There are two ways of looking at the impact of the new tax bill (The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010). One is that giving workers more money via the payroll tax holiday will increase spending in the economy and thus create more economic activity and revive the economy. This is the Keynesian view. Another way of looking at it is that it will have little or no short-term impact on economic growth but it will increase unemployment. This would be the Austrian view.
First let’s look at the actual amount of “stimulus” that will be available. I created the chart below from the CBO estimate of the impact of the Bill on the Federal budget. Their assumption is that what isn’t taken by the government is left in our pockets to spend. They claim there will be $780.4 billion of new stimulus. But the reality is that is not quite accurate.
The government programs into its budget the revenue that would have received as the result of the expiration of the Bush tax “cuts” as its “normal baseline for those budget years (2011- 2013). The way they see it is that if the taxes don’t go up as they had projected, it as a tax “cut” because it reduces projected revenue from their baseline. In the real world the expiration of the Bush tax cuts would have been a tax increase for us.
I made adjustments in the CBO’s estimates to estimate the true amount of new relief taxpayers will receive from the Bill. For example, in the “Adjust for Non-stimulative Items” section in the chart below, I note that the extension of the Bush tax cuts (note 1) isn’t tax relief at all: we will have the same taxes in 2011 as we had in 2010, so we are not getting any new tax relief and there is no new money in our pockets from it. We just avoided a tax increase. Thus we can’t call that stimulus because we have the same as we had before.
This is the same for AMT relief (note 2). There is no new gain to the taxpayer.
The estate tax provision (note 3) is a bit misleading since there wasn’t any estate tax in 2010. But the CBO estimated the new revenue that they would have received had the estate tax reverted to the pre-Bush rates. But the tax bill establishes a new estate tax rate that is lower than the CBO had projected, so the CBO sees it as a tax cut. But the reality is that we are going from zero tax in 2010 to $62 billion in new taxes by the 2013 fiscal year. Instead of being “stimulus” it’s a tax increase.
The investment incentives (note 4) are more complicated since there were already write-offs for equipment purchases. The tax bill reduced the write-offs on some existing programs and added some new ones. The CBO detail on this was not revealing so I just estimated that the net new benefits versus new tax increases would be about two-thirds of what the CBO had estimated in their baseline budget.
I gave the remaining items full credit as new tax relief.
Here is the result. The first part of the chart, below, shows the CBO’s estimates. The section “Adjust for Non-stimulative Items” are my adjustments to show the actual new benefits that would put cash in our pockets.
When you net it all out, the total new tax relief for taxpayers is $229.7 billion. Compare that to a $13.3 trillion economy. That doesn’t sound like enough under Keynesian theory to stimulate spending in such a large economy. At least that’s what Paul Krugman says. The 2009 Recovery Act allocated $787 billion for stimulus: they’ve spent $339.5 billion on projects plus $243.4 billion of tax cuts, for a total of $582.8 billion, and that hasn’t worked yet, so that would lead one to doubt the efficacy of another $229.7 billion of new tax stimulus.
Keynesians believe consumer spending is the key to recovery. But the Keynesian approach has never worked to revive an economy. Economic growth is created only by saving and production and that generates income and wages which stimulates consumer spending. If the government takes money from taxpayers and spends it, that doesn’t create growth. It just wastes capital on projects the government favors. If the Fed prints money to fund government spending, there is only a temporary benefit to whomever gets the new money first; those at the end of the money fix see only higher prices and no benefit.
The supply-siders, such as Art Laffer, believe that lower taxation will lead to economic growth. It makes sense that the less the government sucks out of the economy, more money is available for economic growth. The idea behind the Laffer Curve is that at a certain (high) tax rate, government revenues decline because high taxes cause economic activity to decline.
Now, all things being equal, I believe that lower tax rates are better for the economy. But the problem with tax cuts is that they don’t always work to revive an economy. It has to do with the state of the economy when the cuts are implemented. I am not suggesting that taxes shouldn’t be cut, but mainstream supply-side economists equate them with stimulus: the more cash in consumers’ hands, the more they will consume. Yes, this is a kind of Keynesian stimulus from economic conservatives of the Neoclassical school of economics, such as Mr. Laffer.
If the supply-siders believe that these tax cuts will result in a sharp boost in GDP, I believe they are mistaken. Since the first round of tax breaks from the Recovery Act ($243.4 billion) did nothing to stimulate the economy, another tax cut will yield the same results.
Presently taxpayers are reducing their debt and increasing their savings. Most taxpayers will apply the tax relief to their existing debt or add to savings. Thus, such stimulus will most likely not result in a massive shot in the economy’s arm from consumers that the Bill’s sponsors expect. What it will do is help repair the economy and lay the foundation for future economic expansion. By paying down debt consumers are regaining their financial security. And, by saving for their future, they are providing the capital that is necessary for future expansion after the scourge of malinvestment from the Fed’s credit binge has been resolved. Until deleveraging is completed by consumers and financial institutions, the economy will go nowhere.
Another fallout of the payroll tax holiday is that it may actually increase unemployment. Bob Murphy at The Mises Institute gives a good analysis of the point. If the tax holiday had gone to employers instead of employees it would have resulted in increased employment because the employer now has more money to spend on employees. On the other hand if it goes to employees, they are getting an automatic wage boost. Whether the employee spends it or not is beside the point. What happens in the economic sense is that because of the rise of wages, more folks want to work so the pool of potential employees increases but jobs don’t. Thus the number of unemployed has grown.
Tax cuts are always good in the long run. In the short run, unless the government cuts spending, the result of tax cuts will be a higher budget deficit which will divert more capital away from productive uses to service the debt. The only win-win for the economy and we taxpayers would be if the government were to cut spending equal to the deficit. What is the likelihood of that happening?
This is a good accounting of the legislation, but I have a quibble.
I don’t think many supply-siders believe this bill will stimulate the economy. At least, I haven’t seen any making that argument. Moreover, I think you’re misrepresenting their logic. The Laffer Curve effects aren’t primarily due to increased money available for private consumption. Although I think most would agree that money is spent more efficiently by the private market than by government, that’s not where the heavy lifting comes from. The supply-side benefits come from reducing the disincentives on work, savings and investment that are created by high marginal rates on income and capital.
Thanks for the comment Brian.
I understand the Laffer Curve stands for the proposition that government tax revenues are maximized at some optimum of taxation. Go too high and revenue will drop off. So the idea is that the more money the government takes out of the economy, the less capital is available for private enterprise and economic activity drops off. You are also correct as to the effects on incentives as well. I probably was too critical of supply-side economics in the piece, but I see it as a Neoclassical form of economics that is not a unified theory as much as a set of ideas. Being a follower of Austrian theory, there are many things I admire about it, but others I dislike.
As I said, I only considered it a quibble with the overall piece. I understand where you’re coming from, and not being an economist appreciate the chance to learn about some of these different approaches.
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The problem with arguments such as “all else being equal, reduced payroll taxes will increase GDP (or employment)” is that all else is not equal. As the municipal debt crisis continues to grow, municipalities will be forced to cut wages and/or lay off staff (or probably both). They will also reduce payments to contractors and vendors, who will lay off staff. A rising unemployment is baked into the cake already. What one has to do (and this is very hard) is say: will the coming rise in unemployment be made better or worse by reducing taxes?
In any case, I think it is wrong to focus on the revenue side of government. What matters is the spending side: this is where the ass hits the diaper and the waste comes out. Cut spending and everything takes care of itself. Don’t cut it (or increase it) and real wealth has to come out of the remaining pool of capital somehow, by taxation, inflation, or borrowing.
jeff liked your cbo explanation makes sense. bearster i understand cut spending but could you please be more specific?
OK, more specific. Start by eliminating:
– department of energy. its mandate was to end our dependence on foreign oil. Epic Fail, but costs continue to rack up.
– department of education. bureaucratizing, federalizing, and politicizing education has no upside. Ideally we would have a separation of education and state for the same reasons as separation of church and state, but ending the federal interference would be a good start.
– health and human services
– interior
– homeland security
– the federal reserve
end all welfare programs, both corporate and personal.
end all regulatory agencies, which only unfairly favor incumbents at the expense of would-be competitors, customers, taxpayers, and everyone else.
pull out of the UN and every foreign subsidy where we have no interest, or where the beneficiaries hate us anyways. Carefully define what exactly constitutes US interests and then have focused, fast, inexpensive missions to accomplish objectives that actually advance our interests (hint: endless wars on nouns cannot possibly be in our interest)
The above would be a good start.
Amen – Short sweet and to the point
Better Question:
Will Jeff ever stop asking Captain Obvious questions?
RE
rev i never though i would do this but i’m goiing to defend jeff. that was a good chart for defining what the real stimulus was. very concise. bearster do we get to keep social security program? i’m going to give you an example, a personal one, my husband was in the navy from 67-72 the took vo tech to be a diesel mechanic and paid fica all his life, he is now in a medicaid nursing on a list for veterans. he need’s 24-7 care and it’s only me no family. we pay 1200 a month to this facility and here is where the government rip off starts. that home charges 4500.00 a month roughly 167.00 a night just for a bed. i can’t wait to get him out of there but the nursing home federal government thing is such a scam! i also hate to admit this but i agree with most of what you say but how are we going to accomplish your good start. realistically speaking.
We are going to accomplish it voluntarily now, or involuntarily when the real wealth is all consumed. Unlike paper, real wealth cannot be printed. It is saved by producing more than one consumes.
The problem with social security (and all of the other ponzi schemes) is that people think they have “paid in” and are now entitled. But in reality they paid *out*. My mom is in the same boat. All her life, she paid social security taxes. But this money was immediately paid to the then-retirees and the rest was given to Congress to pour down whatever drain. THE MONEY IS GONE.
Now the choice is to bankrupt those producers who have managed to survive thus far (and still fail to generate enough tax revenue to dent the problem, much less fix it). Or to default.
People who are now (or will soon) be collecting social security payments need to ask themselves: who should be robbed at gunpoint in order to make those payments? Would you really throw someone in prison for the “crime” of not wanting to pay? What would you do with those slightly-above-water businesses that will be pushed under by the crushing load of payments for SS? Would you be so cavalier to push them under? Then of course there are fewer producers and more people collecting (welfare, unemployment, social security–it’s all the same to the budget).
Current retirees were ripped off by a ponzi scheme. They paid out to retirees decades ago. But this does not make it right for them to rip off current producers. Per my point above, they can force current producers into insolvency but they cannot create the real wealth necessary to make good on all the promises.
Default is coming one way or the other. Plan on it.
Leslie the very sad part in all this is people are going to be hurt. What did Shakespeare say, something to the effect, “Once Evil is put into Motion, it must run it’s course.” SS is a ponzi scheme, what is the saddest part is Good People like your husband believed in America and trusted what the Politicians, used car salesmen, were selling. The last man in the pyramid gets left holding the bag. My beloved FIL, bless his heart, was a brilliant engineer but mentally declined in old age. He was getting all those credit card offers with checks attached, just deposit these and all is good. Well 30% interest and tens of thousands later just the minimum payment was consuming the bulk of their retirement income and threatening their home. Thankfully I was able to step in and payoff 12 cards and get them stable before he died. Elder abuse comes to mind.
Good People need to realize there are just a lot Side Show Acts out there, Modern Government Being the most abusive with Financial Institutions and the Sell Sell Sell boys being right behind. Caveat emptor has never rung so true, a little Paranoia is very healthy.
Unfortunately your situation, which should be criminal, was created along with many others and the perfect storm is sadly upon us.
I have a kid getting out of College with an Engineering Degree, smart kid, I doubt there will be a job in her chosen field available for some time.
Bear defined the medicine but it is going to make everyone sick to take the cure. It is not pretty but sooner or later the medicine will be forced upon us, I fear for my children’s quality of life.
God Bless your Husband
Leslie
Dont buy the ponzi scheme crap these guys are pushing. A ponzi scheme is when someone tells you they are investing and getting returns and in fact are just giving you money from a new investor. Bernie Madoff was a ponzischeme. SS is up front about how it works. No lies or deception, that is coming from its detractors. Current workers pay for current retirees with the understanding that when they retire workers will pay for theirs. Most people think its important to guarantee grandma something, to be certain she will not have to eat cat food to survive. To be able to live with some dignity. Obviously not EVERYONE feels the same way about insuring dignity for the elderly. SS is insurance.
What the detractors love to do is extrapolate out years and years, calculating the amount that will be paid out and say ” How will we ever have that money they dont have that money now” What they fail to tell you is that they (SS) will never have to pay all that money at once. If the same logic were applied to EVERY insurance co they would be insolvent too. I could take the face amount of every life insurance policy that Northwestern owns, add that up and show you “Northwestern is obligated to pay X amount of life insurance, they dont have that now!!!” Well of course they dont because they collect premiums monthly AND (barring a nuclear disaster) they wont have all their policy holders die en masse.
Social Security is on more solid footing than ANY private insurance contract you’ve entered into. Bank on it.
This is wrong on a great many accounts. SS is quite deceptive to people, most of whom would be surprised to learn that their money is not being saved and invested in any way, and that there is no Social Security trust fund, despite the fact that it has taken in more than it has paid out.
And the concern over the future of SS is most certainly not predicated on the claim that it will be paying out more over a period of time than it has now, but that it will, in the very foreseeable future, start paying out more than it is taking it at that specific time. And since there is no money saved, having all been spent by the politicians, that is a very real problem. It is a ponzi scheme in every way except one: you’re forced to participate whether you like it or not.
Brian
By your definition, ALL insurance is a ponzi scheme! There are govt bonds that have been issued for all SS payments. As of now there is enough in SS bonds for over 20 years of payment. The govt doesnt “save” money in the manner the private sector does, thats a nonsensical concept. The govt issues the currency that the private sector saves in the first place.
The deception is not coming from SS, all payments and collections are in public records. The deception has come from politcians who scare people with notions of the govt running out of money. How can a govt run out of something it creates in the first place!?
Again, “The Quiet Company” has a real risk that they will not have the money to make all their promised payments, the US govt? …. NEVER!
I’m sorry that you dont like insuring that your grandmother will have something to live on no matter what, sorry for you mostly and secondarily for your grandmother. You are a part of a community whether you like it or not. Maybe you should move to Somalia. I hear lands cheap (you get all that you can defend with force), govt is non existent and every man is for himself….. paradise!
Bearster, I like your list of cuts as a start. Unfortunately, there is no way to measure the benefits that such a plan would have in the creation of capital formation and production. The initial pain would be significant but the wealth creation that would result would be enormous. Without seeing the benefits of this wealth creation, it is impossible to address the SS problem.
Our politicians easily scared the people in believing it could be worse but could they convince the people that it will be better. A default workout would force this approach which I fear is the only way.
Greg, explain to me how the government issues the currency that the public saves. Savings come from production which is in excess of consumption. Money or currency is just a medium of exchange.
ralph
Are money market accounts not savings? Are savings accounts not savings? All those are filled with is your “medium of exchange”.
There is some value to understanding the “real” aspect of savings, which Austrian theory directs us to look at, but thats not “all there is” in reality. Most people produce nothing. So most people would not have savings in the Austrian sense. I as a health professional only provide a service….. for money. My savings are in money. I buy stocks or bonds or commodities (at a nominal price) in the hope of selling them later at a higher ‘nominal’ price. Is that a “real” price? When I sell them I have made money and can add to my income flow. I have no surplus real value that gets created, but I am very well off because I have many ways to make claims to real goods in our economy.
The govt never runs out of money. If you think real hard about it you will realize this is true. People who have money in their pocket only have it because it was willed into existence by a currency issuer.
You could be a currency issuer too. You could create, from thin air, “ohioralphs”. If you were capable of providing something your currency would have value and people might save it. But they couldnt save it until you issued it.
A man as ignorant as you would be better off listening than “explaining” (much less preaching).
We are at the point where even the “unwashed masses” can see the cracks in the vast edifice of central banking fraud. If you can’t see it yet, that is no great crime. But if you want to people from seeing it, that is a whole ‘nother matter.
health care is an enormous field. i know that the US has been top heavy with services for some time. if people would buy insurance, wouldn’t it make for a great deal of new jobs? and creation of the technical machines needed to support life and better it, wouldn’t that create more jobs also? greg, i do think real hard about the economy, i think you just made a frivolous statement. what i see now is the federal reserve lending money to the banks on wall street which then, in turn, rewrite bad paper and lend it to people. i see the stock brokers doing the same. where does main street come in here? it seem’s to me that the only thing saving main street is the free trade agreement which hasn’t done the common man in the united states a lot of good. it has eliminated many of our jobs for example, where are all the technical computer jobs anymore. i know they are not here because i talk to microsoft all the time. and i ask a lot of questions. i’m not bringing up assembly because i know what the government did with the fed res there and it’s wrong but the free trade agreement destroyed that industry. a mechanic can always get a job. not many people want to do that anyway. i know.
my point about the fed is that they can’t keep chasing a shrinking dollar around wall street and expect to recoup it on main street. that fleeces the middle american on both ends. what are we to do?
Greg, I disagree that most people produce nothing. If that were the case my employer would not pay me. I do get paid in government currency or deposit credits because of legal tender laws. If I had other choices, I might choose them. As far as trading stocks is concerned, that is a zero sum game. When you buy someone has to sell or when you sell someone has to buy. I agree with you about being a currency issuer but to do that, I would have to me a part of a community issuing this currency. This is difficult when only government legal tender is accepted for taxes and not my/our currency.
ohioralph
My point about producing anything is simply that there is small number of people who are working on the actual production of anything. Growing food, mining, reworking the raw materials into a useable form or design and production of end use products all require a very small portion of our population due to improved efficiency and mechanization. Everyone else is involved in marketing, sales, and other service type jobs. Are these valuable? Of course. Our modern economy depends on all these things. The finance, insurance and real estate (FIRE) sector has grown as well, but well out of proportion to its utility. So the idea that savings is just “production in excess of consumption” is incomplete. It describes what savings is in a pure barter economy but we are far from a pure barter economy. Money in and of itself becomes a “thing” to be chased and saved.
Leslie, below is a quote from the “Case for Legalizing Capitalism” which reflects your concerns. This book is an excellent read and one which will clarify or give you insight in all economic issues.
By letting unprofitable companies go bust and moving labor and
machines into more useful hands, domestic productivity will improve,
ultimately raising wage rates relative to prices. This is positive progress,
this is real change. We must understand that change is inevitable,
and we must not fight it. Even if we are able to protect a small
group of people, they will gain at the expense of the rest of society,
and only temporarily. By allowing companies and individuals to adjust
as needed to market forces, everyone benefits in the long-run.
It should now be a logical conclusion that using taxpayer money
to keep people in their jobs, or preventing economic progress for the
sake of keeping things the same, reduces our quality of life. Workers
around the world who constantly protest their employer’s actions or
seek government assistance to this end prevent economic progress.
Free Trade is Good
There should really be no debating that free trade is good for
everyone. Most economists actually agree on this, even though many
of them often advise foreign countries to restrict trade. Even most leftwing
economists are decent on the trade question, including Paul
Krugman, of all people. These economists still try to get governments
to manipulate trade because they erroneously believe they can
arrange more beneficial scenarios, but they generally agree with other
economists and true free marketers on the concept of competitive
advantage and the general notion that free trade is best. So the next
time you hear your politicians claiming a country is not trading fairly
or that we need to “protect” workers from foreign competition, send
them a message that you know they are trying to fool you and that
you want free trade
ralph i think that premise is unsound because the nations we trade with have much smaller salaries. i really don’t understand how that makes it better for the working class in the united states. i don’t listen to politicians for my personal views. i try to be objective in my observation. politicians usually have a personal agenda. observe congress for proof
Leslie, here is an additional passage from the book referenced in my previous post which should give you more understandng that wages and salaries rise and/or prices decline as a result of free trade.
Capital Structure as the
Driving Force of Rising Wages
It should be clear at this point that what helps workers, besides
the ideas of entrepreneurs and the expertise of the business owners, is
capital. The availability of capital derived from savings makes possible
the transformation of an idea into real, physical goods and services,
and the ability to produce these goods at faster rates, and with increasing
salaries. Countries that experience a continually rising standard of
living do so only because of a growing capital structure.
Since we now know that a capital structure is the collection of
physical buildings, factories, machinery, and tools in place that make
not only the consumer goods we buy, but also additional capital goods
that allow us to make even more consumer goods, it should be clear
that the bigger the capital structure, the more we can make of everything
we need, and the more real wealth we have.
ralph thank you for the input. i can see where we will sell more widgets and we recently went over 10% in exports so i hope you are right. however, i still think textiles and assembly are long gone.