Taxing and Spending

One argument for tax cuts I’ve seen a few times, including on Wikipedia, is that the Bush tax cuts were followed by an increase in tax receipts.

[Link] In 2006, the US Treasury reported that monthly tax receipts in April reached their second-highest point in the history of the nation, totalling $315.1 billion, second only to April 2001′s mark of $332 billion prior to the burst of the Internet stock bubble. These results contradicted dire predictions in the wake of enactment of the Jobs and Growth Tax Relief Reconciliation Act of 2003, suggesting that the US was still on the right half of the Laffer Curve.

It’s not particularly surprising that tax receipts are increasing. Nobody has ever said tax cuts reduce economic growth, except in the long run when the debt is crushing. The United States faces a near-crushing debt, but is still in the short run from the vantage point of the Bush tax cuts.

On the other hand, the USA has a GDP of 12.9 trillion. In 2001, a recession year, it was 9.9. In 1995, it was 7.1. In other words, in the mid- and late 90s, the US economy managed to grow more quickly than it does now even though the rich paid an income tax of 40% then compared with 35% now.

The countries that have managed to grow because of tax cuts are typically those that had a booming underground economy. In Georgia, Saakashvili’s reduction of tariffs and other pro-business policies have worked because the government was plagued by corruption and had to deal with a separatist region with a gigantic black market. Instituting similar policies in France or Britain would be a disaster.

Another argument that high taxes reduce economic growth is that the American economy is growing faster than the Eurozone and Japan. But this is not a very good comparison, considering that Japan’s only now emerging from a 15-year depression, and the Eurozone is dominated by France, Germany, and Italy, all of which combine the worst features of capitalism and socialism.

In contrast, Denmark and Sweden don’t suffer from the cumbersome bureaucracy that plagues non-Scandinavian Europe, and have far more generous welfare payments and far higher taxes. They also have more economic growth, and lower unemployment. Maybe it’s bad for the economy to have the marginal income tax rate at 55% but good to have it at 40% or 80%… in which case 80% is better, considering that Scandinavia has rock-bottom poverty rates while the United States has an intolerably high one.

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4 Responses to Taxing and Spending

  1. Deep Thought says:

    Very interesting stuff, related to some work I had done specifically ion Sweden recently. However, I encourage you to take a second look at those poverty rates: Sweden uses a relative poverty index, the US an absolute index. Recently Swedish academics argued that if Sweden used the American-style definition of poverty 40% of all Swedes would live in what we call the “low income bracket”.

    http://andune.blogspot.com/2006/03/follow-money-during-my-discussions-of.html

    Keep up the great work.

    [Note: I agree – the American level of poverty is intolerable. I just think some other nations shield their true numbers)

  2. Alon Levy says:

    Actually, if you just compare the amount of money a low-income Swede has to a low-income American, Sweden will still come out better. A bottom-quintile Swede has 20% more post-tax, post-money transfer income than a bottom-quintile American; note that the bottom-quintile Swede will be even better off than that due to better health care and education, which don’t figure into consumption statistics when they’re government provided. Similarly, a bottom-quintile Norwegian has 78% more income than a bottom-quintile American, and a bottom-decile Norwegian has double the income of a bottom-decile American.

  3. Deep Thought says:

    Alon,
    Uh, did you really mean ‘transfer income’ – the monies transfered to a person or family via governmental or group actions, i.e., social security, pensions, medicaid benefits, etc? Or did you mean ‘discretionary income’?
    Further, in your earlier posting you switch between ‘median’ and ‘mean’ without really noting the difference in detail, but attempt to use the difference between median and mean to redefine the meaning of ‘poor’ from the original report. The definition used by most nations but the US, and used in the report, is less than 50% of the median income. This makes the ‘poor’ in America much larger as a percentage since the difference in median income is serious.
    Add in that the median American is, actually, better off than the median Swede by no less than 12% *after* transfer income effects are added and that Americans are much more mobile economically than Swedes.
    In the end, there are a number of papers, including studies coming out of Swden, pointing out that the poor in Sweden are at about the same standard of living as the poor in America even after all those social programs simply because the nation of Sweden is directly and proportionally much poorer than the nation of America. The fact that the poor of what is, after all, a much poorer nation are doing as well as the poor of America is amazing… but it isn’t magic. The higher incomes in Sweden simply don’t exist. While a boon for egalitarianism, many Swedish researchers are concerned with the number of Swedish corporations, professionals, and entrepreneurs fleeing the nation’s taxes by moving abroad to open businesses or work.

  4. Alon Levy says:

    Actually, the US has less income mobility than Sweden (which is nonetheless the least upwardly mobile country in Scandinavia). It’s not really surprising, considering that in the US your income is largely determined by your level of education, which is largely determined by how much your parents could afford to live in a good school district and send you to college.

    It’s true that Sweden has a fairly low income, but that’s just Sweden; Norway, which has largely the same welfare state as Sweden, has a GDP per capita slightly higher than the USA’s, and less unemployment. Sweden is the most socialist country in Scandinavia and the largest, but it gets the worst results on most of the metrics in question here.

    Also, where do I switch median and mean? The statistics I’ve cited in this thread concern the mean bottom-quintile income, which is a far better measure of poverty than the median income.

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