SI
SI
discoversearch

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor.  We ask that you disable ad blocking while on Silicon Investor in the best interests of our community.  If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.
Politics : Politics for Pros- moderated
 Public ReplyPrvt ReplyMark as Last ReadFilePrevious 10Next 10PreviousNext  
To: DMaA who wrote (126959)7/23/2005 3:02:17 AM
From: wonk  Read Replies (3) of 793717
 
How so? Tax revenues doubled.

Hard to explain. The starting point is understanding what economists mean when talking about nominal versus constant dollars.


Total Federal Tax Collections (billions)
Year    Nominal   Constant (87 dollars)

1980    $517.1    $728.1
1981     599.3     766.6
1982     617.8     738.2
1983     600.6     684.3
1984     666.6     730.4
1985     734.1     776.6
1986     769.1     790.0
1987     854.1     854.1
1988     909.0     877.3
1989     990.7     916.2
1990    1031.3     914.1


Note how nominal and constant dollars values are the same for 1987 (since it is in 1987 dollars). The nominal column is what you’re describing above – tax revenue doubling from 1980 to 1990. However on a constant dollar basis they only went up about 26% from 1980 to 1990.

Now using the 1980 tax revenue in constant dollars as a baseline how much should they have grown – all else being equal. If we assume the economy grew on average over the period at 3% a year (I don’t know what the compounded annual growth rate for the period was but the 3% should take into account low growth recession years and the higher growth years coming out of recession) – then with no change in the tax code tax revenue should have been 35% higher by 1990 or 978. (1 + 0.03) ^10 = 1.35 and 1.35 * 728.1 = 978

So given the sizable tax cuts in the 1981 (there were modest tax increases subsequently and the 1986 tax reform was fairly neutral) simplistically tax collections never recovered from what they should have been if we hadn’t fiddled with the tax code at all.

Of course, it’s not this simplistic, e.g. try to quantify the actual effect of the 1981 tax cut on the 82-83 recession). But to say that tax cuts generate more revenue – without caveat - is equally simplistically false.

Perhaps a better way to think of it is from basic financial analysis.

Lets say over 5 years your company will make $100 of net income per year for a total of $500. You decide to lower prices on your widgets figuring that increased market share will eventually offset lower revenue per widget and lead to greater net income. In the first year, after the price change, Net Income is $70, the next year $85 as shown below. The PV column is the present value (@10%) of the net income for each year. 


Nom	PV	Nom	PV
100	 90.9 	70	 63.6 
100	 82.6 	85	 70.2 
100	 75.1 	100	 75.1 
100	 68.3 	115	 78.5 
100	 62.1 	145	 90.0 

500	 379 	515	 378


At the end, your net income is up 45% over what it would have been. You’ve actually got a $15 increase in cumulative nominal net income over what you would have had. But on a present value basis you’ve lost money (379 versus 378). Whether one is a junior analyst or a CFO – that gets you fired (assuming your still around after the early years when the share price got pounded for the huge drop in earnings).

The point here is that you can’t compare “nominal” dollars (as the economists say) and expect that it tells you anything.

ww
Report TOU ViolationShare This Post
 Public ReplyPrvt ReplyMark as Last ReadFilePrevious 10Next 10PreviousNext  

HomeMailHotSubjectMarksPeopleMarksKeepersSettings
Terms Of UseContact UsCopyright/IP PolicyPrivacy PolicyAbout UsFAQAdvertise on SI
© 2025 Knight Sac Media.  Data provided by Twelve Data, Alpha Vantage, and CityFALCON News