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Politics : American Presidential Politics and foreign affairs
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To: DuckTapeSunroof who wrote (43302)5/19/2010 2:32:35 PM
From: TimF  Read Replies (1) of 71588
 

Nice speculating about percentages....

I wasn't speculating about the percentages. I used 1/3rd and 2x as examples of the point. I didn't claim they where actually correct, but the point holds for plausible alternative numbers.

The actual tax percentage was in 2008 28.3% (which makes my point slightly strong than the 1/3rd I used in my calculations). That's not speculation, its the reported statistic. The effect of the reduction of government spending on GDP (during the downturn, in normal times it might increase GDP even in the fairly short run, and likely in the long run, but in a downturn its fairly likely that cutting government spending will reduce production), would largely be speculation, but I intentionally picked a very large number. More frequently its estimated as being closer to 1.5 multiplier than 2, others would say its lower still (even perhaps below 1).

Using the real 28.3% rate, the forgone multiplier effect would have to be over 3.5 to cause a reduction in government spending to make government revenue lower. That's highly implausible.

OTOH I would consider a reduction in production, income, and wealth, more important than a reduction in government revenue, and a short term drop in prediction and income is far more likely than a reduction in government revenue. If the short term is the only term your considering than even if a reduction in spending reduces the deficit (which is likely) it (in the context of a recession) would still be something you might want to avoid. OTOH over the longer term the reduction in spending will likely have both fiscal and economic benefits.
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