Political Roundtable Pulsar of Annihilation part IV

[nate33]

This article explores the impact of tax policy on economic growth in the states within the framework of an endogenous growth model. In this model differences in tax policy pursued by the states can lead to different paths of long-run equilibrium growth. Regression analysis is used to estimate the impact of taxes on economic growth in the states.

The analysis reveals that higher marginal tax rates had a negative impact on economic growth in the states. The analysis also shows that greater regressivity had a positive impact on economic growth. States that held the rate of growth in revenue below the rate of growth in income achieved higher rates of economic growth.

http://www.cato.org/pubs/journal/cj28n1/cj28n1-4.pdf

[Zonkerbl]

Erm, well, that article is part of a long literature that has discovered (shock! dismay!) that states compete with each other for investment.

So, stimulating the economic growth in California at the expense of economic growth in Texas is not really relevant to the point: Would lowering marginal tax rates in the U.S. increase economic growth? Well, depends. Are you getting rid of double taxation (corporate income tax, capital gains tax) and replacing that revenue with a VAT? Are you getting rid of tax loopholes at the same time? Or are you leaving the whole tax system in the same mess it is now but just lowering a few select tax rates for the group that lobbies the loudest?

Absolutely, there are things we could do RIGHT NOW that would lower marginal tax rates on businesses and increase economic growth. Like I've said before, we have just about the STUPIDEST tax system in the developed world. But those specific things aren't being discussed. In fact, we have literally NO IDEA what Romney is proposing, because if he did it would be like throwing red, bleeding meat into a river full of piranhas. He's not stupid. But it also means we have no idea what particular tax reform we'd be voting for.

[Nivek]

I saw that, nate. That study addresses state tax rates, not federal, which is what I was talking about. I presume that's what Romney and Obama are talking about as well.

At the federal level, I saw a lot of other stuff indicating that the relationship between tax rates and economic growth is very weak. My thinking on this is that there are many other factors at play in terms of what causes economic growth (or contraction). Makes sense to me that the federal tax rate probably has a fairly minor effect such that a few percentage points one way or the other isn't going to cause or inhibit economic activity. I somehow doubt that Generic Businessman is really going to say, "I have this great product that will make me millions. Oh wait, the top tax rate is up from 35% to 39.6%? Screw that, I'll just collect welfare checks."

If the difference is 50% or 90% to 35% -- then yeah, I could see it having a significant effect. I don't think anyone's proposing going back to one of those uber-high marginal rates, though.

I don't "know" for sure what the right answer is on this. This is obviously a complex issue. I'm unconvinced by the GOP anthem that every economic problem can be solved with a tax cut, much as I'd like to receive one.

[Severn Hoos]

Kev, thanks - I appreciate the posts. Much to say, but two quick items. 1) Have you read The Black Swan? Think there's some interesting items there that may apply, will expand later when I have a few minutes. 2) I would place more of the stimulative vs. dampening effect on uncertainty rather than tax rates. Right now, that's my bigger concern with the economic direction of the country than specific tax rates.

[nate33]

I saw that, nate. That study addresses state tax rates, not federal, which is what I was talking about. I presume that's what Romney and Obama are talking about as well.

At the federal level, I saw a lot of other stuff indicating that the relationship between tax rates and economic growth is very weak. My thinking on this is that there are many other factors at play in terms of what causes economic growth (or contraction). Makes sense to me that the federal tax rate probably has a fairly minor effect such that a few percentage points one way or the other isn't going to cause or inhibit economic activity. I somehow doubt that Generic Businessman is really going to say, "I have this great product that will make me millions. Oh wait, the top tax rate is up from 35% to 39.6%? Screw that, I'll just collect welfare checks."

If the difference is 50% or 90% to 35% -- then yeah, I could see it having a significant effect. I don't think anyone's proposing going back to one of those uber-high marginal rates, though.

I don't "know" for sure what the right answer is on this. This is obviously a complex issue. I'm unconvinced by the GOP anthem that every economic problem can be solved with a tax cut, much as I'd like to receive one.

The way I see it, it is all but impossible to effectively study the cause and effect relationship of tax rates and economic growth at the national level because there is no basis for comparison. A study at the state level can at least weed out much of the "noise" and provide some fairly reliable information. And if low marginal rates do indeed help at the state level, it's not too big of a logical leap to conclude it would help at the national level.

Where I disagree with the GOP is in their assertion that we are always on the right side of the Laffer Curve. I think tax cuts would certainly boost GDP, but it's unlikely that they would boost GDP so such a degree that the tax cuts would pay for themselves.

[Zonkerbl]

Nate, you're not getting it.

That article is about a zero sum game. It's about robbing Peter to pay Paul. It has no relevance to the point you are trying to make at all.

The ultimate conclusion is, game-theory wise, it is likely that there will be a race to the bottom for state level tax rates, resulting in a less than optimal state-level tax rate in the long run equilibrium. Finding evidence that it is in fact happening is a disheartening result.

[dandridge 10]

As Kevin points out, the effect of tax cuts on economic growth is a very complex issue and one which depends on a variety of factors. I don't think it is a clear cut issue either way, although pundits on either side of the aisle like to claim that it is.

As an independent, I don't particularly like Romney or Obama. However, I am leaning towards Romney. I don't particularly like how he has not provided details on his tax plan or his waffling on some issues like abortion. However, if I had to choose between a proven businessman and a person with little to no experience in business to lead the country out of economic turmoil, I'm going to pick the proven businessman.

I also don't trust Obama to cut spending. While I think Obama has good intentions, my biggest beef with him that I think he views the government as the savior for everyone. There are a lot of people in this nation that genuinely need help and they should get it. However, I also think there are even more people that need help because they created their own problems and are looking to get bailed out.

Finally, I think Romney will work better to reduce the partisonship in Congress than Obama. I think the reason why Romney has waffled on some issues like abortion etc is that he really is a moderate Republican but he doesn't want to piss off the conservative base. If elected, I think he will lean more towards the middle than to the right. In comparison, Obama is about as left as can be, which I think has led to some of the unwillingness to work together that we have seen.

[popper]

Induveca, socialist policy didn't make those extended family members scammers. Parenting and environment is what molded them. Ultimately, their own character and work ethic is what determines how they subsist. That those options enable them to scam is true, as far as I am concerned. But it did not make them that way IMO.

Family molded you, too, Induveca. I don't know you but I would bet you $15,000.00--(probably nothing to you, but a whole lot to me), that your parents and/or your grandparents made sure you could read well at a very early age. You might have left with only $100 in your pocket but you had a lot of life lessons deposited in your heart and mind already by age 17. That you had reading skills your critical thinking skills also able to serve you well to become the successful entrepreneur that you are today. You worked hard but I bet you DID NOT do everything alone. In your formative years, someone influenced you.

"We make men without chests and expect of them virtue and enterprise. We laugh at honor and are shocked to find traitors in our midst. We castrate and then bid the geldings to be fruitful." - C. S. Lewis

CCJ, I absolutely believe that these issues are societal rather than governmental. And unfortunately, that means that no election, no candidate, no party can change it. The bigger problem is that when people speak out for things like honor, family, and commitment, they most often receive mockery or scorn. So little by little, they move to the background and remain silent. And children are raised without Fathers, without moral grounding, without the Golden Rule (after all, it's from that scary book that all those crazy Tea Partiers keep quoting).

I am becoming more and more "Libertarian" (if we must apply labels) in recent years, but I do worry for society. Still, reforming society is not the job of the Government, it is the job of the Church. That means holding up a moral standard, caring for the poor in her midst, and proclaiming the Truth. And right now, sad to say, she is failing miserably.

Severn Hoos - I agree with most of your post. Our leaders and the media have played a big role in diminishing the values of our society and therefore they could provide an equally positive influence if they so choose. As you hinted, the values issue is the single most important determinant in predicting the success or failure of a society. Ours is declining because our values are diminishing. I wish I was a bit younger with more talent and energy so I could help reverse course.

[Induveca]

This is an insightful conversation, but at the end of the day I can give a very good perspective on the impact of business OWNERS. I'm not talking about 100 employee businesses, but smaller/more agile tech companies which consistently popup to support the latest technologies.

I'm a serial entrepreneur. I've been involved with over 20 startups, and my own consistent consulting/vc business for the past 20 years now (11+ as a consultant/vc). The major issue for me, is Obama's insistence on raising the dividend tax rate. It literally will kill large portions of the most creative/risk taking/progressive sector of business in the US.

Most of us do business in the US because we consider it home, and we put up with the excessive legal/government intervention because the dividend tax is around 15%. Raise that to 30%, combined with legal costs, and it becomes unbearable.

This isn't republican or democrat (I could care less about either party "ideals"), end of the day, for myself and my colleagues it's about an environment in which we can create/support/develop without being overburdened by taxation. No matter what is installed massive government theft occurs, it's the name of the game, but there are few issues I pay attention to....one being the dividend tax. That hits 30% and you'll see an exodus of technology companies like no one expected.

I'm talking hundreds of billions in revenue, that the common person doesn't see.....but there are hundreds of niche tech/telecom firms that rake in this level of revenue yearly. They have no "office", no "office employees", and no real need to operate within the borders of the US. They do so purely due to the dividend tax rate.

Take that away, and it's cheaper to setup shop in Bermuda, Caymans, or even certain countries in the EU. The UK has offered me 100% tax free status, and a free office in Central London to run my practice over there. Austria has done the same, but they require a US$250k commitment in real estate, and then they give me Austrian citizenship! Singapore is much the same....

Bankers around the world are rooting for Obama to win, and it's not for fiscal policy but to attract American wealth. Raising the dividend tax rate is unbelievably foolish. The US leads the world in "innovation rate" exponentially for a reason, and much of it are the benefits offered to entrepreneurs, again the biggest one by most accounts the dividend rate. Self employment tax AND a dividend at 30%? Hell no......

[Chocolate City Jordanaire]

Induveca, I really appreciate your input and perspective on things. I have no idea about that stuff but I appreciate your candor and insight.

[fugop]

And, as long as I'm kvetching, I'm also sick of people telling me what someone else's motivations are. As in, Obama wants to turn America into a socialist nation. Or, Romney wants to take away your healthcare. Any time I hear some blowhard start with something like, "What he's really trying to do is..." I want to know how the blowhard knows. Did you talk to the guy? Did he tell you that's what he was trying to do? Is this something you're inferring? Making up?

This is an interesting conversation; I hope I can ask a question without derailing...

The two examples you gave for "someone else's motivations" seem completely different from me. Motive addresses the question of "why" -- why doers somebody support a particular policy. "Obama is secretly a Muslim who hates America and is working as a fifth columnist to destroy the country." That's an imputation of motive. "Romney is a Mormon stalking horse trying to posthumously baptize nonbelievers," or "Romney is a class warrior who wants to steal from working Americans to enrich his hedge fund buddies" -- those are imputed motives.

"Romney wants to take away your healtcare" doesn't seem to be of the same kind. It's an empirical question that doesn't get to the "why" question. It's just a question of which policy he or she actually supports. With Romney, as you note, it takes far too much work to figure out what he actually supports, and assertions of the sort are a necessary step in the process of figuring it out. "Romney wants to outlaw abortion." "Romney wants to privatize Social Security." "Romney wants to invade Iran." "Romney wants to pass a 5 trillion dollar tax cut." Those are of a type with your healthcare statement. They are interpretations of his policy preferences, in some cases direct, in some cases extrapolations. They are falsifiable, and have at least some colorable support.

Do you really think your two examples are semantically equivalent?

-----------

On your more direct point, I trace the re-introduction of motive questions fairly directly to Charles Krauthammer and the nascent neoconservatives at The New Republic in the 1980s. Krauthammer was something of a genius at descrying illicit motives in people who disagreed with him, usually antisemitism, but philo-communism often went hand in hand.

There is a long history of the tactic in both rhetoric and American politics (John Adams & George Washington were secret monarchists, Thomas Jefferson was a French-loving libertine), but its use has ebbed and flowed. It was a very focused tactic from the 40s through the 70s, targeted acutely at Communists and socialists by McCarthy etc. It has been used more broadly since the 80s.

Richard Hofstadter's The Paranoid Style in American Politics is an interesting, if archaic, read on the subject.

[Chocolate City Jordanaire]

Induveca, socialist policy didn't make those extended family members scammers. Parenting and environment is what molded them. Ultimately, their own character and work ethic is what determines how they subsist. That those options enable them to scam is true, as far as I am concerned. But it did not make them that way IMO.

While this is true, I think it only tells part of the story. In a society with a generous safety net, there is less incentive to develop a strong work ethic. It gets worse every generation until you reach a point where people honestly believe that they are entitled to a job, health care, education, food and housing; and that the money that pay for it just comes from "the government"; as if the government actually has any money that they don't tax from hard-working citizens.

I'll never forget this video:
[youtube]http://www.youtube.com/watch?v=_Ojd13kZlCA[/youtube]

Obviously, this is anecdotal and I'm not saying that every Obama voter thinks this way. But the fact that this sentiment exists for even a small percentage of the population is terrifying.

nate, that video has me cracking up. Getting a few stares here in Starbucks.

I hate to admit this but it sounds like they interviewed one of my sisters! Sounds JUST like her.

"Why are you here? To get some money! ... What kind of money? Obama Money! …. Where's it coming from? Where did Obama get it? I don't know. From his stash! ... We don't know … but we LOVE him."

[closg00]

Romney has won the pre-debate coin-toss twice and Paul Ryan also won the coin toss. Bad omen for Obama?

[TheBigThree]

Obama is pummeling Romney so far. As bad if not worse than the first Presidential debate which was heavily in Romney's favor.

[Induveca]

Gotta disagree....the sentiment polls show Romney up by 15%.

[TheBigThree]

Gotta disagree....the sentiment polls show Romney up by 15%.

Where are you seeing that? As a pretty impartial observer, I see no way Romney comes out on top of this debate. So many crucial missteps.

[closg00]

Romney was the clear winner in the first debate, Obama the winner in the 2nd.

[hands11]

Finally, some realtime fact checking. We need more of that.

Obama did a much better job in this format and he really hit back at Mitt when he was just making stuff up or trying to frame things in ways that distorted the truth. Mitt on the other hand looked rattled and had what looked like a Gore moment.

I particularity liked the gas price one. The same line Michelle B used over and over. Gas prices where 1.90 when Obama got into office and now look at them. Obama hit back with the truth. I have been waiting a long time for the President to respond to this with these facts.

Gas prices only dipped that low because the economy was in a free fall. It didn't last very long and they went right back up once Obama policies helped stabilize things and the recovery act kicked in. Obama then got in the zinger. Mitt might give you lower gas prices again because he wants to return to the same failed Bush polices that tanked the economy...

Look, Gas prices are a world demand issue and a market issue. No president is going to deliver higher or lower gas prices. Its a long term issue. Its a macro issue. They can change the gas tax, but that would rob funding for highway which are good manufacturing and infrastructure investment jobs. That system is a good pay go type system so changing that isn't the answer. Then you have speculators. That is something that can actually get fixed. But overall, gas prices will remain higher then in the past. That has been the trend for a long long time.

The best solution to higher gas prices are things like higher fuel efficiency cars and competition via alternative solutions ie electric cars, natural gas and public transportation, city planning, and things like remote work so people drive less. In the future, fuel cell cars or hydrogen cars.

These are long term technology issues. No president is going to lower your gas prices in four years. Best they can do is implement policies like higher fuel standards for cars and investment in alternative energy. Drilling more now is the shorter term fix. Obama has done these things. He lead the charge for higher CAFE standards. He helped Detroit stay afloat and retool to build the next generation of cars. They are investing in alternative power. These are the right policies both short term and longer term. They are right for the economy and the are right for the ecology.

[hands11]

http://www.huffingtonpost.com/arianna-h ... 70360.html

Found an article about a topic I recently posted about. These debates have to become more useful.

I do like the town hall format better then the first format but they need to make more progress.

On a side note, I listened to CPAN after and listened to the people that called in. Just amazing how little people understand basic economics and how little facts play a role in their views.

I wish the macro topics were communicated more. People are so today oriented. Lower my gas prices. Give me a high paying job.

Technology and a world economy has changed so much. The internet has removed tons of sales jobs and blown up many local markets. Self checkout and ATM have done the same. Software sales are getting tougher and tougher because of open source programs and free wear. Internet video are replacing training classes. Companies like Google are eating up everything. And the baby boom bubble has popped. That bubble of population created a bubble of demand and now that demand is leaving the workforce.

These things effect jobs and the economy. There is no changing that. ATMs are a good things. They create efficiency. But they also eliminate jobs. That is a dynamic that needs to get addressed.

One very important thing our government can do is to help seed growth industries that can produce things that there is a world demand for. You need to invest with a goal on the future markets. Public/Private partnerships are an important part of seeding future industries.

Also, more people need to understand the difference between money simply changing hands .. getting redistributed and what creates new wealth. Converting natural resources into useful resources is a good way to understand new wealth. Sand into Silicone ships is one example. Iron ore into steel. Farming. That are all easy examples for people to understand.

[Zonkerbl]

High gasoline prices are good. We drive less. We use public transportation more. We bike more. We move closer to our jobs, we take less trips to the grocery store. We buy smaller, more fuel efficient cars. And, btw, cellulosic ethanol production becomes commercially viable at about $4.50/gallon, at current production costs as of 2001, and costs have probably gone down a lot since then.

Furthermore, all the advances in automobile technology over the last thirty years: fuel injection, turbocharging, etc.? It's all gone into making cars that accelerate faster, perform better. You could take that same technology and make cars more fuel efficient instead. Once demand for fuel efficient cars go up, automakers will start building them.

We are a bunch of spoiled jerks when it comes to gasoline prices. We do not need low gas prices to succeed as a nation. We just don't.