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Home Publications Blogs Beat the Press $800 Billion in Tax Increases Are Equal to 0.4 Percent of GDP

$800 Billion in Tax Increases Are Equal to 0.4 Percent of GDP

Wednesday, 02 November 2011 07:53

It would have been helpful if the Washington Post gave readers some context in an article that discussed Morgan Stanley Director Erskine Bowles' appearance before the supercommittee. Mr Bowles suggested that the committee agree to $800 billion in additional taxes over the next decade.

This amount is a bit less than 0.4 percent of projected income over this period. It is also less than one fourth of the increase in annual military spending (measured as a share of GDP) in the years since September 11th.

Comments (11)Add Comment
alchemy v science
written by frankenduf, November 02, 2011 9:13
so where did the amount come from? dartboard?
written by Steve, November 02, 2011 9:22
So why wasn't the Progressive Caucus balanced budget discussed? Why did the Progressive Caucus NOT make a ruckus about being excluded? Is that all just a kabuki dance to make progressives think they are being represented?

The Democrats are finally gaining some traction from shifting the message toward jobs, partly benefiting from OWS. Then they go back to this deficit crap.

Why don't those guys lead?

I see Obama's approval ratings are starting to go back up. He probably will now think he can relax and stop talking about jobs, but rather go back to the "centrist" focus on the debt and bailing out banks, where he really is comfortable.
How Does Raising Taxes Increase Employment?
written by Paul, November 02, 2011 10:19
Every economist knows that to balance the Federal budget like Clinton did, economic growth is the only option. So how would raising taxes by $800 billion increase economic growth and employment? Did Keynes ever advocate such a step to increase aggregate demand?

Why doesn't Bowles advocate increasing federal spending by $800 billion which would actually incease jobs? Oh right, Bowles and his pals in the 1% already have jobs, so no need.
written by joe, November 03, 2011 9:10
Paul, Clinton signed one of the largest tax hikes in history in 1993. It increased revenue by .83% of GDP. He did not balance the budget merely through economic growth.

Omnibus Budget Reconciliation Act of 1993
- created 36% and 39.6% tax rates for individuals
- repealed income cap on Medicare taxes
- increased transportation fuels taxes by 4.3 cents per gallon
- increased taxable portion of Social Security benefits
- permanently extended phase-out of personal exemption and limit on itemized deductions
- created 35% tax rate for corporations

REVENUE EFFECTS OF. MAJOR TAX BILLS by. Jerry Tempalski. U.S. Department of the Treasury. OTA Working Paper 81
Joe, What is your model?
written by Paul, November 03, 2011 9:37
As Prof. Krugman has said repeatedly, you must have a model that shows how you get from A to B in any macro theory of economic growth.

How exactly does raising taxes by $800 billion reduce unemployment and accelerate economic growth? In the Keynesian model, raising taxes now is the exact wrong move which is why all Keynesians have advocated tax cuts, spending increases and incentives to consumer demand.

I know you understand macro, so why are you taking an anti-Keynesian stance?
Macro and Taxes
written by Jeff Z, November 03, 2011 1:54

There are several possibilities from a practical, if not purely Keynesian point of view. It matters very much who is taxed.

Tax the piss out of the rich. They have a much lower MPC than the rest of us. There is a great deal of "forced saving" there, meaning a great deal of idle resources (capital) that could instead be used productively. Have the government spend that money, putting people to work. Hire more teachers, subsidize more libraries so that they can afford to buy accurate, if unpopular, work, thus (indirectly) encouraging its publication and availability. Caveat - avoid military Keynesianism. Joan Robinson once said that if that is the case, the cure is worse than the disease. If this means a "Tobin Tax", a financial transactions tax, so be it. Call the financial speculators' bluff.

Nationalize health care and pension administration to reduce the costs for all businesses, and make it easier for smaller businesses to attract talent.

Since these are actually forms of public investment, the payoff is increased productivity in the longer term, and thus better standards of living for all. The short run payoff is reduced unemployment.

Even increases in the supply of money are Keynesian in a sense. Target a higher (moderate) rate of inflation. BUT, the problem is the channel through which this works - our so called banking system. Thus, Keynes own preference for active fiscal policy.

Increasing taxes may in fact be Keynesian in the sense of restoring some measure of progressiveness in tax collections, thus reducing the inequality in the distribution of income.

This seems like a classically Keynesian prescription to me.
Keynes NEVER Advocated Tax Increases in a Recession
written by Paul, November 03, 2011 2:15
The whole point of Keynes was to increase demand in order to increase investment. Increasing government deficits increases demand by putting more spending power into the economy.

NOTHING else matters. The only way forward for us is to increase demand by increasing investment and consumption. Everything else being discussed is a complete distraction from what needs to be done to reduce unemployment.

So everyone who cares about the unemployed and the future of our country needs to stop talking about all the side issues like nationalizing health care or new "Tobin" taxes. Those are irrelevant now.
written by Jeff Z, November 03, 2011 4:42
Paul writes

The whole point of Keynes was to increase demand in order to increase investment. Increasing government deficits increases demand by putting more spending power into the economy.

NOTHING else matters. The only way forward for us is to increase demand by increasing investment and consumption

If nothing else matters, then we need to look at what works to "increase consumption and investment," as you say. If the tax code is an impediment to this, it needs to be addressed.

If there are broader, structural problems that impede consumption and investment, then those should be addressed as well. That means that issues such as health care, the tax code, and financial speculation are at the very heart of the matter. They are not side issues or distractions.

The same argument goes for the structure of trade deals and their impact on the distribution of income. If they are structured to favor a very small, uber rich minority, they impede consumption and investment.

At this point, we need to be looking at anything that would increase aggregate demand and begin to reduce unemployment.

“Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done” (General Theory Ch 12, p142 in Google Book edition, Atlantic Publishers)

Right, Let's Revise the Tax Code Right Away
written by Paul, November 03, 2011 5:14
That should be easy! Maybe just take a week, right? After all, the Repubs in Congress have tax reform at the top of their agenda.

Oh wait, their agenda is to cut taxes for the uber rich and raise them on the rest of us. So all we have to do is get 60+ Dems in the Senate and a big majority of the House. Yeah, that could happen and I am sure the unemployed will be happy to wait a few more years for a job.

Or we could try to get tax incentives for people to buy houses, autos, etc. which Repubs have done in the past to increase demand and jobs.
Easy vs Necessary
written by Jeff Z, November 03, 2011 8:06

You are entirely correct to point out the political roadblocks. But they are the same for progressive taxes as for increased deficit spending.

It is clear to me that the size of the federal government deficits right now are too small. The tax incentives you mention will politically be non starters as 'serious people' will point out that their first effect will be to reduce government revenue.

Economically, the primary effect will be to pull consumption forward. People will buy their house sooner, or their car sooner. If they do this in response to a tax incentive, they were probably on the brink of making that purchase within a year or two anyway.

I did not claim that my proposals in my last post were going to be easy to pass. They won't be, and they won't even be considered seriously UNLESS the OWS crowd also 'occupies' the steps of the Capitol Building, or the Federal Reserve, or the park across the street from the White House, or all three.

I have heard that they want to keep things "non-political", though. This is a serious pipe dream and flaw in their thinking, since their very actions up to this point are deeply political. What they do not want is to be steered into the Democratic Party, which they regard as deeply corrupt. This is political tactics whether they admit it or not.

It would also leave the structural problems unchanged. If your house collapses, or burns down because of a structural flaw, you do not rebuild it in the same way. You replace it with something different, so that it does not have the old flaw or flaws. To be sure, it will have new ones, but to reproduce the old flaws is stupid.

The economy is a human creation, so it will obviously have flaws. At this point, progress is dealing with new flaws rather than old ones.
To Pull Consumption Forward
written by Paul, November 03, 2011 11:53
Is the whole point! Obviously more consumption now creates more jobs now. Postponing consumption into the future creates NO jobs now.

As economic growth increases with more consumption and more jobs, the deficit will get smaller due to more taxes being collected. There is simply no downside to increasing consumption, jobs and tax revenues simultaneously.

Nor can the unemployed wait for Washington to fix the "structural" flaws in the economy. They have already been waiting for over 3 years! Enough is enough.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.