Tuesday, December 14, 2010

A Crack In Romney's Thinking

There are lot of good things to gather from Mitt Romney's piece blasting the income tax compromise. I also am against the deal. But one paragraph absolutely baffles me.
It will also add to the deficit. In many cases, lowering taxes can actually increase government revenues. If new businesses, new investments and new hiring are spurred by the prospects of better after-tax returns, the taxes paid by these new or growing businesses and employees can more than make up for the lower rates of taxation. But once again, because the tax deal is temporary, a large portion of this beneficent effect is missing. What some are calling a grand compromise is not grand at all, except in its price tag. The total package will cost nearly $1 trillion, resulting in substantial new borrowing at a time when we are already drowning in red ink.
Let's think about this logically. Romney is arguing that the Obama/Republican compromise on the Bush tax cuts will not result in substantial growth in the economy. Or, that is, not enough growth to make up for the loss in revenue from the tax cuts.

Yet, the Bush tax cuts have been in effect since 2001. And there was so much growth in the economy the last nine years that the Bush tax cuts have more than paid for themselves. Right? Of course not. The Bush administration ended in debt, just like the Reagan administration.

If Romney wants the Bush tax cuts to be permanent (and I am not against that if...), then he ought to argue passionately for government reductions to offset the loss in revenue. Republicans need to end what George H.W. Bush rightfully called "voodoo economics." We can't just cut taxes and expect the growth in the economy to make up for our spending habits.

25 comments:

Anonymous said...

I'm no fan of Romney's but you are off base...tax cuts do increase revenue which, in turn, increases taxable income. The debt increases during the Reagan Administration and the Bush Administration was mostly due to the increase in military spending due to the cold war and subsequently on the war on terror...not to mention the rise in entitlements...but other than that, Pablo...I agree with you...Romney is wrong.

JR

Right Wingnut said...

We can't just cut taxes and expect the growth in the economy to make up for our spending habits. - Pablo

Who's talking about a tax cut? The argument is whether to raise rates, or keep them at the same levels.

The only complaint I have in regards that passage from Mitt's op-ed, is that he's calculating the "lost revenue" from not raising taxes into the total cost of the bill ($1 Trillion). This conridicts his argument that lower taxes increase revenues to the government (which I agree with).

Right Wingnut said...

...and I would like the GOP to oppose the bill and pass a new one retrocative to Jan 1 once they take over. Make Obama choke on it....

phil said...

Pablo,

I'm not sure what you're getting at.

He is not arguing passionately about cutting spending in this op-ed because it's not the place to do so.

He laid out the specifics as noted in the op-ed. He came out against The extra fluff in the bill, extending unemployment benefits as basically sticking your finger in the dike and not addressing the problems.

There is no doubt in my mind that 'cutting spending' was high on his list after making the tax cuts permanent and more friendly to the employERS as well as employees.

Pablo said...

"I'm no fan of Romney's but you are off base...tax cuts do increase revenue which, in turn, increases taxable income."

I am not arguing that tax cuts do not increase revenue. I am arguing that tax cuts (often) do not increase taxable income enough to pay for the initial loss in revenue from the tax cuts. There is a fine line where the Laffer curve does work. But when one cuts taxes and increases spending at the same time, then we cannot expect the tax cuts to result in a cut in the deficit. And yes, I understand that part of the deficit problems during the Bush administration were due to wars. But the reason for the deficit spending during the Obama administration has been because of the recession.

Pablo said...

Phil,

I hope that you are right, but it is funny how politicians very rarely get specific about reductions in government spending. Either that, or they rail against earmarks, and thus avoid a real discussion about the debt.

Ann said...

Mike Pence joins Romney against the tax bill:

http://www.nationalreview.com/corner/255303/pence-won-t-vote-tax-compromise-katrina-trinko

Pablo said...

RW,

That is a fine way of looking at it, but Romney is arguing that a permanent tax cut will have substantial returns. Whether we want to call this a tax cut or not is beside the point. I am saying that this "permanent tax cut" would not result in decreasing the deficit if it is not accompanied by significant reductions in government.

Right Wingnut said...

Pablo, Are you arguing that a tax increase would help reduce the deficit? I agree with Mitt--It wouldn't. That's why I don't understand why he's calculating "lost revenue" into the cost of the bill. If anything, it helps bolster the postion of those on the far left.

Right Wingnut said...

...and of course I agree that we need massive cuts in government.

Anonymous said...

I'm leaning towards Phil's explanation. (That is if I've understood him correctly. If not, here's my explanation.)

The whole deal adds additional spending. The ethanol subsidies and the extension of unemployment benefits are the ones that are mentioned most often. We will have to pay for this spending, and if we don't get enough growth in the economy from the tax cuts to pay for the spending, then the bill will add to the deficit. His further point seems to be that making the tax cuts "permanent" might create the growth that would bring more revenue than the cost of the extra spending.

I have mixed feelings about this analysis.

If the tax cuts provide any growth at all, then the total amount of spending on unemployment benefits should be less. While unemployment benefits may encourage some people to stay unemployed rather than take jobs that pay much less than what they had previously made, few people would rather be on unemployment than be back at a job like the one that they lost. If the growth allows people to get back to good jobs, that money won't be spent as unemployment checks.

The other point is that loss of the tax cuts could cause more unemployment. Small businesses that based their number of employees on the previous rates may have to cut employees with the higher tax rates. If the sudden rise in estate taxes causes some small businesses to fail or be liquidated to pay the death taxes, then more people will lose their jobs. We may get some people off the unemployment rolls because their time has run out, but they may be replaced by people who will lose their jobs because of the tax increases. In that case, unemployment benefits will cost the same.

One point is that passing this compromise now doesn't mean that we have to let the issue drop for two years. We could come back in January and try to force a "permanent" tax cut through the House at least. While the Democrats will not want to give on the issue, we put them in the position of either dealing with tax cuts now or waiting until closer to the next election. They may not want to wait until later, so we might be able to get something passed and signed.

For the "little guy" out there who could be facing unemployment as a result of the increase in income taxes next year or the jump in death taxes, the current deal has the appeal of possibly sparing him from being in a horrible position next year. I sympathize with that position because I'm currently unemployed. I understand Mr. Romney's focus on the big picture, but I won't be upset if the compromise passes.

Bill

illinoisguy said...

I'm pretty sure I know what Mitt was saying. If you read it closely, he was talking about the fact that with this being passed as just a two year deal rather than a long term relief, that businesses would not do what we want them to do. In other words, instead of them investing money on capital goods, they will still be reluctant to invest because of the uncertainty that comes with it. In other words, Mitt believes that normally keeping these cuts would keep us in the right area of the Laffer curve such that the increase in capital expenditures and hiring people etc. would bring in enough money to compensate for the money not coming in during that year. But, in this case with the 2 year limit, much of what would be expected for businesses to do won't be done. I hope this made sense.

Anonymous said...

"I am not arguing that tax cuts do not increase revenue. I am arguing that tax cuts (often) do not increase taxable income enough to pay for the initial loss in revenue from the tax cuts. There is a fine line where the Laffer curve does work." There is a bit of economic truth to that statement, but the solution remains that spending must be cut. Tax increases (even limited ones) often backfire and are not right especially in a Great Recession (or mini Depression.)

OHIO JOE

Anonymous said...

I agree with Illinoisguy. When I read the article, I thought that the reason Romney was calculating the addition to the deficit is because he was arguing that 2 years is not enough to help businesses with their planning on expenditures. Therefore, the deficit will end up going up, not down, and so the continued lower tax rates will not have the desired effect on the deficit.

AZ

Pablo said...

So far, excellent comments from everyone. Let's review where the debate currently is.

1. My original point was that if these would be permanent "tax cuts" (whatever you want to call them) are supposed to grow the economy in such a way that they will make up for the loss in revenue, then why didn't they do just that the past nine years?

2. RW responded by saying that there were wars to pay for in the past nine years. And entitlement growth.

3. That response requires that I look more into economic growth vs deficits during the Bush administration.

4. My response to RW: If I am not mistaken, economic growth was greater during Clinton's administration than during W's. This, despite the fact that Clinton (as well as Bush before) raised taxes. I am just not convinced that raises SOME taxes will greatly affect economic growth. I do agree that all around high taxes does affect economic growth, but I don't believe that a tweek here and there will. We desperately need that revenue to pay for our deficit. I essentially agree with Mitch Daniels that we will need to raise some taxes in order to put our house in order.

6. I am very open to the possibility that Mitt is right and I am wrong. I am just not quite convinced yet.

Anonymous said...

Economic growth was greater during Clinton's terms more than Bush's was, in part, due to the dot com boom...which was lost when the bubble burst early in W's term and the nation faced a mini recession. After 9/11 and the tank in the markets...the Bush tax cuts revived the economy with record job growth and soaring markets. Unfortunately, low interest rates helped build the housing bubble that put people into houses and mortgages they couldn't afford, and since the demand was so high, into inflated housing prices.

With all due respect, it seems like you only want to paint part of the picture...the part that helps your argument.

JR

Doug NYC GOP said...

There really should be no arguement here.

Standing alone, cutting tax rates increases revenue to the government. That has been proven.

But if you grow spending at a faster rate than the revenues coming in, you end up in debt.

Think of it this way; If your boss gives you a 20% raise and you cut your household spending - surplus. If you spend 25% more - debt.

If spending was cut or even kept frozen and the tax rates were extended permanently, you would see a growth in revenues to the government. If they spending level is frozen at current rates or cut, you'll end up with a surplus. Will it wipe out the national debt, No. but in the fiscal years you would see a surlpus growing on the books.

Pablo said...

JR,

I am more than willing to admit that I am wrong here. But as far as painting part of the picture. The reality is that Republicans have never resided over an economy where their tax cuts led to a decrease in the deficit. It has never happened. Maybe there is a good explanation for that, like what you gave. But call me skeptical.

Pablo said...

Doug,

If that is Romney's argument, then I can go for it.

SteveT said...

Actually, the 1997 tax cuts that included a big cut in the Capitol Gains tax rate, helped create a surplus in 1997-2000. This was a Gingrich - Clinton compromise that helped further stimulate the economy.

Posted by SteveT

Revolution 2010 said...

Pablo,

I think you're reading to much into what wasn't said as opposed to what was said by Romney.

Doug NYC GOP said...

Pablo,

That is his argument. In the quote you provided, he cites the overall cost of the package, which includes the new spending. That coupled with the short duration of the tax cuts, will not provide the desired effect.

In the 1980's when Reagan cut tax rates, he also made "cuts" in Gov't spending. Actually he cut back on the rate of growth of spending, than actually cutting a program. For example if Budget Item X was slated to go up 6% in the next fiscal year, he set at 3-4%.

If we rolled back spending to 2008 0r 2006 levels, matched that with a permanent extension of the tax rates, I think you see business react very positively.

Anonymous said...

The economic growth in the 90's may have been spurred more by demographic factors than by governmental action. During the 90's, we saw a large number of baby-boomers hit their 50's and realize that they needed to invest in order to have a good retirement. They poured money into the stock market, and the increased capital led to economic growth. Much of that "growth" was the illusion of the dot com bubble, but the money invested stimulated the entire economy.

On the government side, Clinton cut the military, and while military cuts are among the least effective at curbing waste and stimulating growth, they led to more money being available in other places.


Bill

Pablo said...

I just want to say that the comments over here at Right Speak are sooooooo much better than at ROS. Thanks for the feedback and I will definitely continue researching this topic.

illinoisguy said...

We don't have that idiot Huckabee craig "Iowa" guy over here. He ruins their whole site.