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WmLambert
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As many of you know - I post often on Supply-side economics, trying to explain some of the definitions and history behind Reaganomics - and where to get more information for those who are interested. Today Jude Wanniski made one of his insider newsletters public and I thought some here at Ornery would be interested in reading it. Usually, these newsletters are only available through very expensive memberships in Polyconomics. The Supply Side University classes are free at SSU, and Wanniski's Memo on the Margin are available daily - but this insider stuff is the real thing that you never get to see. I figure a few Ornerians or lurkers may appreciate this and be prompted to buy a membership, so Jude, in the best Free Enterprise fashion, wouldn't mind me reprinting this for your pleasure. Enjoy!

Celebrating Our Forecast

quote:
Re. Spring is here, so are the jobs

When the news reached the financial markets on Friday that 308,000 new jobs were created in March, there were celebrations in the Polyconomics' offices in Parsippany, N.J. For almost a year, since May 23, we had been advising our institutional clients and newsletter subscribers not to expect the tax cuts then enacted to produce new jobs until this spring. When asked, we also warned Democrats not to count on the "jobs issue" for the November elections because there would be jobs aplenty and a rise in real wages as the labor market tightened. Here is the first client letter explaining the mechanics of how the economy would develop:

Polyconomics - May 23 2003 - Domestic Reports

TAX BILL A BIG WINNER
By Jude Wanniski

The lead story in The Wall Street Journal today is about “Bush’s Tax Cut: Victory – at a Cost,” with the reporters noting that “it will provide a significant short-term boost to the economy, but at a potentially significant long-term cost.” Nonsense. The legislation is far better than any of us could have imagined could come out of this Congress just a few months back. As it is, the dramatic cuts in the cost of capital embodied in this first truly supply-side package will feed economic growth far into the future, with its rosiest impact on the employment numbers showing up in time for the 2004 presidential elections. The equity market has already advanced by about 5% since the legislation began coming out of the shadows in mid-March. At first, it appeared all the economy would get would be an acceleration of the cuts in marginal income-tax rates, with no room at all for a cut in the double-tax of dividends and not even a mention of a cut in the capital gains tax to 15% from 20%.

It was the President’s father who campaigned in 1988 for a cut in capgains to 15%, but who gave up on the legislation after he was elected when outmaneuvered by the Senate Democrats. In the space of several weeks, George W. Bush has brought home his father’s foreign policy objective of regime change in Iraq and his domestic policy promise of a 15% capgains rate. And he has added the first of his own objectives in cutting into the double-taxing of corporate dividends, which he surely aims to complete in a second term. By expanding bonus depreciation to 50% from 30%, the legislation instantly increases cash flow to corporate America by roughly $53 billion. What the Journal reporters and their editors do not see is that the lower costs of capital in the dividend and capgains provisions will soon begin showing up in orders for capital goods, as the after-tax returns on those goods will rise accordingly.

As we have been pointing out repeatedly, the biggest gains will be to labor, which was being unemployed as the business community found it could supply all the demand for goods and services with a reduced work force, given the high after-tax cost of marginal capital. Gary Robbins of Fiscal Policy Associates points out that before there is a renewed expansion in the work force, the business sector will have to see that the surplus of capital at the new lower cost is being accompanied by a scarcity of labor. He thinks the third quarter numbers will begin reflecting the first phase and it will be clear by the second quarter of next year there is increased demand for labor. And this will occur at higher real wages again reflecting the increase in the capital/labor ratio.

Most of the credit has to go to the President, as he made the hard decision to ignore all the Robin Hood rhetoric of the Democrats in pursuit of his objectives. The editors of the WSJ editorial page Thursday blasted House Ways & Means Chairman Bill Thomas for his “failure” to get all he could have gotten out of the divided Congress, but if it were not for Thomas it would have done President Bush no good at all to be resolute in his determination. It was Thomas who first delivered everything the President wanted in a $726 billion package to eliminate the dividend tax, but then saw it would be impossible to get anything close to that number from the Senate. Instead of whittling away at the $726 billion to get it into Senate range, Thomas went back to the drawing board with his 5-15 plan to tax dividends and capgains at the same rates. Where the sunsetting of these rates back to the original, higher rates after five years would have had a very modest effect on corporate behavior if applied only to dividends, the new combination will pack enough punch to insure that it will be practically impossible to let them expire.

Without an effective class warfare argument to prevent supply-side downward adjustments in marginal tax rates on capital and labor, the Democrats can only stand aside and complain that the package will fail, and hope that it does. The only opening they have left to offer the electorate in terms of economic growth is a commitment to fundamental tax reform. A total overhaul of the tax codes would permit Democrats to finesse the class-warfare arguments, something they seem not yet to have noticed.

The most important development here, I believe, is that President Bush has established a baseline for tax policy. In his first two years, he tried a front-loaded neo-Keynesian plan to boost consumer demand, and that was a sure loser. By replacing Treasury Secretary Paul O’Neill with John Snow early this year, Mr. Bush made it possible for Bill Thomas to change course in mid-stream, as Snow clearly supported the House package over the Senate version that the White House political people were still pushing. This is why there was so much confusion earlier this week, as The New York Times reported the Senate version had been picked, when in fact it was Thomas and the House version that won the President’s favor -- with Snow’s endorsement being decisive.

I’ve told the story before, but it bears re-telling on this account, of the time in March 1989 when I was invited to Washington by George W. Bush. His father had a few days earlier cinched the GOP presidential nomination, with Jack Kemp a distant loser. I was asked to lunch to advise on what the supply-siders really wanted to be happy with his father. At the top of my short list was a cut to 15% in the capital gains tax. His face lit up as he said he thought that was doable. That’s because of his father’s experience in the Texas oil business. He knew that when you hit a productive well, you would want to sell it so you could look for more, but the high capgains rate would discourage you from selling. Your capital would be frozen, he said. As a result, it always struck me as odd that he would understand that so clearly in 1989, but leave the concept out of his 1999 plan. He’s finally on track and that bodes well for the future.


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Danzig
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Well, as someone who intends to be making a few capital gains in the next five years, I support any reduction in that tax. [Smile] Also, while I dislike taxes in general for both moral and financial reason, I would rather have a higher income tax than higher other taxes. If you do real estate right then you will never have to pay taxes on it, and that is the part of tax law that I want to stay the way it is most of all. I figure income tax is an excellent red herring for fiscal liberals who do not really know what they are talking about.
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Gary
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quote:
... I dislike taxes in general for both moral and financial reason ... --- Danzig
That's very interesting, could you expand on the morality of taxation?
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Zyne
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So, Danzig, you support an income tax that doesn't apply to the income you expect to earn, and that's moral?
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Ivan
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You see, it isn't taxes themselves that are imoral, just the act of paying them. [Wink]
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John L
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Jeess!!,

Here we go again. Even students in economics, like Ivan, are so immersed in convaluted Demand Side Keynesean theory that they aren't even taught landmarks such as Says Law or the importance of the Law of Diminishing Returns regarding taxes. So Wm, if you will allow me, let me once again introduce the lefties out there to the Laffer Curve. The first part is to be found right here. . Part 2 is to be seen here.

What I can't understand is how elites, and those who are brainwashed by them, can't add simple things like this together, mix in a little real world dynamics, and come out with the truth. It's so simple that it is like looking at the sun and saying "it must be day time"!

I am absolutely convinced that the tail is wagging the donkey here(how appropriate). Since Collectivism is the perfect ideal, we will shape and bend the world to suit our ideals, and the hell with reality.

But who am I to complain. I'm just a simple minded Classic Liberal, who is a member of the unwashed in flyover country. Go Figure! [Confused]

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Everard
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Please don't get me started on the laffer curve again. WHerever the hump is on the laffer curve, we haven't been on the wrong side of it in the last 25 years. The famous reagan tax cuts didn't move us from one side of teh hump to the other, and when all the data is in, I doubt George II's cuts will have taken place on the wrong side of the hump.
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John L
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Well, you are entitled to your Collectivist opinion, and you know that opinions are like? [Wink]
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Syzygy
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The Laffer Curve supports my opinion that Bush should have put off the tax cuts until after the wars were over. People are willing to pay higher taxes during war, and the economy certainly wasn't going to rebound when we were in the thick of fighting.

So why didn't Bush and the Congress pay for the war with the higher rate of taxes, while promising to lower taxes after the war, and then making good on that promise? The rebound happened both due to supply-side (capital acquisition, etc) and demand-side (buying houses, furniture for those houses, etc) factors, but the strangthening effect on the economy seems to have waited for the wars to cool off. That should have been what everyone expected, since there's almost always a recession during war, with a rebound afterward.

He knew he was going to be invading Iraq before Sept 11 (a lot of people knew it before te 2000 election), so he could have planned better.

Instead, we've got a huge deficit, a mounting debt, and there's popular (and professional) dispute over whether the Bush tax cuts are helping or hindering the economy only because the war has muddled the whole picture.

Bush would be a cinch for re-election if he had followed simple economic principles and CHANGED COURSE on tax cuts after Sept 11.

This is Bush's biggest flaw (and polls as his most popular character trait): He refuses to change his mind, or to allow his mind to be changed. Resoluteness is a virtue only in moderation.

I'll offer another explanation besides stubbornness. I suspect that in Bush's priorities, invading Iraq was from the beginning higher than anything else--even his own re-election. So, in case it took too long to invade Iraq, and the 2004 election was approaching, he wanted something to run on: tax cuts.

Whatever the personality explanation, it was an economic and political blunder.

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John L
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quote:
Whatever the personality explanation, it was an economic and political blunder. -Sy
If static assumptions were the rule of the day, you might be right. However, they are dynamic and elastic. Consequently for the tax cuts to fully kick in, they have to be allowed time, which is coming to a peak this summer. This is what was intended.

Forget the hue and cry of the Left about how this defecit is the largest in history, or that the economy is going down the toilet. It ain't true! Statistically, it is far less of a defecit than others before, and the engine of growth will soon tend to wipe it out.

And who says that a balanced budget is essential. Do you have ANY credit cards, is your house paid for, or how about your automobile? If you say no, then allow me to complement you. The rest of us borrow and spend more than we have currently available. So why do you begrudge the government the same?

AAAANNNNNDDDD, why is it that the Democrats have a confirmed history of spending untold dollars more than they have. Yet, now they are suddenly so frugle. If you say hypocracy, you win!!!

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Zyne
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I don't find anything here worthy of debate.

BUT--one month does not a trend make.

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Everard
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"Well, you are entitled to your Collectivist opinion, and you know that opinions are like? "

Its mathematical fact that Reagan's tax cuts didn't increase the revenue taken in over what revenue would have been had he not raised taxes, and the economy performed similarly to how it had been performing prior to his tax cuts. While unadjusted tax revenue rose in the 8 year period following reagan's tax cuts, they actually fell for two years following his first cuts, and over the 10 year period of the 1980's, adjusting for growth of the economy before and after his tax cuts, and tax rates before and after his cuts, there was not one single year in which government revenue was higher then it would have been had reagan not cut taxes. If you care to do any sort of analysis adjusting for the variables, you'll find I'm right. In fact, the, now, 5-6 times I've posted on this, no one has been able to show that I'm wrong... and, in fact, no one has even tried. YES, absolute tax dollars went up. Irrelevent, because tax dollars went up without tax cuts either, and with the tax cuts, they went up slower then they should have without tax cuts.

Reagan's tax cuts took place on the wrong side of the laffer curve. Where is the right side of the curve? We don't know, because we havent' found it yet. Taxes haven't been high enough to find it.

I also note you still can't post without patronizing. I've told you before, don't do it to me. I don't find it "humorous," which is your tired defense for the drivel you post on these boards.

[ April 07, 2004, 10:02 PM: Message edited by: Everard ]

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Wwolfs
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I'll be the first to admit that economic theory is not my strong suit. I've never been able to stomach reading much from any viewpoint; for me, I just can't conform my thoughts to exclude moral and human concerns and just think about money. But I tried very hard to understand the link provided to SSU.

quote:
To see this in another way, imagine that there are three men who are skilled at building houses. If they work together etc etc etc
I did a little math to see if it would help me understand this. The givens from the article is that 3 men could build 3 houses in 3 months while working together or they could each build 1 house each in three months. That seems reasonable to me, seeing as each of them would be experts on different parts of the house.

The article goes on to state that at a tax level of 49%, it would be advantageous for the men to work together, and at 51% it would be personally advatageous for them to work seperately. That is what I don't understand. Assume each house sells for $100k and there is $20k in fixed costs per house. At 51% taxation, they gross $49k per house and net $29k.

If they work together, they can build a house every month (well, 3 houses in 3 months, but same diff). Divide the $29k among three parties to get a monthly income of around $9,600. If they work alone, they each get $29k . . .every 6 months. That nets them about $4,800 monthly income.

Even if the tax rate were 79%(the highest it could be without driving the builders completely out of business), working together they would get about $330 per month. Alone, they would get $1000 every 6 months, or roughly half the income they could get from working together.

What am I missing?

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Syzygy
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quote:
AAAANNNNNDDDD, why is it that the Democrats have a confirmed history of spending untold dollars more than they have. Yet, now they are suddenly so frugle. If you say hypocracy, you win!!!
Political parties change over time. The Democratic Party is clearly leaning toward better fiscal responsibility (though still not good enough for me to join the party yet), after seeing what a good job Clinton did on that score. Sure, there are still spendthrift Democrats, but there are definitely two poles in the Party on that issue.

The Republican Party, on the other hand, defines itself as fiscally responsible, yet it really has two poles also--the frugal Republicans and the don't-tax-but-spend-anyway Republicans. It's one thing to borrow sensibly on a credit card, and it's even useful. But it's quite another thing to make a decision to reduce your own pay BEFORE you get your financial house in order.

If I took a lower paying job when I knew I was still going to have to spend at the same (or much greater rate), anyone would call me an idiot. But when the Party holding "Fiscally Responsible" banner does it, the other Party is called hypocritical for objecting. That may appear true (though I think it makes little sense to call anyone other than a single individual a "hypocrit") but it is no defense of the fiscal idiocy of plowing into two consecutive wars without asking the American people to pay for it!

And how morally irresponsible is it to politically separate the benefits of war from its consequences?!?

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Danzig
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Morally, you are taking money I do not want to give you if I am forced to pay you taxes. That the you is really the government does not change anything. I will voluntarily pay for the military, fire department, and roads, and maybe a few more things, but there is a lot of stuff that I either do not care about or otherwise morally oppose.

I do indeed support an income tax that does not apply to income I expect to earn... more so than I support a tax that does apply to me. If somebody has to pay, it might as well be them. Anyone who knows the laws has a decent chance at doing exactly what I plan to do. The only thing I have that others can never gain is my youth. I am generally good with my money anyway, so that helps as well. Not everyone is, and if you are going to waste what money you have one way or another then why not do me a favor and pay my taxes? That said, ultimately I do not support mandatory taxation at all. One man cannot change the system, however, and even if I could I would be tackling drug laws first. The best I can do is hope that the big corporations keep donating to both parties, and that the parties throw them a few bones. (What is good for big corporations will probably be good for me, due to the area I intend to go into anyway.)

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witless chum
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Danzig, doesn't the fact you live in a democracy mean you don't have any moral authority to not pay taxes, since in theory you voted them on yourself?
Why do you consider consenting as part of voting public as not enough representation?

We've all got our different lists of things we pay for an don't like.
By the way, what is Satan's opinion on paying taxes? "I want your skull, I need your skulluLLULL" Glenn is a good singer.
(I'm assuming your name is reference to something here, if I'm wrong, disregard)

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John L
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quote:
Danzig, doesn't the fact you live in a democracy mean you don't have any moral authority to not pay taxes, since in theory you voted them on yourself?-witless
This is where the battle lines are indeed drawn. It seems to me that if the Left truly wished to help everyone and allow the economy to grow well, they would try to agree with the other side of the isle and seriously target the tax structure so that the maximum taxes would be collected in order to finance their pet projects.

this is why I push something so basic as the Laffer Curve. But Collectivists are hell bent to punish those who are the most productive, but by doing so, they are helping to slow down the maximum revenue they can collect. Some of them can't see where paying less confiscatory taxes would would increase the economy and thus revenue. Others are aware of this, but want to use class warefare to punish acheivement.

What they do not like is the concept that any taxes over the maximum efficiency point will not only cause less revenue, but also less economic growth. On the other hand, lowering tax rates under the maximum efficiency point would decrease revenue, but INCREASE economic growth. Since economic growth puts more money into the pockets of the most productive, along with everyone else, this is unacceptable because it doesn't punish these folks hard enough.

They can't admit this because it is a solid arguement for erring on the side of less taxes, not more taxes beyond the maximum efficiency point. Collectivists will NEVER admit this, because it destroys their class warefare arguement, and takes away another reason for them not to exist. [Wink]

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Danzig
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I did not choose to live here. I was born here. America is one of the better countries to live in, yes, but it has lots of problems.

I do not feel morally obligated to abide by the decisions of my peers, even (or especially) in a democracy. There is not a human I have met that I would trust completely to make decisions for their own lives, much less mine. In theory, I voted them upon myself. In practice, I did not; it was forced upon me by people who are just as selfish and greedy as I. I have lost much of the resentment I once had for them, but I am still out for myself and mine without regard for their welfare.

My name is indeed a reference to the man and band. As for Satan's opinion, I am unsure. I am not Satan myself, I am merely the most evil singer in the entire world.

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WmLambert
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quote:
Everard: Its mathematical fact that Reagan's tax cuts didn't increase the revenue taken in over what revenue would have been had he not raised taxes, and the economy performed similarly to how it had been performing prior to his tax cuts. While unadjusted tax revenue rose in the 8 year period following reagan's tax cuts, they actually fell for two years following his first cuts, and over the 10 year period of the 1980's, adjusting for growth of the economy before and after his tax cuts, and tax rates before and after his cuts, there was not one single year in which government revenue was higher then it would have been had reagan not cut taxes.
No it's not mathematical fact.

The media reported: "When Reagan cut taxes after he was elected, the result was less tax revenue, not more," wrote a prominent Harvard professor in 1998 in his best-selling economics textbook. "Revenue from personal income taxes (per person, adjusted for inflation) fell by 9% from 1980 to 1984, even though average income (per person, adjusted for inflation) grew by 4% over this period."

When we see that revenues “adjusted for inflation” actually fell after the Reagan tax cuts, the case seems to be closed. But the inflation occurred in the Carter years, as gold leaped to $625 from $120. In the Reagan years, the inflation baked in Carter’s gold cake rose, but the gold price fell to $350. If revenues are “adjusted for deflation” they are stupendous. This is why Reagan won his landslide re-election victory, as the electorate knew how the tax cuts had worked their magic. [Those who did not live through this economic miracle, that proved the Keynesian model did not work, are often unable to learn about it through the media.] Everard, if you lived during this time you know beyond a shadow of a doubt that the revenue virtually sky-rocketed and the economy was "glorious."

quote:
Syzygy: The Laffer Curve supports my opinion that Bush should have put off the tax cuts until after the wars were over. People are willing to pay higher taxes during war, and the economy certainly wasn't going to rebound when we were in the thick of fighting.

So why didn't Bush and the Congress pay for the war with the higher rate of taxes, while promising to lower taxes after the war, and then making good on that promise? The rebound happened both due to supply-side (capital acquisition, etc) and demand-side (buying houses, furniture for those houses, etc) factors, but the strangthening effect on the economy seems to have waited for the wars to cool off. That should have been what everyone expected, since there's almost always a recession during war, with a rebound afterward.

No - cutting taxes has always increased revenues. It was not the Marshall Plan that revived Germany after WWII, it was the "German Miracle" which was a huge tax cut. It was the JFK tax cuts that grew the economy. It was the Reagan tax cuts that grew the economy.

Most of the Bush 43 tax cutting was done as incentives to accelerate the economy. By contrast, most "feel good" tax shifting plans are non-effective. Taking money from wealthy tax-payers and giving it to lower bracket tax-payers does nothing to increase the economy - it just changes the hands in which the same money is spent. But smart tax cuts like Bush 43 did by lowering Capital Gains taxes which punish success actually puts more money into circulation.

To help danzig with his explanation of why he dislikes taxes in general for both moral and financial reason:
quote:
THE WAY THE WORLD WORKS: SIMPLIFIED [I wrote this little piece on November 23, 1993, in response to a member of Congress who said he wanted to know in a hurry about supply-side economics. I had remembered that President Dwight D. Eisenhower said he would not read any memos that were longer than one page, so I squeezed it down to that.]

by Jude Wanniski -- November 23, 1993

As the U.S. and most of the world economy continues to stumble along, the economics professionals and their agents in the financial press are becoming increasingly complex and prolix in their rationales and prescriptions. In trying to explain my own thinking to the political class, I've tried to go in the other direction, simplifying in the extreme. In this simplest of all world economic models, there are only three people: A rich old man; a poor but aspiring young man; and the government. Here's what it is all about:

The rich old man has capital, but does not wish to work. The poor young man has labor, but no job and no capital. The rich man would invest in the poor man, but the government tax rate on investment income is so high that after considering the risks, the rich man is discouraged. The government comes upon this predicament and decides the poor man has to be sustained, with food, housing and health care, and borrows these from the rich man, giving him a bond and making the transfer. The government deficit increases. The rich man holds debt instead of equity. The young man might go to work, but when he sees that his investment in himself will be taxed at the same discouraging rate if not more, he remains idle, continuing to receive his subsidy. The unemployment rate remains high, and the government is soon faced with the problem of paying interest on the bond held by the rich man. It must either tax the rich man to pay him his interest, which discourages the rich man from buying more bonds from the government, or it borrows the interest from him with a new bond, which increases the deficit, et cetera. The government can also reduce its obligation to the rich man by devaluing the currency, which means it cheats the rich man out of principal. That also discourages the rich man from further investments in government bonds.

Is this too simple to explain what's happening all over the world? Do you need a more complicated explanation of why government deficits are increasing, interest rates are rising, unemployment rates are climbing? Isn't it enough for you to see that if the government lowers the tax on equity income, the rich old man will invest in the poor young man, buying equity instead of debt. This would tend to drive up the stock market in this three-person economy, and drive down the bond market, since the rich man isn't buying debt. (This is why we're told the bond market doesn't like a strong economy.) But wait, the young, aspiring man now has capital, covering his food, housing and health care. This means the government doesn't have to issue the bond to cover a deficit, and in fact is able to tax the young man, who has chosen to invest in himself by working instead of remaining idle, because the government tax is no longer discouraging. This means the government revenues rise as the deficit falls, and unemployment declines, and stock markets and bond markets rise. The crime rate falls as idle young men are now occupied, getting rich.

Why don't our Nobel Prize winning economists see this? Because the concept of risk-taking does not exist in a demand model, and all our Nobel Prize winners live in a risk-free world, where debt and equity are interchangeable. If this simple world economic model were in place, think of how many economists, lawyers and accountants would be out of business, forced to work for a living. That's why it's all too simple.


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Syzygy
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quote:
No - cutting taxes has always increased revenues. It was not the Marshall Plan that revived Germany after WWII, it was the "German Miracle" which was a huge tax cut. It was the JFK tax cuts that grew the economy. It was the Reagan tax cuts that grew the economy.

Most of the Bush 43 tax cutting was done as incentives to accelerate the economy. By contrast, most "feel good" tax shifting plans are non-effective. Taking money from wealthy tax-payers and giving it to lower bracket tax-payers does nothing to increase the economy - it just changes the hands in which the same money is spent. But smart tax cuts like Bush 43 did by lowering Capital Gains taxes which punish success actually puts more money into circulation.

WmLambert, I agree with your logic, but not that your examples do anything to disprove my assertions. Your examples all fit (or do not apply to) the pattern that I suggested--after a war, the economy rebounds, and that's the good political time for a tax cut. Your assertion that the tax cuts boosted the economy--and the implication that leaving the turmoil and unpredictability of war had nothing to do with encouraging entrepreneurship, purchase of capital, buying homes and having babies--is an acceptable hypothesis, too, but neither one is proved or disproved by your examples.

In fact, the example we have in the present seems to be the only one that differentiates between your take (purely supply-side economics) and mine (a mix of supply and demand) is the recent past, when we saw recession during both Iraq wars, followed by economic improvement after the uncertainty of the wars settled down, and it's my hypothesis that is best supported.

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