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Tilting at Windmills

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April 2, 2009

THE RIGHT WON'T LET THE TAX FAIRY GO.... The National Review's Andy McCarthy had an item yesterday, which was not an April Fools' joke, and which served as a helpful reminder of why discussing tax policy with conservative activists tends to be frustrating.

We know that lowering marginal tax rates can increase federal revenue, but it's clear that the President won't cut taxes (not even for "95 percent of Americans"). So we need a Plan B....

So, if the government lowers taxes, the argument goes, government revenue necessarily goes up. It's something "we" already know. Indeed, it's so obviously true to McCarthy, he doesn't bother to explain how he came to believe such nonsense.

The idea has been around for years, and it's known in some circles as the "Tax Fairy" argument -- all we have to do is lower taxes and, like magic, the Tax Fairy will boost revenues. Under this approach to tax policy, tax cuts just pay for themselves.

The problem, of course, is that the argument is wildly wrong. Dean Baker recently explained, "It is amazing to me that people have treated this as though it is a debatable point, because it is really not." Or, as A.L. noted yesterday:

[I]t's demonstrably, empirically untrue. We've lowered marginal tax rates multiple times, and it never produces more revenue. Even the most ardent supply-side economists don't believe that tax cuts fully pay for themselves (they believe only a fraction of lost revenues are offset by supply-side effects).

In other words, only complete crackpots believe that McCarthy's "Plan A" would increase revenue. Sadly, with respect to this issue, virtually all mainstream Republicans are now complete crackpots. Which goes a long way toward explaining why the Republican party's budget proposals make absolutely no sense. How can you craft a coherent budget when your only idea for raising revenue is to massively cut revenue? If you're working from that premise, why bother coming up with numbers at all?

What's more, even if we accept McCarthy's foolishness at face value, why wouldn't officials just cut taxes all the time? As Matt noted, tax cuts tend to go over well with voters, so political leaders have an incentive to keep cutting. If "we know" lowering marginal tax rates can increase federal revenue, why would any politician ever oppose more tax cuts?

As for McCarthy's contention that President Obama "won't cut taxes ... even for 95 percent of Americans," didn't we just have this debate? Hasn't Obama already cut taxes for 95% of Americans?

How odd.

Steve Benen 8:00 AM Permalink | Trackbacks | Comments (39)

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Comments

How odd indeed. When one has no ideas, new or old, that make any sense, one should shut up. Having Joe the Plumber as the "face" of your National party says it all. Nauseatung...

Posted by: Stevio on April 2, 2009 at 7:59 AM | PERMALINK

It is not odd. It is entirely consistent with behavior of conservatives in general when it comes to the discussion of issues--they are all intellectually dishonest people who believe and rationalize, rather than reason. Except in terms of tactics, they are incapable of learning becasue they are incapable of acknowledging fault. Conservatism isn't a philosophy; it's a personality disorder.

Posted by: wonkie on April 2, 2009 at 7:59 AM | PERMALINK

It really is impressive.
I mean, some very serious things are happening that require very serious thought, and these GOP schnooks are busy asserting over and over that night is day and up is actually down.
I just hope Obama's efforts bring some results fairly soon. Otherwise the same schnooks will howl "See? If only we wudda lowered taxes..."

Posted by: richard greenslade on April 2, 2009 at 8:03 AM | PERMALINK

The modified tax fairy idea is that, yes tax cuts don't pay for themselves, but have to be paired with spending cuts. When challenged to identify spending to be cut, the tax fairy reply is "waste, fraud and abuse." Asked how much money would be recovered by this mechanism, the mumbling becomes inaudible.

Posted by: Joel on April 2, 2009 at 8:09 AM | PERMALINK

So let's raise taxes to a 50% rate and really rake in the cash. If raising taxes makes the government more money why not just take have and "call it even?"

This sentence from The Center on Budget and Policy Priorities is not so solid:
"Revenues in 2007 were still more than $200 billion short of where they would have been had they grown at the rates typical in other recoveries."

"Would have been," Is commonly known as speculation. Just because a liberal says it doesn't make it so.
Did the revenues of the federal government go up, continue on the same, or go down when taxes were lowered? If they went up or remained the same it proves that higher taxes do not improve the federal government's operational cash.

Spending increasing exponentially is the biggest problem.

Posted by: Eric on April 2, 2009 at 8:11 AM | PERMALINK

And the Tax Fairy is the child of the Underpants Gnome.

Sorry fRighties, in addition to our other problems, we're still paying for two wars (which you never seem to mention any more). After that we'll have to pay for the care of the soldiers who fought in them (no they aren't characters in a video game).

Posted by: The Answer WAS Orange on April 2, 2009 at 8:21 AM | PERMALINK

Eric,

1. Go find a table of historical tax revenues. (The OMB among other organizations has them.)

2. Make a graph of tax revenues for the years 1970 - 2007 (the last year, typically, for which data is available).

3. Look at the 40 year trend curve. Notice how, after the Bush tax cuts, although the GDB continued to to percolate along (thanks, we now know, to the real-estate bubble, but that's another story), the revenues dropped, then only recovered part of the way, and continue to lag the trend?

What you are doing here isn't "speculation." It's "observation."

Posted by: Charles on April 2, 2009 at 8:30 AM | PERMALINK

Blast. Make that GDB into GDP.

Posted by: Charles on April 2, 2009 at 8:31 AM | PERMALINK

There's no mystery here-- it's just working backwards from the political premise that what's always needed is less tax for the wealthy and fewer benefits for the poor and middle class. The mystery is why anyone imagines that there is some non-political (i.e., economic, intellectual, ideological, whatever) motivation here.

Posted by: MattF on April 2, 2009 at 8:39 AM | PERMALINK

You continue to misunderstand the nature of post modern conservatism.

The point is not to state the truth, it is to cut taxes.

Truth is irrelevant if you win the argument.

As a WM article pointed out, the right has learned from French philosophes.

Posted by: valuethinker on April 2, 2009 at 8:43 AM | PERMALINK

Eric:

"Would have been," Is commonly known as speculation

Um, you're contradicted within the quote you provide:
Revenues in 2007 were still more than $200 billion short of where they would have been had they grown at the rates typical in other recoveries

This isn't alleging that a particular policy caused a shortfall. It's only saying that, if you look at earlier recoveries, figure out the growth rate in and following them, and apply that rate to the current starting point, you get revenues that exceed what we actually saw. This isn't speculation. It's math.

Posted by: Bernard HP Gilroy on April 2, 2009 at 8:44 AM | PERMALINK

"...when your only idea for raising revenue is to massively cut revenue..." and when you also believe that government is not the answer, government is the problem, your basic philosophies work against good government. But I like the premise: Repigs are the government, hence THEY are the problem. How nice of them to point that out. Of course, it never occurs to them that government can be, and often IS a part of, and a facilitator towards, solutions to problems. They don't believe even in working "by, or and for" the PEOPLE, unless you are talking corporate 'persons'.

----------------
Spending increasing exponentially is the biggest problem.
Posted by: Eric on April 2, 2009 at 8:11 AM | PERMALINK*************************

Wow, Air-dick, you must be REALLY pissed at bu$h and DICK, since Presidunce bu$h increased government spending more than any of the six presidents preceding him, including LBJ. Bu$h increased discretionary outlays by an estimated 48.6 percent. The largest increase took place in his last year and included, among other things, the $700 billion financial industry bailout bill (TARP - money well spent, eh?) and the federal takeover of Freddie Mac and Fannie Mae. That damn socialist bu$h!! I don't blame you for being pissed man. I mean when, for eight years, the bu$h cabal spent almost twice as much as his predecessor, President Clinton, you must have REALLY been mad!! Especially since, when adjusted for inflation, bu$h increased the federal budget by a whopping 104 percent. You go ahead and give those big spending socialist republicans hell! You are right, they deserve it! (Source of facts: Tax and Other Fiscal Policy, Government Accountability Project, Working Papers, Mercatus, Financial Markets Working Group Working Papers)

Posted by: In what respect, Charlie? on April 2, 2009 at 8:49 AM | PERMALINK

Dear McCarthy the Stupid,

We have decided to conduct an empirical experiment to determine if your theory of "cutting taxes equals more government revenue." As a microcosm of the bigger federal picture, we shall use your paycheck.

To begin with, we will reduce your pay by 10%, effective immediately. Any increases you experience in salary as a result of this action is yours to keep. However, if you do not experience an increase in personal revenue equal to or in excess of the original salary reduction, we will cut your pay by another 10% or its original amount, and will do so until you can experience the full benefit of the"reduced-revenue-inflicted increase of revenue."

If, in the end, you should experience a 100% reduction in salary without the benefit of any revenue increase, then you may consider yourself to have been indefinitely "sent Galt".

Cordially,
S. Waybright
Human Resources Department
United States of America

Posted by: S. Waybright on April 2, 2009 at 8:52 AM | PERMALINK

I know I am the token Republican Troll but I would like to correct one thing.

The "tax fairy" does exist.

If you had a tax on certain income of 99% then you would get more revenue by lowering taxes. It is the other side of the Laffer Curve. However, no one really knows where the top of the Laffer Curve is.

Insane Republicans, and I am worried that the 'insane' part of the phrase is redundant, think the top of the curve is significantly less than 35%.

Sane economists are smart enough to know that they really don't know what the curve looks like. Some guess the marginal rates of between 60% and 90% are counterproductive.


I am not arguing that we should set the tax code marginal rates to achieve maximum revenue.

The TAX FAIRY is real. It just is sleeping and has been sleeping for at least 45 years.

Posted by: neil wilson on April 2, 2009 at 8:59 AM | PERMALINK

Air-hick:

If you measure spending (or revenues, or almost anything) in dollars that are not adjusted for inflation, you will find it increases exponentially, because inflation compounds, meaning that it increases exponentially. Because exponentials ultimately grow faster than all other "normal" functions (ones that don't have names of their own, like factorial, Ackerman's Function, or the Busy Beaver Function), in almost every case, if you don't adjust for inflation, you get exponentials.

Posted by: dr2chase on April 2, 2009 at 9:05 AM | PERMALINK

Here's a quote from Bush in 2001:

"Along with funding our priorities and paying down debt, my plan returns about one of every four dollars of the surplus to the American taxpayers, who created the surplus in the first place," Mr. Bush said.

Notice Bush didn't say, "I will cut tax rates and the surplus will GROW BIGGER which will fund a massive expansion in government spending." That would have been laughable to non-idiots and republicans alike.

Posted by: Jasper on April 2, 2009 at 9:07 AM | PERMALINK

As usual, you progressives are totally misunderstanding this issue.

As we true Republicans know, cutting the top marginal tax rates WILL raise federal government revenues. Our economic god is Arthur Laughler. The problem is that we just have not cut them enough for the Laughler Curve to fully take effect.

As any really knowledgeable person should point out, the solution is:
- Jobs in our country are created by 'the rich'.
- Accept John McCain's definition of rich as being those who make more than $5 Million a year.
- Eliminate taxes for those making more than $5 Million a year.
- Eliminate the death tax so that the rich can become a permanently self-perpetuating class.
- As they do not create jobs & really provide little for the economy, raise tax rates for the non-rich.

To further boost our economy and address the massive debt that democrats have caused, we should also:
- Raise payroll taxes
- Raise the age at which the greedy underclass starts getting their grubby paws upon social security. An appropriate age to be eligible to draw social security should be determined by actuaries as being one year less than the expected life span of persons. Of course, as women can expect to live longer than men, their retirement age should be higher.
- Reduce social security benefits for those parasites already receiving it.

Posted by: RepublicanPointOfView on April 2, 2009 at 9:12 AM | PERMALINK

Neil W,

The existence and/or wakefulness of the tax fairy is also complicated by the fact that we have different tax brackets. Suppose, for example, that we created a tax bracket of 99.99%, starting at one quadrillion dollars. This is unlikely to affect anything at all, since nobody earns a quadrillion dollars or even comes close.

It's worth noting, too, that some people DO pay very high marginal rates, if you call a "tax" "money that comes out of my paycheck". Middle-class wage earners pay income tax, plus social security, plus their employer also pays a similar amount in social security on their behalf. Add that all up, I think you get something in the ballpark of 40%.

Economists (sorry, no links handy) have also noticed that the cut off of various low-income-linked benefits can also act as a very high marginal tax rate for people at lower incomes.

Most other countries in the OECD, they'd notice what you spend on your medical insurance, and ask why that shouldn't be treated as a tax, too? (Seeing as how they all spend much less, and generally get more, I think they have a point -- it seems pretty stupid to deny ourselves cheap quality health care just so we can avoid the "t" word.)


Posted by: dr2chase on April 2, 2009 at 9:19 AM | PERMALINK

If lowering the marginal tax rate INCREASES the government revenue, doesn't that mean that everyone that is given the lower tax rate is paying MORE in taxes in pure dollars?? Shouldn't McCarthy be opposed to lowering the tax rate then?

I always thought the whole point was to shrink government to the point where it can be drown in a bathtub. Doesn't lowering the marginal rate have the exact opposite effect?

These Repubs are so confusing some times.....silly Tax Fairy!!

Posted by: GreyGuy on April 2, 2009 at 9:20 AM | PERMALINK

As republicans have made a god of Ronald Reagan, I believe that we should make every effort to return to those idyllic days.

As the world was crap when Saint Ronnie took office in 1981 & paradise when he left office in 1989, I suggest a midpoint of 1985 as a compromise to emulate.

It is my suggestion that we return our top marginal federal tax rates to the level that they were on January 20th of 1985 - the day that the patron saint of republicans took the oath of office for the second time.

The top marginal federal tax rate at that time was 50% & I think that would be a good target for January 20th of 2010 - just in time for the 25th anniversary of the saint's 2nd term as president.

Of course, republicans should also be aware that a god is just backwards dog!

Posted by: SadOldVet on April 2, 2009 at 9:28 AM | PERMALINK

Hasn't Obama already cut taxes for 95% of Americans?

Yes, but only because he knows -- it's obvious, really -- that cutting taxes raises revenue. Which is what Obama wants! More revenue for monster-sized government programs! Just as GreyGuy explained, when revenues increase, that means Americans are paying more in taxes, even if it's at lower rates.

It's insidious! By embracing tax cuts, Democrats have corrupted them!

(It's still April 1st somewhere, isn't it?)

Posted by: Grumpy on April 2, 2009 at 9:30 AM | PERMALINK

"Of course cutting marginal tax rates increases reveue. Look at history. This is why the first President Bush got re-elected after first running balanced budgets and then surpluses. It was only when tax-raising President Clinton came along that we retreated into deficits again." - Andy McCarthy

Posted by: JohnJay60 on April 2, 2009 at 9:34 AM | PERMALINK

Steve,
This post reminds me of an old lady who Proust describes as, bizarrely, always ending her letters with diminishing salutations. Thus:

adoringly
passionately,
fondly,
sincerely
respectfully

Aren't you kind of burying the lede here? Isn't the *first thing* we note is that Obama has already cut taxes for 95 percent of americans. And therefore *even if* McCarthy's supply side economics beliefs were held to be true (assuming a can opener) then our revenues should be rebounding even as we speak? The fact is the guy lies first off and only secondarily do we have to have a problem with his logic.

aimai

Posted by: aimai on April 2, 2009 at 9:34 AM | PERMALINK

What I find most frustrating is that Republican pundits say this all the time on TV show after TV show, and no one ever questions it. I heard the same bullshit on Real Time, and even Bill, being the kind of attacking person that he is, didn't say boo. Same issue a few months back with George Stephanopoulos - I mean, do any of these people read anything other than each other?

Posted by: inthewoods on April 2, 2009 at 9:37 AM | PERMALINK

If we cut taxes to zero, then revenue should be infinite, right? Why don't we do that?

Posted by: Arachnae on April 2, 2009 at 9:54 AM | PERMALINK

The verbal ploy is "'can' raise revenues." Yes, if you had a capital gains tax rate of 90% and cut it to 25%, you could well see more revenues because a wave of asset sales would be triggered as prices dropped. Whether that would continue after prices stabilized is another question.
Even Arthur Laffer points out that his basic theory is that taxes rates that are too high discourage activity and therefore restrict revenue, not that lower taxes necessarily increase revenues. There is a point of equilibrium, a tax rate at which revenues are maximized and below which further cuts just reduce revenues. Conservatives don't acknowledge this because, as many posters point out, their real aim is just lower taxes, revenues and deficits be damned. Mr. McCarthy says "'can' raise taxes" so that he can say he is intelligent enough to understand Laffer's point and that he is not deliberately lying, but he clearly hopes that his readers will take his statement as confirmation that the Tax Fairy does exist.

Posted by: ballplayer on April 2, 2009 at 9:54 AM | PERMALINK

Even if, perhaps though, Mr. McCarthy knows this to be a lie and fully unsupported, he has to parrot the position in order to keep his job.

Posted by: Bob Johnson on April 2, 2009 at 10:45 AM | PERMALINK

One reason why the pundits tend not to question it is because they benefit enormously from these tax cuts, so when they hear about how effective cutting taxes is they're like, "Great idea."

Posted by: Guscat on April 2, 2009 at 11:32 AM | PERMALINK

Supply side might work if it weren't contrary to human nature. Theoretically tax cuts should throttle spending, but in reality the people who think you don't have to pay taxes are the same ones who think you don't have to limit spending. Growth, after all, will pay for spending just as well as tax cuts for the rich. This apparently was the psychology of our president Bush.

Posted by: Luther on April 2, 2009 at 11:40 AM | PERMALINK

McCarthy: "it's clear that the President won't cut taxes (not even for "95 percent of Americans")"

McCarthy is making a fool of himself. By now most working folks have seen their first paycheck post stimulus bill - their take home pay is bigger because their taxes are lower. I especially see it as I do payroll for a number of companies. Faced with fact - bigger paychecks due to lower taxes - vs. McCarthy's New Speak, well, um... good luck on that writing career, Mr. McCarthy.

Posted by: Hannah on April 2, 2009 at 11:54 AM | PERMALINK

By this logic if we paid no taxes at all it would create a surplus. And everyone get a pony!

Posted by: SimpleLogic on April 2, 2009 at 12:01 PM | PERMALINK

Gosh I hate when I'm this late to the party, but I have to point everyone in the direction of Jon Chait's excellent The Feast of the Wingnuts, and these grafs in particular:

It doesn't take a great deal of expertise to see how implausible this sort of analysis is. All you need is a cursory bit of history. From 1947 to 1973, the U.S. economy grew at a rate of nearly 4 percent a year--a massive boom, fueling rapid growth in living standards across the board. During most of that period, from 1947 until 1964, the highest tax rate hovered around 91 percent. For the rest of the time, it was still a hefty 70 percent. Yet the economy flourished anyway. None of this is to say that those high tax rates caused the postwar boom. On the contrary, the economy probably expanded despite, rather than because of, those high rates. Almost no contemporary economist would endorse jacking up rates that high again. But the point is that, whatever negative effect such high tax rates have, it's relatively minor. Which necessarily means that whatever effects today's tax rates have, they're even more minor.

This can be seen with some very simple arithmetic. As just noted, Truman, Eisenhower, and Kennedy taxpayers in the top bracket had to pay a 91 percent rate. That meant that, if they were contemplating, say, a new investment, they would be able to keep just nine cents of every dollar they earned, a stiff disincentive. When that rate dropped down to 70 percent, our top earner could now keep 30 cents of every new dollar. That more than tripled the profitability of any new dollar--a 233 percent increase, to be exact. That's a hefty incentive boost. In 1981, the top tax rate was cut again to 50 percent. The profit on every new dollar therefore rose from 30 to 50 cents, a 67 percent increase. In 1986, the top rate dropped again, from 50 to 28 percent. The profit on every dollar rose from 50 to 72 cents, a 44 percent increase. Note that the marginal improvement of every new tax cut is less than that of the previous one. But we're still talking about large numbers. Increasing the profitability of a new investment even by 44 percent is nothing to sneeze at.

But then George Bush raised the top rate to 31 percent in 1990. This meant that, instead of taking home 72 cents on every new dollar earned, those in the top bracket had to settle for 69 cents. That's a drop of about 4 percent-- peanuts, compared to the scale of previous changes. Yet supply-siders reacted hysterically. National Review, to offer one example, noted fearfully that, in the wake of this small tax hike, the dollar had fallen against the yen and the German mark. "It seems," its editors concluded, "that capital is flowing out of the United States to nations where 'from each according to his ability, to each according to his need' has lost its allure."

Here is where a bit of historical perspective helps. If such a piddling tax increase could really wreck such havoc on the economy, how is it possible that the economy grew so rapidly with top tax rates of 70 and 91 percent? The answer is, it's not. It's not even close to possible. All this is to say that the supply-siders have taken the germ of a decent point--that marginal tax rates matter--and stretched it, beyond all plausibility, into a monocausal explanation of the world.

Which, for any rational person, would go a long way towards informing their understanding of why Bush's "largest tax cuts in history" didn't stimulate growth - 3 - 4% in tax cuts for really rich people is less than the rate of return they would accept from their investments, so it's not likely they're going to suddenly feel flush as a result of it.

If the left was smart and coordinated about these big lies, every time a wingnut opened his yap about the abundant stimulative effects of lowering the top marginal tax rates, a counterpart would pop up to remind everyone that the "stimulative effect" of cutting top marginal rates decreases the lower the top marginal rate goes, even as those cuts very effectively fuel budget deficits.

Posted by: Jennifer on April 2, 2009 at 12:07 PM | PERMALINK

"What's more, even if we accept McCarthy's foolishness at face value, why wouldn't officials just cut taxes all the time?"

This is what Alexander Fraser Tyler warned about, exactly. He wrote in the 18th century:

"A democracy cannot exist as a permanent form of government. It can exist only until the voters discover they can vote themselves largesse (defined as a liberal gift) out of the public treasury. From that moment on, the majority always votes for the candidate promising the most benefits from the public treasury, with the result that democracy always collapses over a loose fiscal policy, always to be followed by a dictatorship."

This little experiment in democracy of ours is almost certainly doomed to failure.

Posted by: Jim Pharo on April 2, 2009 at 12:18 PM | PERMALINK

.
.
.
Especially telling is that Republicans believe that the Laffer curve has much smaller effects on labor than on capital.

So the best tax cuts are those aimed at the top of the income curve.

Politically convenient, no?
.
.
.

Posted by: eightnine2718281828mu5 on April 2, 2009 at 12:36 PM | PERMALINK

Steve: we have no objection to letting the Fairy go. You can go to Cuba, Venezuala, or have you every thought about relocating to Tehran? I hear it's nice there . . .

Posted by: RichT on April 2, 2009 at 12:52 PM | PERMALINK

We should eliminate all taxes; our revenues would then = infinity!

Problem solved!

Posted by: dzman on April 2, 2009 at 1:51 PM | PERMALINK

Awww, the iddle troll made a homophobic joke. Isn't it cute?

Posted by: Mnemosyne on April 2, 2009 at 2:21 PM | PERMALINK

1. I don't know about you, but the President's stimulus plan has sure lowered taxes for me -- I saw an extra $41, this month!

2. Why do lame-brained defenders of the weird proposition that "tax cuts (always) increase revenue" always argue as follows against anyone who disagrees with then: "Well, if you're not for tax cuts, that means you must want a huge increase in both taxes and government spending." This is absurd. Sensible politicians of both parties...(well, if there were any sensible Republicans)...want to have optimal spending, and a corresponding tax rate that is just enough to cover that spending.

What that optimal level is, and what costs it consists of, are of course political issues: that's what the political process exists to resolve, or would if one party didn't spend its time plugging its ears and shouting "Naa...naa...can't hear you...naa...naa."

Posted by: PQuincy on April 2, 2009 at 3:10 PM | PERMALINK
The idea has been around for years, and it's known in some circles as the "Tax Fairy" argument -- all we have to do is lower taxes and, like magic, the Tax Fairy will boost revenues. Under this approach to tax policy, tax cuts just pay for themselves.

No, No, No! That's now how the Tax Fairy works. You leave a tax cut under your pillow, and in the morning you'll find the Tax Fairy left you a balanced budget.

Posted by: Unca Paul on April 2, 2009 at 3:43 PM | PERMALINK




 

 

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