM | Report abuse

Jon Kyl-Paul Ryan in 2012!


Posted by: FastEddieO007 | July 12, 2010 3:00 PM | Report abuse

It is a no-brainer to conclude that the economy grows more when taxes are lower just as a restaurant can expect more customers if the price of their food is lower.


This is not rocket science.

Posted by: FastEddieO007
_______________________
No, it's complete fiction. the restaurant will have more customers, but it won't make more money if it cuts prices beyond a point that every entrepreneur is looking for. At a penny, a steakhouse will have lots of customers, and go broke. at a hundred bucks, it will make a killing if it ever sells one, but probably won't, and go broke. somewhere, for any given product at any moment in the marketplace, is a price that optimizes revenue for the owner. Same with taxes. At zero, the economy hums, but there's no revenue. at infinite, there's no activity to tax, and no revenue. somewhere in the middle is optimum revenue. there's never a justification for being on the right side of the peak, because by definition there's a rate on the left side that yields the same revenue but taxes less, which suppresses activity less. Unless you are unintentionally or perversely on the right side of the curve, over the peak, cutting taxes lowers revenue. you have to cut spending to avoid raising the deficit, which eventually requires taxes to pay for it, if not spending cuts.

Kyl is just proposing that we have tax cuts that our children will pay for in interest on the debt unless they cut spending because he doesn't have the courage to propose that. Sooner or later you have to pay for a tax cut with either a tax increase or even larger spending cuts, with interest on the debt you ran up with uncovered tax cuts.

Posted by: JoeT1 | July 12, 2010 3:14 PM | Report abuse

@FE007

Taxes were much higher in the 50s and 60s and business grew quite well and so did GDP and living standards.

That reality doesn't match your fictional rocket science.

Posted by: fitzptrk | July 12, 2010 3:15 PM | Report abuse

FastEddieo007: "It is a no-brainer to conclude that the economy grows more when taxes are lower just as a restaurant can expect more customers if the price of their food is lower."

No, that confuses short-term and long-term, and also confuses consumption with investment. In the long-term, tax cuts don't have that much effect on economic growth. That's the research results. In the short-term, tax cuts OR spending increases can rev-up the business cycle, which is then called GDP growth, but you ought to pay for them during the same cycle to prevent a deficit. In the long-term, tax cuts don't even have enough effect on economic growth to outweigh certain other uses of the money. The reason why is that long-term growth depends on innovation, and that depends on education. Investors supply the funds for innovation, but they don't actually create innovation. In fact, since some kinds of government spending is on education, R&D, and infrastructure, it should be called "investment" and the story gets more complicated.

Posted by: Lee_A_Arnold | July 12, 2010 3:39 PM | Report abuse

Klein:

"What's remarkable about Kyl's position here is that it appears to be philosophical."

Actually, it isn't. If Klein bothered to look at the budget tables from the OMB, he would see that federal tax revenues increased after the 2003 tax cuts. Lower tax rates meant businesses had access to more money for expansion. Expansion meant more employment. More employment means more people paying income taxes. Naturally, Klein doesn't factor in these facts because it would harm his narrative. He'd rather continue his false class warfare demagoguery.

Posted by: steve_tsouloufis | July 12, 2010 3:40 PM | Report abuse

FastEddieO007: "There is an optimum rate to set taxes at that can be supported by an economy. Period."

No, because the society will have different needs generated by negative externalities which private markets can't handle, and these things are often contingencies that were unknowable beforehand.

Posted by: Lee_A_Arnold | July 12, 2010 3:41 PM | Report abuse

Wait a minute here....

Last week the right wing was whining and complaining that "40% of the American people aren't paying income taxes!"

Now they are holding up a false argument about how they are somehow protecting the middle class by stopping an increase from 10% to 15% tax rate.

This is the most disingenuous, phony argument I've heard in a very long time.

BE HONEST. The rich have the biggest microphone. The rich have the best Congress money can buy.

They are whining and complaining because their tax cuts are about to expire. They might have to start paying even a morsel of what could be called their fair share.

It's ridiculous to think this is anything other than the rich whining and complaining that they might have to contribute.

Posted by: robin5956 | July 12, 2010 3:42 PM | Report abuse

steve_tsouloufis: "If Klein bothered to look at the budget tables from the OMB, he would see that federal tax revenues increased after the 2003 tax cuts."

Wouldn't they have increased anyhow? We were coming out of a recession, when revenues ALWAYS increase.

By the middle of 2007, CBO reported that the benefits of the Bush Tax Cuts were over. In the Wall Street Journal:

http://blogs.wsj.com/washwire/2007/07/22/cbo-tax-cuts’-impact-has-faded/

Posted by: Lee_A_Arnold | July 12, 2010 3:50 PM | Report abuse

Um, you conservatives out there supporting Kyl as "shrinking the government" realize that tax cuts without any spending cuts paired to them don't shrink the government at all, right? That's kind of our whole point here. Kyl's not saying we should shrink the government, presumably because that means killing programs that some substantial number of people like. Kyl's saying we should have the same government we have now, but with less money to pay for it because we tax people less.

You can agree with him that people should be taxed less and we can have that argument, but simply saying we should tax people less not only proves you don't really care about the deficit, which is, of course, the whole point of this post, it proves you aren't interested in governing responsibly.

Oh, and FastEddie, are you suggesting that there's an objectively identifiable optimal tax rate? Is this for any given economy or across economies? Does this objectively identifiable optimal tax rate change depending on circumstances in the economy, or is it consistent over time? Does the tax rate depend on the expenditures of the government?

Also, what is this magical tax rate?

Posted by: MosBen | July 12, 2010 3:51 PM | Report abuse

fitzptrk,

Marginal tax rates on the hyper-rich (which were often avoided/evaded, hence the introduction of the ATM) were higher in the 1950s and 1960s, but government revenue collection as a percent of GDP was much lower. From 1950-1969, government revenue averaged 27.5% of GDP, and from 2000-2009 it averaged 34.7% of GDP.

http://www.usgovernmentrevenue.com/downchart_gr.php?year=1900_2015&view=1&expand=&units=p&fy=fy11&chart=F0-total&bar=1&stack=1&size=m&title=&state=US&color=c&local=s

In any case, economic theory only suggests small changes in growth in either direction due to a modest change in marginal rates - a few tenths of a percent of GDP per year at best. That amount tends to get lost in the trend. If Clinton's tax hikes reduced GDP growth, it might have been by all of 1% or 2% of GDP during the 1990s - difficult to notice during a decade when GDP expands 40%, but real money nonetheless. Likewise, in a weak period of economic growth such as the 2000s, it is difficult to notice an extra 1 or 2% of GDP gained during a decade. You can't prove the effects on growth by looking at a time series with growth and tax rates. There would be a huge difference in growth rates if rates were 10% as opposed to 80%, and that would be relatively easy to measure, but between 35% and 39% it is pretty much impossible. Perhaps a better way to determine the effects of tax rate cuts on economic performance is to look at how countries perform given their different approaches to tax policy.

From 1920-1973, potential GDP growth across the world was very high. You could have terrible economic policies, such as those of the USSR, and still turn out 5% or 6% GDP growth in middle income countries, and 4 or 5% growth in the most advanced countries such as the United States. After 1973, we hit a wall, and growth slowed pretty much everywhere. Nations which adopted neoliberal reforms more aggressively tended to be better off - UK vs France for example. From 1945 to the mid 1970s, GDP per capita in the developed European nations was in the process of catching up to GDP per capita in the United States. After the late 1970s, that convergence not only stopped, but has backtracked somewhat since 1995.

Not all of this was in the tax realm - maybe not even most of it. Many European countries have attractive corporate tax rates, and combined federal, state and local income taxes are at European levels in many places in the U.S. - labor market regulations are probably more responsible for Europe's weak performance vis-a-vis the U.S. since 1980. Europe has done a decent job keeping unemployment from rising in the last recession as compared with the United States, but at a large cost in economic flexibility. If you look at Germany, unemployment now is actually lower now than in Dec 2007. However, the U.S. has done far better than Germany in terms of GDP, both shallower decline and a stronger rebound.

Posted by: justin84 | July 12, 2010 3:56 PM | Report abuse

Spending increases and tax decreases have the "exact" same effect on the budget only if you assume that the spending or tax changes won't effect the market's behavior at all.

A small business (i.e. "the wealthy") may decide to hire or fire an employee (or hundreds) based on the tax consequences of doing so. Lower taxes often means higher business investment and hiring.

Alternatively, pure spending only has any effect on the few select businesses lucky enough to benefit from the spending (not to mention the inefficiencies involved in the federal government collecting money then distributing or spending it compared to allowing businesses to keep or invest the money in the first place)

Posted by: mrw7z | July 12, 2010 4:02 PM | Report abuse

It is hard to be sure what that rate is but were you to create a perfect virtual model of our economy and play with the tax rate setting on that model you would find that one rate would deliver an optimum revenue/growth for a period of time.

A shorter-term view will tend to make higher tax rates better and longer term will tend to make lower rates better.

Laffer started to define this science, though his model was simplified.

Posted by: FastEddieO007 | July 12, 2010 4:05 PM | Report abuse

Justin84, I tend to agree with you here, but for two small caveats:

(1) As soon as we notice the modest changes in growth rates due to the changes in tax policy at the moderate U.S. levels, then the salutary effects of government spending on better quality of life, and the detrimental effects of long-term deficits on growth, may become salient.

(2) Economists don't usually think about this but I'll bet one advantage the U.S. has over Europe is the size of the geographic area. Adam Smith argued that "the division of labor is limited by the extent of the market," i.e. a bigger market area supports more division of labor, which in turn spurs more innovations. Free trade might tend to level this advantage, but not completely.

Posted by: Lee_A_Arnold | July 12, 2010 4:09 PM | Report abuse

"Expansion meant more employment. More employment means more people paying income taxes."

It's too bad we didn't see any of that additional employment during the Bush years.

Posted by: lol-lol | July 12, 2010 4:12 PM | Report abuse

It is hard to be sure what that rate is but were you to create a perfect virtual model of our economy and play with the tax rate setting on that model you would find that one rate would deliver an optimum revenue/growth for a period of time.

A shorter-term view will tend to make higher tax rates better and longer term will tend to make lower rates better.

Laffer started to define this science, though his model was simplified.

Posted by: FastEddieO007
_____________________
again with the abstraction in a vacuum. how low, how long? let's assume we are taking the longest view imaginable. how low a rate would that be, at what sacrafice to revenues? And the deficit matters, because you have to raise the money you are spending, sooner or later.

Posted by: JoeT1 | July 12, 2010 4:12 PM | Report abuse

Good job of exposing the GOP for its fiscal irresponsibility. Now get to work on the Dems who are even worse. We have two terrible parties and that is the reason there is something called the Tea Party

Posted by: Steve851 | July 12, 2010 4:12 PM | Report abuse

Effect, not affect.

Too much use of non-words like FinReg has dialed up the illiteracy level overall.

Posted by: pj_camp | July 12, 2010 4:15 PM | Report abuse

Lee_A_Arnold!!

LOL!!!

You said, "No, because the society will have different needs generated by negative externalities which private markets can't handle, and these things are often contingencies that were unknowable beforehand."

Let me paraphrase what you say this way, no matter how much more the government taxes its citizens, the politicians will figure out new ways to spend it that hadn't ever been dreamed up yet when they raised the rates.

Conversely though, the government will figure out efficient ways to make cuts that it never has before once reality sets in and its is realized that the money was never there to begin with.

Posted by: FastEddieO007 | July 12, 2010 4:21 PM | Report abuse

Back in the real world, tax cuts and spending increases have the exact same affect on the budget deficit. This sort of comment is how you tell people who care about the deficit apart from people who are interested in exploiting fears of the deficit to shrink the size of government
================
No it doesn't genius. Take some economics and look how taxation policies have an impact on REVENUE.

Using your simplistic notion cutting capital gains from 30% to 15% would have negatively affected the deficit. Guess what. Government revenues increased.

More simplistic garbage meant for the simple minded from Ezra. Gee I'm shocked.

Posted by: Cryos | July 12, 2010 4:22 PM | Report abuse

I think the optimum tax rates in the years following a recession would be around 20%, but up to around 40% when the economy is roaring.

Posted by: FastEddieO007 | July 12, 2010 4:25 PM | Report abuse

To add to my comment I do disagree with Kyl's notion that you don't have to offset reducing taxes.

However tax cuts like with capital gains the revenue loss/gain is not straightforward but the revenue does not to be offset.

Posted by: Cryos | July 12, 2010 4:38 PM | Report abuse

Lee_A_Arnold:

"Wouldn't they have increased anyhow? We were coming out of a recession, when revenues ALWAYS increase."

Not at the percentages that they did. The data (http://www.whitehouse.gov/omb/budget/fy2011/assets/hist01z1.xls) shows huge revenue increases (by percentage, year-to-year) after the 2003 tax cuts were passed that weren't even seen during the Clinton era, even after Clinton's last tax increase.

The problem is that Klein is promoting a false ideology as some kind of scientific fact when he said "Back in the real world, tax cuts and spending increases have the exact same affect on the budget deficit," then tries to pass Kyl off as some kind of nut. Obviously, tax cuts (which are really tax rate cuts) and spending increases don't have the exact same effect on the budget deficit, and the data proves it.

By the way, Klein is touting the line usually given by the CBO, that tax cuts and spending increases are the same. However, the CBO usually puts through a whole host of disclaimers indicating they can't work through all the possibilities of a given event (like a tax cut), while Klein expresses his point as an absolute truth, even when the facts show his "truth" isn't true.

Posted by: steve_tsouloufis | July 12, 2010 4:38 PM | Report abuse

Typo on my previous comment. Reposting my last.


I do disagree with Kyl's notion that you don't have to offset reducing taxes.

However tax cuts like with capital gains the revenue loss/gain is not straightforward but the revenue does need to be offset to balance the budget.

Posted by: Cryos | July 12, 2010 4:40 PM | Report abuse

FastEddieO007: "Let me paraphrase what you say this way, no matter how much more the government taxes its citizens, the politicians will figure out new ways to spend it that hadn't ever been dreamed up yet when they raised the rates.
Conversely though, the government will figure out efficient ways to make cuts that it never has before once reality sets in and its is realized that the money was never there to begin with."

Wrong, your paraphrase mangles the point that an externality could arise before anyone realizes it, and afterwards the markets can't provide for it -- a good example is the disappearance of wildlife ecosystems, or the realization that markets can never provide universal health coverage because not everyone will make enough money. The Democrats just made a move toward universal health coverage while simultaneously making a move toward reducing the long-term deficit, so it is possible to get a two-for-one. I would strongly urge anyone who wants this to be a better country NOT to vote for Kyl's party right now. They really don't know what they are doing. DeLong makes the argument very well:
http://delong.typepad.com/sdj/2010/07/fiscal-policy-the-long-term-budget-outlook.html

Posted by: Lee_A_Arnold | July 12, 2010 4:42 PM | Report abuse

justin 84

My post was to point out that Fast Eddie's notion that simplistic ideas that lower tax rates are the cure all for the economy are false.

As for the rest of your post, how much of that "extra" GDP growth was achieved by unsustainable debt levels?

And is it worth it to squeak out a little more growth when most of the population sees none of it? Wage growth has disappeared for the bottom 85% of the population.

As for Germany, I'm not sure what kind of flexibility you're looking for but they have managed to maintain a manufacturing sector with good wages and benefits while US jobs have all been outsourced.They did this despite having most of their infrastructure destroyed in WWII as well as having to digest East Germany.

Posted by: fitzptrk | July 12, 2010 4:44 PM | Report abuse

Simple fact is a lot of people don't like tax cuts because they already get a refund or pay little. "whats in it for me"

They are being small minded voting for what they think is their own financial benefit and do not have the intelligence to see past that. They could care less what is good for the country.

That is why socialism NEVER works throughout history. Fact is a majority of people will work only hard enough to be comfortable and when the takers outweigh the producers and producers give up on working hard the system collapses.

Hate to break it to you liberals but most of your "great new ideas" are just rehashes of failed economic policies. You are no smarter than the previous collapsed civilizations.

Posted by: Cryos | July 12, 2010 4:50 PM | Report abuse

Republican political and economic theory is like Mathematics before Calculus. Simplistic, adequate for grade school figuring and predicts that the Earth is flat.

Too bad we live in a non-Euclidian Universe and you can't get to the moon without Calculus. That's why republicans insist on grade school name-calling and "won't play" tactics.


Posted by: thebobbob | July 12, 2010 4:58 PM | Report abuse

"The Democrats just made a move toward universal health coverage while simultaneously making a move toward reducing the long-term deficit, so it is possible to get a two-for-one"

Lee_A_Arnold is a "True Believer". How cute that'd be if it weren't so dangerous.

How is that medical marrijuanna working?

Posted by: FastEddieO007 | July 12, 2010 5:03 PM | Report abuse

The only thing the healthcare bill did to the long term deficit was to put the tax-payer on the hook for the healthcare cost of 35 million more people.

The only possible way it reduces the spiraling cost of healthcare per person is if the Department of Health and Human Services can force insurance companies to ration health care services with much greater harshness than they ever did before and underpays doctors more than ever before.

Posted by: FastEddieO007 | July 12, 2010 5:06 PM | Report abuse

The nebulousness of adding the healthcare costs of 35 million more people on the taxpayers tab is precisely the kind of thing that is chilling the economic outlook of USA small business pushing them into an uncomfortable bullishness on the near-term economic future and preventing them from the kind of investment commitments that could reduce unemployment.

Posted by: FastEddieO007 | July 12, 2010 5:14 PM | Report abuse

steve_tsouloufis: "Not at the percentages that they did. The data (http://www.whitehouse.gov/omb/budget/fy2011/assets/hist01z1.xls) shows huge revenue increases (by percentage, year-to-year) after the 2003 tax cuts were passed that weren't even seen during the Clinton era, even after Clinton's last tax increase."

You don't think the rate of change is due to the severity of the prior recession? We were coming out of a recession that was one of the three worst in the post-WWII era and receipts had fallen badly. The Bush Tax Cuts were so poorly designed that they extended that recession an extra year. You could have guessed beforehand that, coming out of it, receipts would show a large year-to-year percentage change. Receipts are still less than their usual percentage of GDP, one of the main reasons for the current deficit. Look at the dip in this graph:

http://www.project.org/images/graphs/Receipts-by-Percentage-of-GDP.jpg

steve_tsouloufis: "Obviously, tax cuts (which are really tax rate cuts) and spending increases don't have the exact same effect on the budget deficit, and the data proves it."

Depends on whether you are talking about the short-term or the long-term. And in the short-term, it depends on what part of the business cycle you are talking about.

In the long term, tax cuts and spending increases have the exact same effect on the budget deficit, and Kyl is hoping to talk about the long term. He isn't a nut, he is trying to get emotional votes from people who don't understand how intellectually corrupt it is.

Posted by: Lee_A_Arnold | July 12, 2010 5:19 PM | Report abuse

I think we should all stick with the CBO here, Eddie.

Actually if you GET RID of the insurance companies, you could save another 5 to 10 cents on every dollar... And you won't have lost a cent in added value...

Posted by: Lee_A_Arnold | July 12, 2010 5:27 PM | Report abuse

i can't believe people here actually defend this!
and this is especially funny:

"If your employer were to grant you time off, should they need to justify why?"
Posted by: FastEddieO007 | July 12, 2010 1:15 PM | Report abuse

-
HAHAHA, dude, seriously? what a ridiculous analogy. but i'll play...if my employer granted VP's and above time off, while requiring line staff to work mandatory OT, you bet your ass they'd have to justify it!

but you're not gonna grow a brain after reading my response, so i'll just let you go on deluding yourself, meanwhile hoping there aren't really enough of you to send this country -and the world with it- to chaos.

Posted by: daveincali | July 12, 2010 5:28 PM | Report abuse

The CBO is counting on the HHS rationing care and underpaying like a communist dictator. (or in other words like Don Berwick)

Posted by: FastEddieO007 | July 12, 2010 5:30 PM | Report abuse

daveincali - you prove that Ezra Klein has no aptitude requirements for posting on this blog.

Posted by: FastEddieO007 | July 12, 2010 5:32 PM | Report abuse

"As for the rest of your post, how much of that "extra" GDP growth was achieved by unsustainable debt levels?"

Probably too much. I'm generally not in favor of running deficits, especially when unemployment is low as it was 2005-2008H1.

"And is it worth it to squeak out a little more growth when most of the population sees none of it? Wage growth has disappeared for the bottom 85% of the population."

Wages aren't spectacular across the Atlantic either. I don't think we can pump up real wages significantly using European policies. We can distribute, and I am okay with that as long as its sustainable and minimally intrusive. Anyway, here are some stats:

http://stats.oecd.org/Index.aspx?DatasetCode=INEQUALITY

http://www.oecd.org/dataoecd/48/18/18598721.pdf

The OECD has real median income for France at 17,085.11 in the 'mid 2000s', and 17,868.75 for Germany. Adjust those with a purchasing power parity exchange rate of 1.09, and you have 18,622.77 for France and 19,476.94 for Germany. This compares to 26,990.25 for the United States. France and Germany are at only 70% of U.S. levels. This compares median income, to take out any effect from U.S. hedge fund managers which might skew the results in favor of the U.S.

Growth has been better in France, but Germany has seen the same stagnation the U.S. has.

So it doesn't seem to be the case that we can use European policies to increase median wages - ours our already higher, and Germany's trend is as bad as ours is. Seems to be global factors at work, most likely the emergence of the BRICs. Our inequality thus seems to stem from the fact that our top 1% is so incredibly rich. I'm not sure that's a bad thing.

"As for Germany, I'm not sure what kind of flexibility you're looking for but they have managed to maintain a manufacturing sector with good wages and benefits while US jobs have all been outsourced."

This probably isn't the best long-term strategy with regards to employment. Global manufacturing employment has been a technology-driven decline over the long run, and this decline will almost certainly continue. Manufacturing employment will probably go the way of agricultural employment - automation will eliminate most jobs. The U.S. has a decent manufacturing sector, although it looks much better in terms of output than employment. Germany's industrial production growth hasn't been as strong as in United States, at least over the last two decades or so. Now, I will admit that despite lower volume growth the Germans can make some pretty impressive products.

"They did this despite having most of their infrastructure destroyed in WWII as well as having to digest East Germany."

I'm sure whatever disadvantages the Germans may have had from 65 years ago are no longer an issue, although they have had the burden or large transfers to East Germany which certainly hasn't helped.

Posted by: justin84 | July 12, 2010 6:20 PM | Report abuse

*I am an engineer. *

Now that right there is your problem. Engineers are generally nuts and don't belong anywhere near politics.

The thing is about government is that when you make spending contingent on tax increases to pay for it, then you will be VERY careful about what you spend, because it will be politically expensive to cut other programs or increase taxes to pay for it. When you just cut taxes willy-nilly, then politicians will just spend on whatever they want like a kid with a credit card, because they figure all the money is fake, which is what republicans believe. Kyl's ideas will result in more spending, not less, and we will be stuck with huge deficits that can't be paid for because taxes are too low.

Posted by: constans | July 12, 2010 7:27 PM | Report abuse

justin 84

Thanks for the detailed reply.

My real point in posting was to point out that the economy just went bust and will likely remain in a bad recession for some time yet there are a large number of people recommending the very same policies that caused the bust as a cure.

I think we can agree that there must be some happy medium somewhere that works better than what we have now but I'm not optimistic. An economy needs only so many Wal-Mart greeters and as a whole the service economy has a lot of low paying jobs with lousy benefits.Even engineering jobs are outsourced now.

This at a time when profits have been fantastic and corporations are sitting on billions in cash. You can't have a consumer economy without consumers (even a tightwad like Henry Ford saw this))

If the country is really interested in slaying any deficit it won't come from spending cuts alone and especially not if the massive defense budget is excluded.Massive subsidies for the financial,agribusiness and energy sectors also have to be curbed.

Taxes, especially marginal rates, will have to be raised on the wealthy (I'm talking incomes over $1,000,000 and scaling up)as well as some sort of consumption tax.

I'm not hopeful.

Posted by: fitzptrk | July 12, 2010 8:15 PM | Report abuse

Essential government functions must be funded. The slop, waste, fraud and stupidity is what we object to.

We overpaid billions of dollars for a bunch of used cars in order to crush them? Really? So transportation costs of the poor goes up, the used parts market loses supply, many small businesses go broke, and we have middle and upper-class stimulous lottery winners. Stupid.

Nancy Pelosi goes through more than $900 of booze and snacks riding an Air Force plane home on weekends? Really?

Obama want gov't to take the high bid as long as the excess goes to union cronies. Really?

We buy computers so SEC lawyers and Minerals Management managers can download porn. Really?

Starve the beast. Cut the taxes AND cut the deficit.

Posted by: mark31 | July 12, 2010 8:33 PM | Report abuse

"…tax cuts and spending increases have the exact same affect on the budget deficit." Really Ezra, your understanding of economics approaches the moronic.

Posted by: NelsonMuntz | July 12, 2010 10:41 PM | Report abuse

think the optimum tax rates in the years following a recession would be around 20%, but up to around 40% when the economy is roaring.


Posted by: FastEddieO007 | July 12, 2010 4:25 PM | Report abuse

Remarkable. You do know what the effective federal income tax rate is for the top 1% don't you? And you do know it has been steadily declining for the past 30 years, right?

Posted by: luko | July 12, 2010 11:58 PM | Report abuse

FastEddieO007, steve_tsouloufis: Even Bush's OMB didn't think the tax cuts paid for themselves. The 2007 revenue peak wasn't close to reaching the 1992-2000 trend line. If the 2003 tax cuts were such a huge boost to revenues then why were 2004's tax receipts still less than 2000's? Or to put it another way, what's your estimate of the marginal impact on tax revenues from changes to the tax rate? I believe even the Bush Administration's economists thought that dynamic feedback would pay for less than 10% of the cost of the tax cuts. Do you have other data?

Posted by: halfspin | July 13, 2010 12:37 AM | Report abuse

New rule: some people are simply too stupid to be part of any tax debate. People who think taxes _shouldn't exist_ are an example.

Posted by: rick_desper | July 13, 2010 12:42 AM | Report abuse

did he just say,
tax breaks?
sorta like this one here, huh?
"Sen. Kyl: $678-Billion Tax Break for the Rich should not be offset"

here: http://rawstory.com/rs/2010/0711/kyl-you-offset-tax-cuts/

does he expect to pull out the funds from a hat?

Whatever happened to: "I'm not going to vote for it if it's not paid for?"

Posted by: huj534op | July 13, 2010 6:31 AM | Report abuse

fitzptrk,

"I think we can agree that there must be some happy medium somewhere that works better than what we have now but I'm not optimistic. An economy needs only so many Wal-Mart greeters and as a whole the service economy has a lot of low paying jobs with lousy benefits.Even engineering jobs are outsourced now."

I don't think we're becoming a nation of Wal-Mart greeters. Nearly 37% of the nation's jobs are in management or professional occupations, and another 20% are in production, construction, extraction or installation/maintenance type jobs. Another 11% are in sales. There are about 18% in service jobs, but not all service jobs are bad, and not everyone in a service job is the family breadwinner.

http://www.bls.gov/news.release/empsit.t13.htm

"This at a time when profits have been fantastic and corporations are sitting on billions in cash."

Businesses are lending to the government, presuming by cash we're talking money market funds. Someone has to save in order for the federal government to borrow. Some portion of the recent federal deficits seem to have shown up on the asset side of corporate balance sheets.

"You can't have a consumer economy without consumers (even a tightwad like Henry Ford saw this))"

The consumption economy is doing okay. It hasn't been growing in the past two years but it isn't really lower either. As a percentage of GDP, consumption is at an all-time high (67.3% in '95, 68.6% in '00, 69.8% in '05, and 70.8% in '09).

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=14&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=1995&LastYear=2010&3Place=N&Update=Update&JavaBox=no


Posted by: justin84 | July 13, 2010 9:31 AM | Report abuse

(cont).

Even rich people spend for consumption. If more income go to the wealthy, you get fewer purchases of Toyota Camrys but additional purchases of BMW 760s and Porsche 911s. You can question whether or not such an outcome is fair, but its not as if the rich aren't consumers.

"If the country is really interested in slaying any deficit it won't come from spending cuts alone and especially not if the massive defense budget is excluded.Massive subsidies for the financial,agribusiness and energy sectors also have to be curbed."

I'm in agreement here. Being the world's policeman is expensive and often counterproductive. Germany, Japan, and probably even South Korea are rich and can defend themselves. The defense budget was around $300 billion at the end of the Clinton Administration, about $390 billion in 2010 dollars, give or take a bit. The President's budget gives nearly $550 billion for the base defense budget in FY2011. Given that context, I'd be perfectly happy to see defense spending slashed to $450 billion, and ending the stupid wars which are getting $159 billion in the proposed budget.

I'm also okay with getting rid of all corporate welfare.

Since we're concerned about state and local balance sheets, I'd also end drug prohibition which should have salutory revenue and spending effects at the state and local level, and probably save a decent amount of change at the federal level as well. I'm sure Mexico would be thrilled.

In this context I think more revenue is part of the equation, but I'd rather gain that revenue through fewer deductions and credits rather than rate hikes.

"Taxes, especially marginal rates, will have to be raised on the wealthy (I'm talking incomes over $1,000,000 and scaling up)as well as some sort of consumption tax."

The wealthy are already aggressively taxed - marginal rates at all levels of government are above 50% in many places. Significantly higher rates will probably direct more effort towards tax avoidance and evasion, with disappointing revenue results. We'd have to trust Congress to be principled and not to open tons of loopholes for their rich and powerful supporters to take advantage of, and on that score I'm not encouraged - too many people in government seem to have enough difficultly paying their own taxes. That all said, I am in favor of ending the carried interest loophole which lets hedge fund and PE managers get taxed at 15%.

Posted by: justin84 | July 13, 2010 9:54 AM | Report abuse

wow, this is just desperate mr. klein. more and more the democrats and their kindred spirits in the media strike me as little more than professional liars. any surpise considering the Dems are the party of trial attorneys?

Senator Kyl did not swear off reduced government spending as the way to pay for tax cuts. its retty clear that he was saying you should not raise one tax just because you cut another tax - that would defeat the stimulative impact of tax cuts (which obama has no problem lauding as long as they are part of his stimulus bill).

Posted by: dummypants | July 13, 2010 2:57 PM | Report abuse

you know how you know someone is serious about the deficit Mr. Klein? they think like most americans and opposed Obamacare. spending a trillion dollars to turn around and claim a 100 billion dollar "projected" (and we know several health projects have been revised in a less attactive manor) savings on the deficit is tantamount to blowing a $900 billion dollar hole in the deficit. and it matters not that $500 billion in taxes have been raised (not that it would cover the vast majority of the overhaul), because thats simply $500 billion dollars we wont be able to reduce the existing structural budget deficit by. why use half a trillion dollars to solve a problem when you can just make it worse?

at least wars are finite. like every other big government program passed by democrats (medicare, medicaid, and social security) Obamacare is a ticking budgetary time bomb that will explode on someone else's watch.

Posted by: dummypants | July 13, 2010 3:04 PM | Report abuse

Hey, engineers? When we have an engineering problem, we'll call you.

Posted by: pseudonymousinnc | July 13, 2010 3:08 PM | Report abuse

Kyl is far from alone in living in lala land when it comes to the effect of tax cuts on the deficit. I couldn't believe Judd Gregg leading the effort as well. This is the same Judd Gregg that just a few weeks ago was lecturing the Obama administration on the deficit. Republicans are totally ignorant when it comes to the effect of tax cuts on the deficit. They have this illogical belief that tax cuts produce more revenue in the end. This theory has been disproven by all economists with any credibility including George W. Bush's former chairman of his Council of Economic Advisors Greg Mankiw. The reality is that both spending increases and tax cuts contribute to Keynesian stimulus and at the same time exacerbate the deficit. You can't have it both ways. If you want to cut the deficit you have to either cut spending or raise taxes or both. Doing the opposite of either exacerbates the deficit problem.

Posted by: permabear | July 17, 2010 12:17 AM | Report abuse

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