Deficits and the Tax Cut: Some Folks Just Don’t Get It

A lot of media outlets are crying over the increased deficit caused by the GOP’s tax bill. Here’s what the Texas Tribune says:

The bill is expected to deliver a tax cut to most Americans. But the majority of economists also expect it to widen the national deficit by at least $1 trillion over the next decade.

The truth though is that the level of tax revenue by itself doesn’t determine deficits; it is the combination of spending and revenue that determines the size of the deficit-or surplus.

However, it doesn’t seem to occur to the media or other liberals that we could actually spend less money over the next decade and actually have a smaller deficit!

Now I admit, we haven’t seen much willingness by Congress to control spending. But at least it’s possible.

Happy 100th Birthday Ronald Reagan

“I never thought it was my style or the words I used that made a difference: it was the content. I wasn’t a great communicator, but I communicated great things.” – Ronald Reagan, in his Jan. 11, 1989 farewell address to the American people (text)

“The biggest misunderstanding about Reagan’s political life is that he was inevitable. He was not. He had to fight for every inch, he had to make it happen. What Billy Herndon said of Abraham Lincoln was true of Reagan too: He had within him, always, a ceaseless little engine of ambition. He was good at not showing it, as was Lincoln, but it was there. He was knowingly in the greatness game, at least from 1976, when he tried to take down a sitting president of his own party.” – Peggy Noonan, in her column on Ronald Reagan during this season of his 100th birthday celebration.

“We cannot buy our security, our freedom from the threat of the bomb by committing an immorality so great as saying to a billion human beings now enslaved behind the Iron Curtain, “Give up your dreams of freedom because to save our own skins, we’re willing to make a deal with your slave masters.”” – Ronald Reagan, in his October 27, 1964 “Time for Choosing” speech

“Reagan understood instinctively that modern liberalism represented a rejection of the constitutional premises of self-government. … Hence the core of Reagan’s political purpose was recovering an appreciation for the Founder’s understanding of the principles and practices of American government. This was central to his rhetoric to a much greater extent than it was to that of any other modern day president of either party. … ‘We’re for limited government,’ he said in his 1988 State of the Union speech, ‘because we understand, as the Founding Fathers did, that it is the best way of ensuring personal liberty and empowering the individual so that every American of every race and region share fully in the flowering of American prosperity and freedom.’” – Steven F. Hayward, in The Age of Reagan, 1980-1989: The Conservative Counterrevolution.

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TX v. CA – Texas Wins Again: Less Taxes and Spending Lead to Economic Growth

The Texas Public Policy Foundation released some great research today by Dr. Art Laffer explaining why Texas is doing so much better than California—or just about anybody else for that matter. In case you didn’t know, it is because we have lower taxes, spend less and regulate the economy less than most other states. No surprise here–we didn’t really need to do a lot of research to understand this. But not everybody gets the free market approach, so sometimes we have to do research to prove that it is true. Click on the link to see the whole report.

Subsidies Anyone?

According to the Cato Institute, federal subsidy programs topped the 2,000 mark for the first time last week. Almost half of those have been created in the last 20 years: the number of federal subsidy programs soared 21 percent during the 1990s and 40 percent during the 2000s.

As Chris Edwards, Cato’s director of tax policy, rather depressingly puts it, “There is a federal subsidy program for every year that has passed since Emperor Augustus held sway in Rome. We’ve gone from bread and circuses to food stamps, the National Endowment for the Arts, and 1,999 other hand-out programs from the imperial city on the Potomac.”

Of course, Washington isn’t alone in the subsidy game. Texas does pretty well too. In addition to the standard economic development programs, Texas is tops in the nation when it comes to renewable energy subsidies. By 2020, Texas consumers could be paying as much $1.3 billion a year to support wind energy—that is in addition to the $300 million or so the Feds are contributing to Texas wind producers. The solar folks are also lining up—the cost of proposed solar subsidies last session ran as high as $220 million. And they’ll all be back in 2011.

It would be nice in this one instance if we could topple Texas from its number one ranking.

Plano Lowers the Cost of Living

It is not often that governments voluntarily reduces fees or taxes. So when one does, it is worth taking a closer look.

Last month, Plano voted to eliminate impact fees on developers building new homes and businesses. The fees were charged based on the size of the water meter for the project, and typically ran from $1,000 to $2,000 for a typical home, but could go as high as $95,000 for the largest meters. The money was then used to build additional infrastructure for the city. But as new construction has slowed in Plano, the city is looking for ways to make it less expensive for people to live in.

Taken by themselves, impact fees could be seen as a user fee, which is one of the better ways for governments to raise money. Use a service, pay a fee. That is what makes toll roads so appealing from a market perspective. But user fees are only good if used instead of general taxation, replacing the tax revenue rather than supplementing it.

I don’t know which route Plano took, but the good news now is at least its city council members acknowledge the fact that fees and taxes make living their more expensive—not for the developers, but for the people who live there and ultimately have to bear these costs.

Tax Cuts Work

In his recent National Review Online article on the federal government’s deficit spending, Rich Lowry wrote, “The same way overzealous Republicans once argued that tax cuts paid for themselves, Obama Democrats argue that deficit spending pays for itself.”

Lowry’s statement is problematic on several levels.

For one, it essentially equates tax cutting and deficit spending, abandoning the moral high ground in an attempt to come across as reasoned. Even more importantly, it misrepresents the facts. In truth, tax cuts have paid for themselves time and time again: the Harding/Coolidge, Kennedy, Reagan, and Bush tax cuts all accomplished this.

As noted in the Foundation’s Thinking Economically lesson on the Laffer Curve, “In the four years prior to the 1965 (Kennedy) tax rate cuts, federal government income tax revenue, adjusted for inflation, had increased at an average annual rate of 2.1%, while total government income tax revenue (federal plus state and local) had increased 2.6% per year. In the four years following the tax cut, these two measures of revenue growth rose to 8.6% and 9.0%, respectively. Government income tax revenue not only increased in the years following the tax cut, it increased at a much faster rate.”

People claim the early Reagan income tax cuts didn’t pay for themselves. But they compare tax revenues between 1981 and 1982 when the tax cuts didn’t take full effect until July 1983. Look at the revenue before and after the cuts had been fully implemented, and they worked. The problem with the Reagan tax cuts is that they weren’t implemented fast enough. Just as predicted, people deferred income until after the tax cuts were fully implemented, delaying the growth in tax revenues. Tax cuts generally won’t increase revenue overnight, but they will increase revenue once the economy has a chance to respond.

The one tax where cuts (or increases) affect revenues almost immediately is the capital gains tax. “Following the 1981 capital gains cut from 28% to 20%, nominal capital gains tax revenues leapt from $12.5 billion in 1980 to $18.7 billion by 1983—a 50% increase.” After the rate went back up in the late 1980s, capital gains revenue collapsed. And, once again, “in 1996, the year before the tax rate cut (back to 20%) and the last year with the 28% rate, taxes paid on assets sold totaled $66.4 billion. A year later, tax receipts jumped to $79.3 billion, and they jumped again to $89.1 billion in 1998. … Seldom in economics does real life so closely conform to theory as this capital gains example does to the Laffer Curve. Lower tax rates change people’s economic behavior and stimulate economic growth, which can create more, not less, tax revenue.”

Tax cuts won’t always increase the incentives for people to earn or recognize more income. But we are a long way from a tax rate low enough for that to be the case.

Welcome to Texas

Dear Mr. Limbaugh:

I noted your evident frustration recently with the high tax policies of New York that subject you to a punitive income tax rate anytime you step foot in the state to perform your show. I was delighted that you expressed an interest in
making Texas the home of your alternate studio whenever hurricanes chase you out of Florida.

If you come to Texas to do business, you wouldn’t be alone. Texas has ranked in the top five states for the last five years when it comes to attracting new and expanded facilities, according to Site Selection magazine.

In fact, our success has come at the expense of your soon-to-be-former workplace. Last year, Texas surpassed New York as home to the most Fortune 500 companies. Texas now boasts 58 Fortune 500 headquarters, ahead of New York’s 55 and California’s 52.

Why is Texas forging ahead of the competition?

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