Should the Bush tax cuts be extended?

[CRGreathouse]

responded as predicted

Your prediction was very nonspecific: that responding posts would present "other reasons centered around health care and other matters which return credit to the relevant party". Broad as it was, it doesn't really seem to have matched the posts you quoted.

But then again, I would have predicted that from you.

 

[OmCheeto]

I think you're confusing a budget surplus in a given year with reduction in the national debt.

Obviously.

But tell me this; How can you have a higher debt in 2000 if you had a budget surplus in 1999?

Bad investments?

It is a trivial point as far as I'm concerned, so no hard feelings to anyone, if I happen to be correct, or have missed a subtle accounting nuance, that would make me totally wrong!

 

[Gokul43201]

I'll tell you what I don't understand...

How can your debt go up if you're spending less than you take in?

from the U.S. government treasury web site:I do not see numbers going down for any consecutive year for the time span of your graph.

Went to the link provided in your earlier post and couldn't easily find information on what the numbers represented. Gross or public debt? Chained or unchained dollars? The wrong answer to either of those questions could account for the discrepancy.

Also, there are "off-budget" appropriations that do not show up in the deficit, but get counted in the public debt.

 

[nismaratwork]

Obviously.

But tell me this; How can you have a higher debt in 2000 if you had a budget surplus in 1999?

Bad investments?

It is a trivial point as far as I'm concerned, so no hard feelings to anyone, if I happen to be correct, or have missed a subtle accounting nuance, that would make me totally wrong!

The word "interest" springs to mind...

CRGreathouse: I don't know, singling out health care as the central issue seems pretty specific to me. The latter part was broad, but then, I hit the nail on the head with the what I did single out soooo... yeah.

CAC1001: Yes, I know you don't, the whole concept of cognitive dissonance is that you HAVE RESOLVED IT, and in doing so reinforced your initial preconceptions.

 

[CAC1001]

The word "interest" springs to mind...

CRGreathouse: I don't know, singling out health care as the central issue seems pretty specific to me. The latter part was broad, but then, I hit the nail on the head with the what I did single out soooo... yeah.

Healthcare was the central issue because it was the first big-government thing Clinton tried, and he didn't really get a chance for more after that.

CAC1001: Yes, I know you don't, the whole concept of cognitive dissonance is that you HAVE RESOLVED IT, and in doing so reinforced your initial preconceptions.

Have resolved what? What are my initial preconceptions?

 

[nismaratwork]

Healthcare was the central issue because it was the first big-government thing Clinton tried, and he didn't really get a chance for more after that.



Have resolved what? What are my initial preconceptions?

See https://www.physicsforums.com/showpost.php?p=2900566&postcount=188 if you didn't already read it.

 

[OmCheeto]

"Faith" has nothing to do with it. Facts do. The fact is that the Clinton and the Democrats tried to engage in big government from the get-go. The healthcare they tried, as you mentioned, did not pass.

Clinton vetoed multiple times welfare reform, and that was after it barely passed through Congress (the Republicans used reconciliation to push it through, which they should not have). Clinton completed NAFTA, which was initiated by Reagan, and he (Clinton) was reluctant about that at first. Also as mentioned remember the defense budget was slashed after the Soviet Union collapsed and the Dot Com bubble took off.

If the Republicans had not won Congress and the Democrats had been successful, they would have likely enacted government healthcare, would not have done welfare reform, and would not have completed NAFTA most likely, and likely would have engaged in other forms of spending (as they are now). Seriously, go to any Democrat/Progressive forums. You aren't going to find arguments for limited government there. They want expanded government. They want more federal control over the educational system. They want college for everyone to be "free." They want healthcare for everyone to be "free." You don't get any of that with small government.

With Bush, the Republicans did a 180. When President Bush created his expansion of Medicare, initially, the Democrats said it wasn't large enough. Then they criticized him for how much it cost later on, although apparently it is managing to pay for itself: http://www.washingtontimes.com/news/2010/aug/16/bush-drug-plan-beats-cost-mark/ (it would be wonderful if Obama's health plan ends up doing the same, although I have doubts).

I would count the number of times a person says 'if', 'they', and similar phrases as a sign of cognitive dissonance. "Facts" is a good one, when mixed with 'if'.

Of course, he, Clinton, Reagan, Bush, Democrats, Republicans, can all be used in place of "they".

This is a fun thread.

ps. Drats. I may be channeling previous posts. I only see two "if's" here.

 

[Gokul43201]

Yet no one here has yet demonstrated how raising taxes back to previous levels is going to help the economy? Any takers? Please show with cites and graphs where raising taxes is going to help the economy.

I'll bite.

My source is the March 2009 CBO report to the Senate Finance Committee [http://www.cbo.gov/ftpdocs/100xx/doc10008/03-02-Macro_Effects_of_ARRA.pdf]

In particular, I refer you to Table 1 on page 5, which I reproduce below:

The CBO calculation says that Government spending on goods and services, infrastructure projects, unemployment benefits provide a high short term stimulus (with a large fiscal multiplier), while tax cuts for high income families do not.

One could therefore argue from this that money accumulated by letting tax cuts on high income groups expire could instead be injected into other areas which provide greater stimulus, resulting in a net benefit to the economy in the short term.

Whether or not one trusts the CBO numbers in that table is a separate issue. I haven't found any revised calculation of multipliers by them or another group, but that's not to say that there isn't one (or more). If someone else has another set of multipliers that are relevant, I'd be happy to look at them.

 

[CAC1001]

I would count the number of times a person says 'if', 'they', and similar phrases as a sign of cognitive dissonance. "Facts" is a good one, when mixed with 'if'.

Of course, he, Clinton, Reagan, Bush, Democrats, Republicans, can all be used in place of "they".

This is a fun thread.

ps. Drats. I may be channeling previous posts. I only see two "if's" here.

I would think any person could figure out who I am referring to when I say "they." As for "ifs," yes that's speculation, but since when have you ever seen the base of the Democrat party saying to its leaders: "You all had BETTER work HARD to reduce spending and get the budget under control and we mean it!"

 

[CAC1001]

I'll bite.

My source is the March 2009 CBO report to the Senate Finance Committee [http://www.cbo.gov/ftpdocs/100xx/doc10008/03-02-Macro_Effects_of_ARRA.pdf]

In particular, I refer you to Table 1 on page 5, which I reproduce below:

The CBO calculation says that Government spending on goods and services, infrastructure projects, unemployment benefits provide a high short term stimulus (with a large fiscal multiplier), while tax cuts for high income families do not.

Government spending on infrastructure as a form of short-term stimulus I would question. Government can spend money quickly and inefficiently or slowly and efficiently. Things like infrastructure require a lot of planning and detail to do right.

Unemployment benefits can provide stimulus in that they increase demand, but they also can artificially keep the unemployment rate higher than it otherwise would be.

One thing I am curious about though, is where it mentions about money going to the states for infrastructure...do the states actually use the money for infrastructure? I ask because I would think the big public employees unions might demand the money be used for them, either by expanding the programs that employ them or increasing their benefits.

One could therefore argue from this that money accumulated by letting tax cuts on high income groups expire could instead be injected into other areas which provide greater stimulus, resulting in a net benefit to the economy in the short term.

Whether or not one trusts the CBO numbers in that table is a separate issue. I haven't found any revised calculation of multipliers by them or another group, but that's not to say that there isn't one (or more). If someone else has another set of multipliers that are relevant, I'd be happy to look at them.

Don't have any multipliers here, I know some economists are skeptical of stimulus spending:

http://gregmankiw.blogspot.com/2009/01/infrastructure-spending-as-stimulus.html
http://www.nytimes.com/2009/01/11/business/economy/11view.html
http://gregmankiw.blogspot.com/2009/01/more-spending-stimulus-skeptics_16.html
http://gregmankiw.blogspot.com/2009/01/fama-on-fiscal-stimulus.html

 

[CAC1001]

Yes, it would have to be a federal tax. And it's not an income tax on the wealthy, it's a wealth tax.
Say your house is valued at $100,000 and you have $100,000 in the stock market.
You would have to pay an extra $2000 per year. ($200,000 * 1%)

And speaking of Trump, this was actually his idea a few years ago, when our debt was only half of what it is now.

Why should government tax people's wealth? Wealth takes time to build up, I don't think government should have a right to tax it. Also, how would government tax wealth? I mean if your home is worth $2000, where do you get the money for the tax? The home doesn't necessarilly provide cashflow, and it's value can change.

Wealth only provides cashflow if it's in the form of businesses you own, or stocks, bonds, income-producing real-estate, etc...and even then it depends. You might own $30 million of stock, but the company (s) might not be paying dividends at the moment.

 

[OmCheeto]

Why should government tax people's wealth?

Because they can, and do.

Wealth takes time to build up

Not if it's inherited.

, I don't think government should have a right to tax it.

I do.

Also, how would government tax wealth? I mean if your home is worth $2000, where do you get the money for the tax?

I seem to find a way every year to do it.

The home doesn't necessarilly provide cashflow,

Unless it's paid off, which in comparison to renters, provides a negative deficit in spending.

and it's value can change.

That's why we passed a law in my state to limit taxable valuation.

Wealth only provides cashflow if it's in the form of businesses you own, or stocks, bonds, income-producing real-estate, etc...and even then it depends. You might own $30 million of stock, but the company (s) might not be paying dividends at the moment.

hmmm... $30 million worth of anything would provide me with plenty of cash flow for a very, very, long time. And I'd gladly pay 1% on that annually, to keep a non-Somalian type government running.

 

[CAC1001]

See https://www.physicsforums.com/showpost.php?p=2900566&postcount=188 if you didn't already read it.

 

[CAC1001]

Because they can, and do.

Only if it is inherited though, right? Also the argument, "Because they can" and "do" isn't really an answer. That's like saying, "Why shouldn't the government spy on us?" only to get, "Because they can, and do."

Not if it's inherited.

It took time for the parents to build it. Who are the government to then say, "You can't just give that wealth you spent a lifetime building to your kids. We get to take a slice."

I do.

Well I don't.

I seem to find a way every year to do it.

How so?

Unless it's paid off, which in comparison to renters, provides a negative deficit in spending.

A bit confused here, how does the home being paid off provide any cashflow...?

hmmm... $30 million worth of anything would provide me with plenty of cash flow for a very, very, long time. And I'd gladly pay 1% on that annually, to keep a non-Somalian type government running.

Government already taxes income earned from wealth I believe, whether in the form of dividend payments, interest earned (?), money from real-estate, etc...but the principle itself, I think only is taxed via the estate tax, otherwise the government doesn't tax that.

I do not have a problem with taxes on income earned from wealth, my problem would be taxing the wealth itself. So if you are work hard to build a business say and sell it for $300 million in stock to a company, and now your wealth is $300 million, and that $300 million in stock pays dividends of say $20 million a year (just making up a random number), the government can tax the $20 million a year perhaps (which itself can be a form of double-taxation as the corporation itself is usually taxed, although corporations can reduce their taxes, so again it depends), but the government should not try to directly tax the $300 million itself.

 

[CRGreathouse]

The CBO table suggests a multiplier of 0.1 to 2.5 for the various aspects of the ARRA (0.2 to 2.5 if the upper-end tax cut is excluded). But Romer & Romer measure a multiplier of 3.0 for tax cuts. So taxing money out of the system to stimulate it doesn't seem workable: a tax of T reduces the GDP by 3T, then increases it by kT where k is in [0.1, 2.5]. So at best, taxing T decreases the economy by 0.5T.

Of course if you fund stimulus spending by cutting programs rather than increasing taxes, you may be able to increase GDP.

 

[Gokul43201]

The CBO table suggests a multiplier of 0.1 to 2.5 for the various aspects of the ARRA (0.2 to 2.5 if the upper-end tax cut is excluded). But Romer & Romer measure a multiplier of 3.0 for tax cuts. So taxing money out of the system to stimulate it doesn't seem workable: a tax of T reduces the GDP by 3T, then increases it by kT where k is in [0.1, 2.5]. So at best, taxing T decreases the economy by 0.5T.

CRG, I'm disappointed by that post, and hope I've badly misunderstood it. No time now to address what I believe are the issues with your argument - I will get to it later.

 

[Gokul43201]

Government spending on infrastructure as a form of short-term stimulus I would question. Government can spend money quickly and inefficiently or slowly and efficiently. Things like infrastructure require a lot of planning and detail to do right.

Unemployment benefits can provide stimulus in that they increase demand, but they also can artificially keep the unemployment rate higher than it otherwise would be.

One thing I am curious about though, is where it mentions about money going to the states for infrastructure...do the states actually use the money for infrastructure? I ask because I would think the big public employees unions might demand the money be used for them, either by expanding the programs that employ them or increasing their benefits.



Don't have any multipliers here, I know some economists are skeptical of stimulus spending:

http://gregmankiw.blogspot.com/2009/01/infrastructure-spending-as-stimulus.html
http://www.nytimes.com/2009/01/11/business/economy/11view.html
http://gregmankiw.blogspot.com/2009/01/more-spending-stimulus-skeptics_16.html
http://gregmankiw.blogspot.com/2009/01/fama-on-fiscal-stimulus.html

No time to respond in detail now. I suspect I have read most of the entries in Mankiw's blog cited above, but will look at them when I have more time.

I do not deny the role of government inefficiency or the possibility of problems with the CBO calculation (omitted variable bias, for instance). The above post is not meant to make a stand-alone point. It is meant only to address flynjack's query about whether there exists any argument for raising some taxes. Needless to say, there are probably many more arguments presented in literature (R & R (2010), for instance estimates negative multipliers for certain "kinds" of taxes), and many rebuttals to them as well.

 

[mheslep]

Is the graph false because one axis is ...

I take the graph as Gokul43201 posted from that website to be reliable and accurate in every respect, an excellent source.

 

[mheslep]

Saving this quote for a rainy day!

Well from time to time I'll no doubt earn a reminder. Sorry, I was a little pedantic. I took your point about Clinton's first year or two as a valid caveat (not more) to attempts at assigning majority credit to the Gingrich Congress for fiscal prudence. In a prior discussion we established (I think) that it can be complicated to precisely attribute deficit responsibility, especially in the years when Congress/the Presidency switch parties. Google "obama speech OR remarks inherited" for further illustration.

 

[CAC1001]

http://faculty.chicagobooth.edu/john.cochrane/research/Papers/krugman_response.htm

This was an article by economist John Cochrane that discusses some interesting things regarding stimulus. The article was also written as a response to criticisms of Cochrane by Paul Krugman.

 

[CAC1001]

One will search in vain for any mention of 'Clinton', 'Gingrich', or 'H.W. Bush' in the graph above, which is simply and appropriately labeled 'Federal Deficit' of the US Government.

Just curious, but did you mean by this quote...? I didn't quite get it.

 

[mheslep]

Just curious, but did you mean by this quote...? I didn't quite get it.

Yes cryptic in part due an allusion to old discussions. I meant that deficit data displayed there is only qualified as being produced by the federal government. The data does not speak further as to who or what part of the federal government was responsible for revenue, spending, or economic conditions immediately preceding the current data (i.e. recessions). To get the proper attribution requires some more work:
i) who or what got the economy going to increase revenue (which depends in part on tax rates ),
ii) what was state of the economy just prior (recession, boom, bubble), and most importantly to my mind on the topic of deficits,
iii) who cut or increased federal spending.

 

[CRGreathouse]

CRG, I'm disappointed by that post, and hope I've badly misunderstood it. No time now to address what I believe are the issues with your argument - I will get to it later.

I'm not really sure what there is in my post that could disappoint. The purpose was to communicate a recent result in economic research. I have not fully reviewed the paper, but it appears to be quite relevant here. To demonstrate that, I compared its numbers to those of the CBO.

It's possible that you're "disappointed" in Romer & Romer, or at least disagree with their findings. (In the latter case: hooray, someone else interested in economic theory!)

I had not heard of the Romer & Romer result until I came across it yesterday. I think it's from 2009, so it's not exactly new, but still as close to cutting edge as you'll find outside preprint archives.

 

[OmCheeto]

since when have you ever seen the base of the Democrat party saying to its leaders: "You all had BETTER work HARD to reduce spending and get the budget under control and we mean it!"

Never! We follow our leaders, because they know what we want. And as the graphs indicated, they did a lot better job of reducing spending than the other crowd. Democratic politicians seem to be psychically linked to their constituency, vs. some kind of psychotic link.

On a side note on the economic health of America, I was quite impressed when B. Clinton came to where I work and lectured us that America needs to get health care costs under control. (I work at a very large university hospital.) I thought our president was going to have a heart attack.

Bill reiterated his point of health care costs on the John Stewart show the other night. America spends more on health care then most any other nation in the world by almost a factor of 2.

http://www.kaiseredu.org/topics_im.asp?imID=1&parentID=61&id=358"
Health care costs have been rising for several years. Expenditures in the United States on health care surpassed $2.3 trillion in 2008.

2011 United States federal budget - $3.8 trillion (submitted 2010 by President Obama)

Why is it that it takes almost as much money to keep our hearts beating, as it does to keep an entire country running?

-----------------------------

I hope I get at least a 30 minute ban, or at least a warning! for being this far off topic. And, may I remind you, that I just called all of them psycho's. That's at least +1 point in the consonant dissident side note of this thread.

 

[WhoWee]

Never! We follow our leaders, because they know what we want. And as the graphs indicated, they did a lot better job of reducing spending than the other crowd. Democratic politicians seem to be psychically linked to their constituency, vs. some kind of psychotic link. [/SIZE]

 

[CAC1001]

According to economist Keith Hennessey, the Bush tax cuts were intended to be made permanent: http://keithhennessey.com/2010/08/23/response-to-pk/

Why is it that it takes almost as much money to keep our hearts beating, as it does to keep an entire country running?

Healthcare is about 1/6 of the U.S. economy. Whereas you're comparing it to the federal budget, which is one part of total U.S. government spending. If you add the Federal budget with all the states, counties, and local governments overall, total U.S. government spending is $6.4 trillion (http://www.usgovernmentspending.com/), about 45% of GDP.

 

[OmCheeto]

Healthcare is about 1/6 of the U.S. economy. Whereas you're comparing it to the federal budget, which is one part of total U.S. government spending. If you add the Federal budget with all the states, counties, and local governments overall, total U.S. government spending is $6.4 trillion (http://www.usgovernmentspending.com/), about 45% of GDP.

I'm starting to get suspicious of that usgovernmentspending.com site:

http://www.usgovernmentspending.com/tea_party.php"
Back in 1842 Horace Mann promised that public schools would cut the crime rate by 90 percent. That was when nearly all Americans were able to read. Today the government reckons that only 13 percent of adult Americans are “proficient” in literacy and numeracy. But government spending on education has never been higher.

But then again, I do resort to counting on my fingers once in a while.

 

[nismaratwork]

I'm starting to get suspicious of that usgovernmentspending.com site:
But then again, I do resort to counting on my fingers once in a while.

Wow, that quote... I think maybe that person is the one with historical literacy issues? What a load... I've seen better sites touting the benefits of acai berry diets.

 

[Gokul43201]

I had not heard of the Romer & Romer result until I came across it yesterday. I think it's from 2009, so it's not exactly new, but still as close to cutting edge as you'll find outside preprint archives.

More later, but R & R have more than one paper. I thought you were referring to the one from June 2010, in Amer Econ Rev.

http://elsa.berkeley.edu/~dromer/papers/RomerandRomerAERJune2010.pdf

 

[mheslep]

Why is it that it takes almost as much money to keep our hearts beating, as it does to keep an entire country running?

http://www.nber.org/aginghealth/2009no2/w14839.html" :

in 1954 the Internal Revenue Service decreed that health insurance premiums paid by employers were exempt from income taxation

as people don't pay attention to the costs when someone else picks up the tab.

 

[mheslep]

Romer's finding of a tax multiplier of three is from the 2007 paper, and has some qualifiers.
THE MACROECONOMIC EFFECTS OF TAX CHANGES: ESTIMATES BASED ON A NEW MEASURE OF FISCAL SHOCKS
C Romer, D Romer, UC Berkley, March 2007

In terms of consequences, there are six main findings. First, tax changes have very large effects on output. Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent. Our many robustness checks for the most part point to a slightly smaller decline, but one that is still well over two percent. Second, these estimated effects are substantially larger than those obtained using broader measures of tax changes, such as the change in cyclically adjusted revenues or all legislated tax changes. This suggests that failing to account for the reasons for tax changes can lead to substantially biased estimates of the macroeconomic effects of fiscal actions. Third, investment falls sharply in response to exogenous tax increases. Indeed, the strong response of investment helps to explain why the output consequences of tax changes are so large. Fourth, the output effects of tax changes are highly persistent. The behavior of inflation and unemployment suggests that this persistence reflects long-lasting departures of output from its flexible-price level, not
large effects of tax changes on the flexible-price level of output.

www.econ.berkeley.edu/~cromer/RomerDraft307.pdf[/URL]

In Romer's later paper released just prior to the US stimulous legislation she sites different figures, more in line w/ the CBO numbers Gokul points to above. There are numerous professional critics of that view (spending stimulates more than tax increases depress), as we discussed last month
[url]https://www.physicsforums.com/showpost.php?p=2833038&postcount=760[/url]

 

[CRGreathouse]

More later, but R & R have more than one paper. I thought you were referring to the one from June 2010, in Amer Econ Rev.

http://elsa.berkeley.edu/~dromer/papers/RomerandRomerAERJune2010.pdf

Romer's finding of a tax multiplier of three is from the 2007 paper, and has some qualifiers.

I haven't seen the new paper. I'll try to review it this weekend.

 

[mheslep]

Yes cryptic in part due an allusion to old discussions. I meant that deficit data displayed there is only qualified as being produced by the federal government. The data does not speak further as to who or what part of the federal government was responsible for revenue, spending, or economic conditions immediately preceding the current data (i.e. recessions). To get the proper attribution requires some more work: [...]

Previously addressed here,
https://www.physicsforums.com/showpost.php?p=2790316&postcount=89
my suggested reasons for the deficit/surplus in the 90's, and relevant attributions.

First a bit more detail:
Gingrich left Jan 1999.
The budget in place for the fiscal year under which a given President concurrently enters office in January is created as law by the preceding President and the preceding Congress. So the 1993 US budget was Bush Sr's, which cut the '92 budget deficit by $53B (2005 $)[1]. Likewise, both the FY 2000 and 2001 budgets were Clinton's. The dot com crash was well underway by 2000, on Clinton's watch, and as the revenues collapsed the surplus was cut in half in 2000-01 and was gone in 2001 mostly before Bush W pushed a fiscal button [2].
The Republicans held control of the House from '94 through the remainder of Clinton's term. While minority parties in Congress can stop some actions or slow them down, they can originate almost nothing, certainly not big spending programs. So especially with regard to budgets, I contend there's no such thing as a 'more or less evenly split' Congress, as the majority party no matter how slim calls the shots, and spending originates in the House.

[...]That said, I don't credit the all the yearly deficit results to any single politician, as if this was akin to yearly rainfall statistics. Instead I credit several significant events along the way as dominating the results of the entire period, and those events do mostly deserve credit to one side or the other:

1. The 'defense dividend' as it was called. The fall of the Berlin wall and subsequent collapse of the former USSR allowed the US defense budget to fall. Bush Sr started cutting and Clinton and Congress continued through '96. Perhaps Clinton deserves some credit for actually following through on the cuts, since there always seems to be plenty of congressmen and senators who want new military spending for contractors and bases in their district. [3]
2. Tax increases leading to more tax revenues, credit to Clinton. Works if the additional taxes don't slow down the economy as they are predicted to do, which luckily didn't happen because of the ...
3. Dot Com boom and consequent growth in tax revenue. No credit to Clinton, or even to Al Gore ;-)
4. Welfare reform. Welfare entitlements were periodically exploding prior to reform. Clinton veto'd the effort a couple of times, but eventually did sign it. Almost all credit to Gingrich and Congress for this one, as it was one of the planks of the Contract w/ America that brought them to office in 94-95, and such a bill would have never emerged from the earlier D. congresses.
5. General holding the line on non-defense spending by the post '94 Congress. Gingrich's Congress refused for a time to increase the debt limit, eventually forcing a shutdown of the government for a couple of days in attempts to obtain Presidential approval of additional non-defense spending cuts. Eventually non-defense spending went up as Clinton won politically, but Gingrich and company clearly opposed spending increases, Clinton favored them.
6. Dot Com crash, and consequent collapse of revenues starting in 2000 and continuing to 2003

.

 

[Gokul43201]

The CBO table suggests a multiplier of 0.1 to 2.5 for the various aspects of the ARRA (0.2 to 2.5 if the upper-end tax cut is excluded). But Romer & Romer measure a multiplier of 3.0 for tax cuts. So taxing money out of the system to stimulate it doesn't seem workable: a tax of T reduces the GDP by 3T, then increases it by kT where k is in [0.1, 2.5]. So at best, taxing T decreases the economy by 0.5T.

Let me rephrase, using general terms, what I gather of how your argument works, and you can let me know if I have it wrong.

The CBO has estimated multipliers (x_1,x_2,...,x_n} respectively for govt actions {g_1,g_2,..., g_n} using some methodology M1. Separately R&R estimate multiplier x'_1 for g'_1 using methodology M2.

Your argument is that:

(A) x'_1 is a better estimate than x_1 and g'_1 is essentially identical to or more appropriate than g_1,

(B) Instead of comparing x_1 with {x_2, ..., x_n}, it is more sensible to compare x'_1 with {x_2,...,x_n}.

If that is indeed what you are saying, then the following are my objections:

1. The methodologies are different!

R & R admit that their estimates for multipliers are larger than those derived from conventional estimates. They argue that their estimate is better in that it eliminates some systematic errors that exist in the conventional estimates. But they specifically caution against doing exactly what it seems you've done.

Quoting the 2010 AER paper, Conclusions, pg 799 (4th new paragraph):

" Similarly, our results do not speak to the issue of whether taxes are a more powerful tool of fiscal policy than government purchases. The fact that our estimates of the effects of tax changes are larger than conventional estimates of the effects of changes in purchases is of little relevance: conventional estimates of the effects of purchases, like conventional estimates of the effects of taxes, almost surely suffer from omitted variable bias."​

2. g'_1 (from R&R) and g_1 (from CBO) are significantly different, in several ways:

Since the CBO action g_1 is a one year tax cut for higher income groups (i.e., a pulse of width one year), it does not accurately apply to the pertinent question: "how is there any stimulative effect to letting the Bush cuts lapse on the higher income groups?" (i.e., what is the short term effect on GDP of a step function-like tax increase on the high incomers). My argument assumes that (i) for small changes in tax rates, the response can be linearized, and hence, flipping the sign does not cause a huge error, (ii) we care about short term effects, which I shall define, for convenience, as the immediate year following the action (see also the introductory section of the CBO paper), and I therefore neglect effects of changes to tax policy beyond 1 year as well as any second order anticipatory effects resulting from the knowledge of cuts beyond 1 year. I think these are not completely terrible approximations for the situation.

On the other hand, g'_1 is a "generic" tax hike on all income groups. And while it has the right temporal profile, I believe it introduces a rather significant error in that it is not a high-income tax change, which, according to the CBO report, has a multiplier that is about 4 times smaller than one on the lower income groups. One might argue that (modulo methodology) these are essentially the same, if the contribution of lower income households to GDP were negligible compared to that of the higher income group. I do not know how true (or untrue) that is.

3. The multipliers calculated by both papers are time dependent (i.e., they vary with time measured from the implementation of the action). The time dependences for different multipliers have different forms. For instance, the CBO report discusses multipliers for purchasing of goods and services:

"For example, a one-time increase in federal purchases of goods and services of $1.00 in the second quarter of this year would raise GDP by $1.00 to $2.50 in total over several quarters, with most of that effect in the first two quarters and little effect beyond a year."​

So the effect of government purchases is mostly short term, their multiplier of 1-to-2.5 being realized over a couple of quarters. On the other hand the 3X multiplier calculated by R&R is much slower coming into effect, and takes as long as 10 quarters to mature to that value. In the first few quarters (what I consider the short run), the multiplier stays below 1.

That's all for now.

 

[OmCheeto]

http://www.nber.org/aginghealth/2009no2/w14839.html" :
as people don't pay attention to the costs when someone else picks up the tab.

Reminds me of what I saw regarding the deduction of home mortgage interest about a year ago.

Interesting how experiments in economics can go so awry.