Thread: Income Tax Mirage

It makes sense. I don't know why it's such a hard concept to grasp. When people have more money they spend more money or...when people have more money they save it for retirement and do not have to rely on government assistance for a living. Either of those options help the economy. There really is no other option or destination for the money to unless everyone just decides to burn their money.

Hmmm, I see tax cuts followed by massive deficits, and tax increases followed by surpluses. But then, I'm looking at the numbers and not trying to make the case that each and every year is an exception to the rule because it's caused by something else.

Originally Posted by goober

Hmmm, I see tax cuts followed by massive deficits, and tax increases followed by surpluses. But then, I'm looking at the numbers and not trying to make the case that each and every year is an exception to the rule because it's caused by something else.

That is because you are a total partisan hack.

The reality is that regardless of who is in office, or what the top tax brackets are, federal tax revenues march relentlessly higher except for occasional anomalous events caused by external economic circumstances.

The elephant in the room, that you and all others that try to paint this as a revenue issue ignore, is that federal expenditures also march relentlessly higher, but with no exceptions and at a greater rate than revenues do.

Originally Posted by smurf

The elephant in the room, that you and all others that try to paint this as a revenue issue ignore, is that federal expenditures also march relentlessly higher, but with no exceptions and at a greater rate than revenues do.

Well said, and to be specific - over the last 50 years revenue has grown at an average yearly rate of 7%. During that same time period spending has grown at a yearly average of 7.5%. Now there is your problem!

Note: Over this same time period inflation averages somewhere near 3%. We could have increased spending by double the inflation level for the last 50 years and accumulated surpluses. This is not a revenue problem.

Originally Posted by goober

Hmmm, I see tax cuts followed by massive deficits, and tax increases followed by surpluses.

If you are looking at deficits then you are looking in the wrong column. I am analyzing the relationship between income taxes and federal revenue.

But then, I'm looking at the numbers and not trying to make the case that each and every year is an exception to the rule because it's caused by something else.

So the fact that every revenue loss coincides with a recession is just coincidence? Oh, and in the one case revenue losses extended longer than the recession just happened to be after 9/11 and before the full tax cuts were even implimented. Yeah, ignoring all effects of that day sounds much more reasonable and bipartisan.

How about a Constitutional limit on taxes of 25% of total income from all sources? This would include state and local taxes, property taxes, sales taxes, etc. All governments would then have to live within their income, and even with a 25% rate most would be paying less taxes than they do now.

Originally Posted by SupPackFan

On thread after thread on any economic subject I tire of the repeated claim that the Bush tax cuts created deficits. I realize that the CBO and most economists will consistently refer to income tax cuts as ‘costing’ the government money. In the case of the CBO I understand. Tax cuts change behavior which makes the results unpredictable. But since the CBO is in charge of making predictions some system must be used to do so. That system is to pretend economics is a static science rather than dynamic. The CBO pretends changing one variable has no effect on the others, which in reality is simply not the case.

The economists, on the other hand, I do not quite understand. The historical numbers simply do not support their claims. The numbers I am talking about is federal revenue vs changes to income tax rates. Now, I have not been able to find such a chart – comparing tax rates to revenue – so I was forced to create my own.

First, here is the historical income tax rates table: The Tax Foundation - U.S. Federal Individual Income Tax Rates History, 1913-2011
Second, here is the historical federal revenue table: Historical Federal Receipt and Outlay Summary


And I simply combined information from both to create this: http://www.uniquesavers.com/drivebia...nuetoRates.jpg

The point I am trying to make is that changes to income tax rates essentially have no effect on federal revenue, therefore, have no effect on the federal deficit. The true catalyst for deficits is economic recession and increased federal spending.

I also will reference this table of Recession years: List of recessions in the United States - Wikipedia, the free encyclopedia

I am going to take this step by step. In many other threads my analysis is combated with graphs and charts breaking up the actual numbers in different fashions, followed by quotes from experts directly disputing my point. But I am not making a future prediction, I am making a logical and statistical conclusion from past information. The facts are, I am right and these so-called experts are wrong. This is practically undisputable, though I am counting on many here to do exactly that.

Over the last 50 years income tax rates have been cut 3 times, and increased once.

1960’s: J.F.K cuts the top tax rate from 91% to 70%

The first drop took place in 1964 from 91% down to 77%. Federal revenue increased by $4 billion, where the year before it had increased by $6 billion. In 1966 the top income tax rate dropped from 77% to 70%. Revenue increased by $14 billion the year after. Also look three years prior to each change thru three years following. I fail to see any trend.

The next income tax cuts were in the Reagan administration, dropping the top rate from 70% down to 28%.

The first step, from 70% down to 50%, resulted in a significant drop in federal revenue, including a year of actual loss in FY 1983. Revenue then increased by 11% in 1984 and continued rising through the next two steps of the Reagan tax cuts. Did the Reagan tax cuts cause the revenue losses of 1982 & 1983? Hard to prove, but those two revenue losses did coincide exactly with the 16 month recession of the early 80’s.

Next up is the Clinton tax increases. Top rates increased from 28% up to 39.6% with two steps.

The first step resulted in a slight loss in revenue, but the second step was followed by several years of consistently above average revenue increases. Did the tax increases cause those revenues? Some might give credit to the Internet revolution.

Now, the big argument, the Bush tax cuts. W dropped the top rate from 39.6% to 35% over three steps.

The year before revenue had grown 10.8%. After each of the tax cuts revenue dropped - for the first time since 1983 - 1.7%, 6.9%, and 3.8% respectively. Then came four years of revenue growth, peaking at 14.5% in 2005.

Did lowering the top tax rate from 39.6% to 39.1% cause the gigantic FY 2001 drop in revenue? Is it just coincidence that again, this revenue drop parallels another recession – the one that began in March ’01? Another big drop took place in FY 2002. Which seems more likely to have caused this – dropping the top tax rate from 39.1% to 38.6%, or the complete destruction of Manhattan? Again, the revenue loss from Oct ’02 thru Oct ’03 can either be blamed on Bush or our countries 9/11 hangover.

At the end of the Bush administration, 6 years after the last adjustment to tax rates, federal revenue takes a dive again. FY 2008 and FY 2009 are both the last two Bush budgets and the first two Nancy Pelosi budgets. It is also the beginning of the ‘Great Recession’. But this thread is not about arguing the points of who or what is responsible for this last recession. What is obvious for all to see is that the Bush tax cuts are not responsible.

The truth is, these minor changes to the tax rates make a great election issue for both parties, but are neither the cause or solution to the problems we face. One party uses income taxes to create class envy, the other uses them to level accusations of socialism. Until the modern Tea Party movement, no one seemed willing to tackle the true issue . . . irresponsible and unsustainable federal spending.

Thanks for the chart! You know, what that chart shows me is how well the idea of deficet spending increaseing tax revenues as it grows the economy, worked in past eras. That is, up until the offshoring and flood of dollars started leaving our shores. When that happened, the deficet spending stopped working, more or less to the degree it had prior to the change in economic models.

In the old economy the basic Keynsian principle that deficet spending shortened recessions was proved time and time again, and of course one way to deficet spend is to reduced tax rates. In turn, the money borrowed, is injected back into the economy.

Yet there are so many varaibles that your chart of course cannot show. When taxes were decreased, how much of any increased revenues was the result of some income groups not having to use tax shelters, given the lower tax rates? And how many new tax shelters were created for high income groups as time went on. And of course this would figure into any revenue figures. These tax shelters, figure into the stats, yet we just don't know to what degree, most times.

So one wonders just what was the real and effective rate when the tax rate on the top earners was 91 per cent? Was it indeed 91? By money says hell no. What would serve this discussion much better would be somehow to get the actual and effective tax rate on the rich and the middle class.

And another thing the tables don't show is how much of the revenue increases that came with tax cuts, just what percentage of these were due to the taxes the middle class pays? Remember income tax bracket creep?

My point is, I think it would be very hard to draw conclusions, as you have from your chart. There were more factors involved than just tax decreases or increases. But one thing seems fairly certain, prior to globalizaton deficet spending tended to shorten recessions or business cycle and economic growth was fertilized by deficet spending.

Reagen cut taxes, and just like the Keynsian proponents said, his deficets stimulated the economy to help get us out of that reccession. Deficets have been our friend in the past, until we allowed the economic model to be changed to one that encouraged the flow of US dollars OUT of this Nation, displacing millions of good jobs in the process. Jobs that paid enough to require income taxes to be paid, in larger amounts than your standard replacement service sector job.

Originally Posted by Blue Doggy

Thanks for the chart! ....

You and Goober are really remarkable.

The data SupPakFan presented is a fair and reasonable presentation of the fact...let me restate that...FACT...that higher marginal tax rates at the top of the scale ARE NOT necessarily (or even likely) to be a significant revenue producer for the federal government. There is a good reason for that and it has been mentioned before. The reason is that high income individuals generally have more flexibility in how they receive their income than the average wage earner does. That flexibility allows the individual to do such things as defer income, adjust their income to categories that are taxed at other than ordinary rates or allocate their "income" to other entities.

The more the government chooses to take that income the more the high earner works to preserve it in one way or another. It's human nature and it isn't a practice restricted to the "wealthy". It's actually laughably amusing how much effort so many people go to so that they can itemize their deductions. I see people all the time with $50-60k incomes going into hyperdrive to scrounge up enough deductions to that they can show deductions $500 in excess of their standard deduction.....and save themselves $75 in tax.

The objective of government is not (or should not be) to see how much money they can extract from the population but should be to work to insure a structure where the citizens can provide for themselves, create their own opportunities and enjoy the benefits of their labor.

Originally Posted by Blue Doggy

Thanks for the chart! You know, what that chart shows me is how well the idea of deficet spending increaseing tax revenues as it grows the economy, worked in past eras. That is, up until the offshoring and flood of dollars started leaving our shores. When that happened, the deficet spending stopped working, more or less to the degree it had prior to the change in economic models.

In the old economy the basic Keynsian principle that deficet spending shortened recessions was proved time and time again, and of course one way to deficet spend is to reduced tax rates. In turn, the money borrowed, is injected back into the economy.

I am not quite sure what you are saying. Are you saying that deficit spending increases economic activity specifically during recessions, or that deficit spending increases revenues any time? I am not sure what you see in these numbers that prove that - nor do I see a changed pattern at any time indicating that deficit spending stopped working. I added red to the years with deficits to make such analysis easier:

Yet there are so many varaibles that your chart of course cannot show. When taxes were decreased, how much of any increased revenues was the result of some income groups not having to use tax shelters, given the lower tax rates? And how many new tax shelters were created for high income groups as time went on. And of course this would figure into any revenue figures. These tax shelters, figure into the stats, yet we just don't know to what degree, most times.

You are hitting on my point. Changing tax rates does not give any predictable result. Anyone who announces, "Extending the Bush tax cuts for the richest Americans will cost us X billion dollars over the next 10 years." might as well be talking through their anal cavity. It may increase revenue just as likely as decrease it.

So one wonders just what was the real and effective rate when the tax rate on the top earners was 91 per cent? Was it indeed 91? By money says hell no. What would serve this discussion much better would be somehow to get the actual and effective tax rate on the rich and the middle class.

And another thing the tables don't show is how much of the revenue increases that came with tax cuts, just what percentage of these were due to the taxes the middle class pays? Remember income tax bracket creep?

My point is, I think it would be very hard to draw conclusions, as you have from your chart. There were more factors involved than just tax decreases or increases.

I do understand your point, and agree that many peices of the puzzle are not included in my chart. What percentage of income was taxed at 91% in 1960 compared to what percentage is taxed at the highest rate today? Not on my chart. I also have not included all the middle tax rates, only the top and bottom. However, I do have a link to that chart and you can see for yourself that when the top and bottom rates change all the other rates are also adjusted relatively the same.

But one thing seems fairly certain, prior to globalizaton deficet spending tended to shorten recessions or business cycle and economic growth was fertilized by deficet spending.

Reagen cut taxes, and just like the Keynsian proponents said, his deficets stimulated the economy to help get us out of that reccession. Deficets have been our friend in the past, until we allowed the economic model to be changed to one that encouraged the flow of US dollars OUT of this Nation, displacing millions of good jobs in the process. Jobs that paid enough to require income taxes to be paid, in larger amounts than your standard replacement service sector job.

Again, when it comes to the actual numbers, I do not see what you are seeing. Please point out the places to me where deficit spending results in a jump in revenue. Since there are only 6 years of the last 50 where we did not deficit spend, I am not even sure what to compare it to.

Tax cuts lead to massive deficits, and tax increases precede reductions in the deficit.
All the partisan goggles in the world won't change that picture, just be honest and stop the stupidity and deal with reality.

Originally Posted by goober

Tax cuts lead to massive deficits, and tax increases precede reductions in the deficit.
All the partisan goggles in the world won't change that picture, just be honest and stop the stupidity and deal with reality.

Exhibit A of why this discussion is so painfully irritating . . .

Do you hear the words coming out of my mouth!?

Originally Posted by goober

Tax cuts lead to massive deficits,

No, as much as you would like it to be, that is not true.

Originally Posted by goober

and tax increases precede reductions in the deficit.

No, as has been shown repeatedly, tax rates don't matter, as tax revenues generally go up, regardless.

If you had even a gram of integrity, you would point out that the only time that deficits trended lower was when spending increases were kept in check, while no external economic shock wreaked havoc with increasing tax revenues. You don't, so you won't. Instead you will shriek like a spoiled child about "tax increases", as if they mattered even in the slightest.

Originally Posted by goober

All the partisan goggles in the world won't change that picture, just be honest and stop the stupidity and deal with reality.

What an incredible hack you are. Either you have no honesty, or you are as dumb as a sack of hammers.

Originally Posted by goober

Tax cuts lead to massive deficits, and tax increases precede reductions in the deficit.
All the partisan goggles in the world won't change that picture, just be honest and stop the stupidity and deal with reality.

Out of curiosity, does spending have anything to do with deficits in your world?

Let's play with numbers some more. We have substantial statistical data on taxes from 1995 forward (IRS Statistics on Income) so let's play with those numbers.

In 1995 the top marginal tax bracket was 39.6%. That's the Clinton era bracket that so many of the money grabbers are scrambling to get back to. In 1995 there were 94.5 million tax returns filed and income tax revenue was $600 billion. In that year 33% of the returns filed were for folks with incomes under $20k and that group paid 3.7% of all income tax. 5.7% of the returns filed showed income in excess of $100k and they paid more than 47% of all the tax. The top bracket alone paid 13.5% of all income taxes.

In 2008 the top marginal rate was the absolutely ridiculously low amount of 35%. Only 3% of the returns filed for that year reported income less than $20k and that group paid 0.75% of all income tax. 17% of the returns reported income ni excess of $100k and that group paid more than 71% of all income tax. The top bracket paid over 20% of all income tax.

So let's recap....at the higher, "better" Clinton era rates 33% of the tax filers reported income at or below $20,000 and they paid nearly 4% of all taxes. Under the deficit inducing, crazy and insane Bush era tax rates the number of people filing a return with an income less than $20k dropped by a factor of 10 and the amount of tax they paid dropped by a factor of 5. That's pretty good! Now some more good news...under the Clinton rates the top earners paid 47% of all taxes but under the Bush rates they paid 71% of all taxes and the top bracket...they paid more of the whole tax tab too!

Try redistributing some of that!