Dig A Hole/Fill A Hole Economics - Plus, The Purple Tax Plan
Allan H. Meltzer in the WSJ on the flawed thinking behind Keynesian econ, with four reasons it's a bust:
First, big increases in spending and government deficits raise the prospect of future tax increases. Many people understand that increased spending must be paid for sooner or later. Meanwhile, President Obama makes certain that many more will reach that conclusion by continuing to demand permanent tax increases. His demands are a deterrent for those who do most of the saving and investing. Concern over future tax rates is one of the main reasons for heightened uncertainty and reduced confidence. Potential investors hold cash and wait.Second, most of the government spending programs redistribute income from workers to the unemployed. This, Keynesians argue, increases the welfare of many hurt by the recession. What their models ignore, however, is the reduced productivity that follows a shift of resources toward redistribution and away from productive investment. Keynesian theory argues that each dollar of government spending has a larger effect on output than a dollar of tax reduction. But in reality the reverse has proven true. Permanent tax reduction generates more expansion than increased government spending of the same dollars. I believe that the resulting difference in productivity is a main reason for the difference in results.
Third, Keynesian models totally ignore the negative effects of the stream of costly new regulations that pour out of the Obama bureaucracy. Who can guess the size of the cost increases required by these programs? ObamaCare is not the only source of this uncertainty, though it makes a large contribution. We also have an excessively eager group of environmental regulators, protectors of labor unions, and financial regulators. Their decisions raise future costs and increase uncertainty. How can a corporate staff hope to estimate future return on new investment when tax rates and costs are unknowable? Holding cash and waiting for less uncertainty is the principal response. Thus, the recession drags on.
Fourth, U.S. fiscal and monetary policies are mainly directed at getting a near-term result. The estimated cost of new jobs in President Obama's latest jobs bill is at least $200,000 per job, based on administration estimates of the number of jobs and their cost. How can that appeal to the taxpayers who will pay those costs? Once the subsidies end, the jobs disappear--but the bonds that financed them remain and must be serviced. These medium and long-term effects are ignored in Keynesian models. Perhaps that's why estimates of the additional spending generated by Keynesian stimulus--the "multiplier effect"--have failed to live up to expectations.
Meltzer instead proposes:
•That Congress and the administration make a pact for a 10-year program of government spending cuts to reduce the deficit;
•That there's a closing of loopholes to create a reduction in corporate tax rates and expense capital investment (not sure what the latter is...oh, wait...here);
•That there's a five-year moratorium on new regulations;
•That we adopt "an enforceable 0%-2% inflation target to allay fears of future high inflation."
UPDATE: Via a comment by momof4, here's the Purple Tax Plan, by Laurence Kotlikoff, at Forbes.com:
The Purple Tax Plan, I present at http://www.thepurpletaxplan.org (and from which I borrow some text) is a simple, transparent, efficient, and progressive tax system. It will help the economy save, grow, produce jobs, and deliver higher wages.The Purple Tax Plan replaces the federal personal and corporate income taxes as well as the estate and gift tax with a broad-based, low-rate, progressive consumption tax and a low-rate, progressive inheritance tax. It also makes the highly regressive FICA payroll tax highly progressive. The plan eliminates the need for households to file tax returns and enormously simplifies business tax compliance. It's a 15-15-15 plan, which avoids the tax fairness problem of Herman Cain's 9-9-9 plan.
In considering the Purple Tax Plan, please bear in mind that we can have a highly progressive tax system without high marginal tax rates. The Purple Tax Plan features lower marginal tax rates than the current system, yet achieves a much more progressive distribution of tax burdens. It should also generate substantially more revenue. This is due not to "trickle down" or the Purple Tax Plan's very likely strongly positive growth effects, but simply the fact that consumption is a very broad tax base.
Details on it here.
Your title is perfect: Dig A Hole/Fill A Hole Economics
The government does not commonly create wealth. It just redistributes it.
As an example -- in Wilmington, OH they had Airborne Express. It was then bought by DHL. Part of the requirement for AbEx/DHL deal was building a bypass off I-71 to the airport facility. That way the truckers could move at 65 MPH. It took about 7 years to get the bypass approved. Since then DHL has gone out of business. They are still building the bypass to nowhere and is paid for by the federal government as part of Obama's bailout bill.
The thing no one is looking at is the millions of dollars to build this bypass is coming out of federal, state, and local incomes. Where is that money coming from? From the 53% that pay income tax.
So the road company is employing people and paying them decent wages. The employer are being paid from the government's money. The money is coming from you and me. How is that creating wealth. There is no longer an ABX/DHL to load the cargo from the trucks to the airplanes and vice-versa. Where is the income (or wealth) coming from?
Jim P. at October 29, 2011 12:18 AM
To some extent, Keynesian economics is better than you think it is. The idea is that the government runs temporary deficits during bad times - using money saved up by running a surplus in the good times. That's really not such a dumb idea.
The problem is: modern governments forget about the "running a surplus" part.
a_random_guy at October 29, 2011 2:14 AM
Amy Alkon
http://www.advicegoddess.com/archives/2011/10/29/dig_a_holefill.html#comment-2719387">comment from Jim P.That is awful, Jim P. If that money were *someone's* money, they'd for sure stop.
Amy Alkon
at October 29, 2011 5:44 AM
Said a_random_guy: "The problem is: modern governments forget about the 'running a surplus' part."
And the "temporary" part.
Old RPM Daddy at October 29, 2011 6:10 AM
I have read a little about the Purple Tax Plan and so far I am really liking it. Refunding the sales tax seems needlessly complicated. Something like a tax exempt card that low-income people could show at checkout for necessities seems more logical, but all in all the plan seems pretty rational and straighforward. Laurence Kotlikoff is the author, if anyone wants to read up on it.
momof4 at October 29, 2011 7:06 AM
The issue is not really taxes (revenue) it is spending.
The government has been, and is continuing, to spend like drunken sailors on the first shore leave after six months at sea.
The Purple Tax or Caine's 999(9) plan does nothing to address the issue.
Bush, Obama, Clinton and Congress is responsible for this. By adding regulations (and therefore regulators), new laws (ObamaCare, Patriot Act) and restricting liberty they increase the size of government.
Anytime you have the government involved in the private sector, you distort the market. Look at the CRA and Freddie and Fannie. Look at Government Motors. Look at the BP oil spill -- the only reason they were out that far and down that deep is because they aren't allowed to drill closer by the EPA.
This is not what was envisioned by the founding fathers. They wanted a small federal government that was about equal to the several states.
Jim P. at October 29, 2011 7:36 AM
Amy Alkon
http://www.advicegoddess.com/archives/2011/10/29/dig_a_holefill.html#comment-2720119">comment from Jim P.Spending, absolutely, has to be reformed. You won't find a stitch of disagreement from me on that, and I doubt you'll find any from momof4.
Amy Alkon
at October 29, 2011 7:42 AM
Jim P., it is not true that public funds only come from "the 53%" who pay federal income taxes. There are also other federal taxes, and state taxes, including state income taxes.
jaltcoh.blogspot.com at October 29, 2011 7:56 AM
"The idea is that the government runs temporary deficits during bad times - using money saved up by running a surplus in the good times."
I don't know; it's a a little bit like the statement that true Communism has never been implemented. It may be true according to the literal definitions of the words, but like "true" Communism, it will never happen because it runs contrary to basic human nature. However, your statement is true as far as it goes; Keynes expected that governments would engage in deficit spending in recessions, but pay the debts back in good times, so over the long run it would average a zero balance. Obviously, that's not what's happening today. And it really makes any arguments about whether Keynesism works or not irrelevant, because in the current situation, the Keynesian prescription is contra-indicated by the patient's symptoms.
The burden of the regulatory state cannot be overestimated. It is absolutely crushing. Regulatory burden and the cost of compliance causes productivity to decline, and my personal theory is that declining productivity is where we get stagflation -- the money supply is expanding, but no one is getting the benefits of that expansion because it's all going to pay the cost of compliance. Prices go up while wages remain flat. Stagflation.
And the regulatory burden isn't just measured in money; it's measured in time too. It increases the spread of time between when money is put into a capital investment, and when that investment starts showing returns, and that's a cost that the company has to carry. In the case Jim P. cited, in a rational world it shouldn't have taken more than a year to 18 months to build that overpass. If that capital investment had started showing returns after a year, DHL might still be in business. Those time spreads make American business less competitive against foreign companies who don't face that burden and can act more quickly to become more competitive. It doesn't take seven years to build a 5-mile bypass in China.
Cousin Dave at October 29, 2011 8:20 AM
Re: Purple Tax Plan
What the Blank-Blank is up with this obsession with "Progressive" tax rates?
Look, I don't care who you are, or how much you earn. Just pay your share.
How much is your share, I hear you ask?
Simple.
Your share is the same as mine. 10% (or 12%, or 15%, ect) I am not so concerned with the actual number as I am that everybody pays it.
This "soak the rich" class warfare Marxism has got to stop.
Increasing tax rates on those who earn more is just wrong!
Set the tax rate the same for all citizens.
Those who earn more, pay more.
It is really that simple.
Want to fork over less tax money?
Earn less.
thomas at October 29, 2011 9:15 AM
You are quite correct about that. One hundred percent of us pay corporate income tax whenever we buy anything.
We also pay sales tax in most states.
Then mostly everyone pays property taxes whether you buy or rent.
Then there are the taxes on fuel.
Some revenue comes from import and export duties.
The point of my post is that regardless of where the revenue is coming from, the government does not produce wealth, it redistributed from every person that pays taxes whether directly or indirectly.
Jim P. at October 29, 2011 1:26 PM
The Purple tax plan would not be my absolute favorite, but... pretty much all of the tax reform plans that have been offered are so much better than what we have, that arguing about which one is best is almost beside the point. If I was a Congressman and the party whip came around and said, "We can pass the Purple plan today, if you'll vote for it", I'd vote for it.
Cousin Dave at October 29, 2011 11:17 PM
My biggest problem with any federal flat tax or other plan, is that there is little to nothing that the fed can do to control state tax systems. Many states have state income taxes and these plans have been piggy backed onto the federal plan to allow for deductability of state taxes against federal income tax.
Blue states, the ones with the most progressive tax burdens, (most have high sales taxes in addition to income taxes) are already hemorrhaging population because the industrial base and small businesses that kept workers in state and paying taxes are gone.
The internet and mail order were the final nail in the coffin, as it became extremely easy to run almost any kind of a small business other than those requiring personal service, (plumbers, roofers, dentists etc) from anywhere in the US or abroad.
Every year, as more leave for greener pastures it just accelerates the decline.
They have literally killed the goose that laid the golden egg.
These states are in a position of having to default on, and renegotiate their pensions, and bankruptcy is just around the corner.
I think any flat tax federal plan will only exacerbate the problem, as more states like California and New York "fail" and have to totally change their way of doing business to attract tax payers back to the venue.
New York and California among others have been in the process of failing for the last thirty years.
If things were to turn around tomorrow, it would take another fifty years to get back to where they were before the do gooders with OPM took over.
Isabel1130 at October 30, 2011 8:59 AM
Part of the Purple plan or Caine's 999(9) plan could be done today.
Per the Sixteenth Amendment:
But the Constitution does not contain anything in the enumerated powers, including the Commerce Clause:
to lay a sales tax on the individual transaction within a state. To do that would require a Constitutional Amendment.
Then there is the next factor: Would only the original retail sales be taxed or would resale from individuals be taxed? Would some individual who plants a garden and has extra that he sells from an honor table on his front lawn have to charge tax for that? What about yard sales?
What about if it was the sale of a TV? The guy is an electronics tech. He picks up dead TVs, fixes them and sells them as a hobby/side job. It isn't a formal job and he is selling refurbished items?
What about Goodwill stores?
Should food be taxed? That is an essential item. So if I grow 90% of my own food for my own consumption, should I have to pay taxes on it? And if you don't believe that could happen just look at Wickard v. Filburn. That was was growing his own wheat for his own use.
Jim P. at October 30, 2011 2:17 PM
But the Constitution does not contain anything in the enumerated powers, including the Commerce Clause, to lay a sales tax on the individual transaction within a state. To do that would require a Constitutional Amendment.
The government isn't going to consider amending the Constitution. They'll just do what they want using whatever convoluted reasoning they can pull out of their ass and call it good.
In the early 1900's, it was actually believed a constitutional amendment was required to make alcohol illegal. Must have been harder than our rulers would have liked as they managed a workaround to the amendment process when it came to drugs. And a lot of other things.
Not Sure at October 30, 2011 2:52 PM
The reason the War on Drugs, the .08 DUI, the seat belt laws, No Child Left Behind, etc. are imposed on the states is because the states have to feed the money to the federal leviathan to get it back.
The federal sales tax still has to be implemented by the states and the retailers. If the people were to tell Wal-Mart, Target, Kohl's, Macy's, etc. that we will not shop in their stores if they charge the tax -- it will not go anywhere.
If we go after our state governments and governors and tell them we do not support the extortion, we may be able to break the hold of the leviathan.
We need to push for a Constitutional, limited, federal government. It is probably a forlorn hope.
In the meantime I'm stocking up on precious metals, weapons, ammo, shelf stable food, and toilet paper in case the collapse comes sooner rather than later.
Jim P. at October 30, 2011 6:14 PM
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