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Politics : Politics for Pros- moderated -- Ignore unavailable to you. Want to Upgrade?

To: DMaA who wrote (126959)	7/23/2005 3:02:17 AM
From: wonk	Read Replies (3) \| Respond to of 793698

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

To: DMaA who wrote (126959)	7/23/2005 7:01:57 PM
From: JohnM	Read Replies (1) \| Respond to of 793698

How so? Tax revenues doubled. I expect the 80s tax issues would be an endless discussion between us. I'm not interested in redebating it. I simply stated it as a premise for my thinking. Let's focus on the frame c2 gave us which is what is to be done now, with the high domestic deficits and high trade deficits. What would you argue should be done? As for my assertion about the 80s, let me at least give you a taste of where that conversation might go and why it would be fruitless and frustrating. But you can already anticipate it. There is the nominal versus real stuff someone posted. But then I will argue the more important thing about the 80s is that by the end of it the US was growing deficits out of the whatever. Those early Reagan admin tax cuts left the taxpayers in a bad interest paying hole. You will argue it was the damnable Dem congress that did it. I will argue that one of the reasons the tax revenue went up were the tax increases, the social security raises engineered, thank heavens, by Greenspan and Dole, and at least one general income tax raise, perhaps two. And, anyway, the Laffer curve arguments were only, as Jim, Jack, Bill, whatever, oh yes, David Stockton argued, the whole thing was only an ideological cover to shrink entitlements and thus to shift income from the middle class to the upper class. And you will argue . . . . It just goes nowhere. So what do you argue as to what should be done now? Cut taxes more so that will close the deficit?