Monday, August 23, 2010

Words Mean Things: Surrendering the High Ground

Good old Jazz Shaw and I engaged in a little back-and-forth via Twitter today, sparked by his tweet:

Dear Congress: You can keep all the Bush tax cuts, but you have to cut spending. This isn't rocket surgery.
I responded by pointing out the missing word in that first clause:
@JazzShaw Not "tax cuts". Tax RATE cuts, which INCREASED tax revenues. Expiration will REDUCE tax revenues.

In subsequent volleys, Jazz assured me that I was reading in meaning he hadn't intended (that the two parts were linked, so that the "tax cuts" would result in lower revenue, which then must be "paid for" by the spending cuts). I'm glad to hear I was wrong about that, but I still believe that we should always refer to "tax rate cuts", and avoid even the appearance of linking tax rate cuts to spending reductions, in order not to surrender ground in policy debates.
I wasn't just reacting to Jazz when I tweeted that, but to the kind of "argument" provided yesterday by Nancy Skinner on Freedom Watch with Andrew Napolitano:

Now, I don't for a moment mean to compare Jazz to Nancy, who seems to fill the same role for Andrew as Alan Colmes did for Sean Hannity: mindlessly repeating Democratic talking points that serve as hanging curve balls to be smacked out of the park. You can almost see her flipping through the list of liberal shibboleths (shall I go Palin and coin the portmanteu "lib-oleths"?) until she could find one that fit the situation at hand.

But when we debate on their terms, we unnecessarily handicap ourselves. As you can see in the above clip, Nancy spewed such a barrage of BS that Charlie Gasparino got stuck dealing with only one particularly large pile of it (the idea that money in the hands of higher-bracket earners has a smaller "multiplier" than money "redistributed" into the hands of lower-income people who will use it to consume more, thereby providing a "stimulus" to the economy). I think Don Boudreaux was trying to make the same point as mine but it got lost in the crosstalk. (Note to Napolitano: Try having two guests instead of three; it might make cut down on that.)

I don't want to get bogged down debating the Laffer Curve here, but to put it simply, the idea is that higher marginal tax rates will change the behavior of high-bracket earners. They may put in less time on the job to spend more with the kids, or divert money that would have gone into investing in new production capacity (which means more jobs for lower-bracket folks) and put it in tax shelters like municipal bonds. These alternative investments aren't expected to make as large of a profit, but after the effects of the tax rates are considered, the taxpayers figure they'll actually get to keep more. This pulls capital out of the economy and somewhat depresses the rates paid on the tax-sheltered investments.

Either way, if the marginal rate goes above a certain point, it will actually result in lower revenues for governments. Leftists refer to a tax rate reduction as a "tax cut" that must be "paid for", even when the tax rate reduction produces the same or higher revenues, in effect paying for itself. Note that even a rate reduction that goes below the point of maximum revenues can still meet that standard, because for any point above the maximum, there exists a point below it that brings in the same revenue.

The reason the "Bush" tax rate cuts, like the "Reagan" cuts before them, worked so well, is that they reduced those highest marginal tax rates to a level where people could improve their after-tax income by concentrating on making their investments profitable, and stop worrying about the tax implications. The money that was tied up in arcane shelter instruments came back to create new jobs. Tax revenues went up in real dollars under both the "Reagan" and "Bush" tax rate cuts.

However, there was a difference. The earlier cuts were "permanent", meaning that they would remain low until Congress took action to increase them again (during the Clinton administration) but the "Bush" cuts had a built-in expiration date, which will see them end this year unless Congress extends them with Jazz' permission. For several years now, taxpayers have been making investment decisions recognizing that Democratic majorities in Congress are very unlikely to "cut taxes on the rich", so the high-bracket marginal rates are nearly certain to rise back to pre-Bush levels.

Restoring those tax rate cuts, and committing to keep them for several years, will not need to be somehow tied to spending reductions to "pay for" them. As they have done before, they will again pay for themselves. Using our opponents' terminology of "tax cuts" reinforces their ability to frame the debate in terms of fiscal responsibility. We need to convey that cutting rates will actually be a tax increase. Everyone understands that a business can cut prices and increase revenues. We need to talk about tax rate cuts as putting taxes "on sale".

[Even if those tax rate reductions do result in lower revenues, we can't allow ourselves to be in favor of that being an excuse to raise the taxes. Government spending always costs us, regardless of how it's "paid for". But that is a topic for another day.]
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1 comment:

  1. "We need to convey that cutting rates will actually be a tax increase." I would propose a change to read "...will result in higher tax revenues." But that's just me.

    And, liboleths... this I dig of you.


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