Supply side economics and tax policy

[Biochemist]

I noted in recent media reports that the federal deficit for the current fiscal year is now projected at about $350 million, down from the previously estimated $420 million.

This is one of many cases where the standard line of media pundits (that lowering tax rates "costs" money) is again refuted. Every major federal tax reduction in the US since 1960 (Kennedy, Reagan, Bush) has resulted in a revenue increase to the federal government.

It is not clear why commentators so frequently equate federal tax rate reduction with a decrease in federal revenue (and vice versa) when the evidence is so strong.

Thoughts anyone?

[Qfwfq]

One thing I gathered, it was a mainly foreign debt and they used the old standard trick of devaluation to help pay it off. Debts that were fixed in US$ were easier to pay when the US$ is worth less. The dollar his been rising back up lately.

Of course, it's always a complex system so the overall effects of changing taxes can't always be so trivial to work out.

[bumab]

While the federal revenue may not decrease, I was under the impression that during the Regan and Bush years the overall deficit (federal revenue vs. expenditures) rose by the highest amount during the Regan years and the Bush years. While revenue may not decrease, that doesn't mean we aren't borrowing the money from somewhere.

[UncleAl]

I noted in recent media reports that the federal deficit for the current fiscal year is now projected at about $350 million

$350 billion, not million. The real annual Federal deficit is closer to a full $trillion. Costs have been hidden, ignored, relabeled, embezzled, and deferred. The astounding cost of the Near East imbroglio will be made up with massive inflation, as with the Vietnam War. Taxation would penalize the rich. Inflation creates investment opportunities while imploding pension obligations, sucking value out of every savings account, and rendering off-shore investments in other currencies golden.

In 2002 the average debt per American household with at least one credit card was $8940 at 15-19% interest, a total of $750.9 billion in principle owed, and growing 14%/year. Banks pay savings interest of 0.1-0.5%. Total US personal debt of all kinds is almost $7 trillion. There is no elasticity remaining to allow for surviving hard times. 1929 was nothing compared to what is coming on fast.

It is not clear why commentators so frequently equate federal tax rate reduction with a decrease in federal revenue (and vice versa) when the evidence is so strong

Government is about taking not making.

[Biochemist]

Originally Posted by UncleAl

$350 billion, not million.

Major whoops. Thanks for the correction, UA.

...The astounding cost of the Near East imbroglio will be made up with massive inflation, as with the Vietnam War.

That is pretty unlikely. We have a much more competent Federal Reserve now. Aggregate federal debt service (i.e., interest payments) are at something like 2.5% of GDP. This is not a particularly troublesome burden. The war interest/cost is not immaterial, but it is dwarfed by the impending liability for Social Security and (far more importantly) Medicare. But that is another topic.

It is also probably true that the war cost is relatively small compared to the cost of another terror attack. 9/11 cost the US economy well over a trillion dollars. Ergo, war or no war, we still have a cost problem to deal with in terms of the economic cost of terror.

Government is about taking not making.

No argument there.

[Biochemist]

Originally Posted by bumab

While the federal revenue may not decrease, I was under the impression that during the Regan and Bush years the overall deficit (federal revenue vs. expenditures) rose by the highest amount during the Regan years and the Bush years. While revenue may not decrease, that doesn't mean we aren't borrowing the money from somewhere.

True. That is because federal SPENDING went up faster than the revenue increase. But revenue did go up dramatically. The feds just spent more than they got. Gee, what a surprise.

[Biochemist]

Originally Posted by Qfwfq

One thing I gathered, it was a mainly foreign debt and they used the old standard trick of devaluation to help pay it off. Debts that were fixed in US$ were easier to pay when the US$ is worth less....

I'm not quite sure what you mean, Q. US federal debt is denominated in dollars, and we pay interest in dollars. It is true that the internationaly currency markets will affet the trading prices of US bonds, but the aggregate debt burden remians the same in dollars.

The issue for the thread is the common media misconception that an increase in marginal tax rates (particularly in the higher breackets) increased revenue. It doesn't, and yet we still hear that drone from the usual media sources on a regular basis.

[bumab]

Originally Posted by Biochemist

It is also probably true that the war cost is relatively small compared to the cost of another terror attack. 9/11 cost the US economy well over a trillion dollars. Ergo, war or no war, we still have a cost problem to deal with in terms of the economic cost of terror.No argument there.

How did you calculate this number? I assume this number also includes costs which were not exactly "caused" by the terror attack. The dubious Homeland Security Admin. (for one) has cost a fortune, for example. That was a response to the attack, there were alternatives. Is that included? Is the "war on terror" included? Just curious.

[Biochemist]

Originally Posted by bumab

How did you calculate this number? I assume this number also includes costs which were not exactly "caused" by the terror attack. ...

Good question. I saw a couple different numbers in the Wall Street Journal. A significant portion of direct costs were related to insurance loss and reconstruction related to the structures in lower Manhattan. Ther is also (undeniably) a much larger hit that the overall economy took in the following quarter. I think most of the number is that component. Keep in mind that a decrease in GDP is functionally very similar to a tax increase from the point of view of an individual.

Let me check around a bit and get back to you.

[Biochemist]

Originally Posted by bumab

How did you calculate this number? ...

Bumab- I poked around and this is the best summary I could find:

http://www.ccc.nps.navy.mil/si/aug02/homeland.asp

The largest element (and really the only one I was talking about) is the impact of a reduction of GDP. This report has the estimated impact of that element at about $500 billion as of the end of 2003. The impact on New York (in terms of direct damage repair) is variously estmated from $60 billion to over $100 billion, depending what one might include.

None of the above includes the cost of homeland security outside of New York, or the direct cost of the war itself.

I did not intend to suggest that the war is cost effective, but only that the cost of war should be considered in light of the cost of another attack. It also might be considered in light of the potential for incremental increases in the homeland security budget if another attack succeds.