Taxes, Deficits, Debt, and Gimmicks

599 views
492 views

Published on

Published in: News & Politics
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
599
On SlideShare
0
From Embeds
0
Number of Embeds
98
Actions
Shares
0
Downloads
4
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Taxes, Deficits, Debt, and Gimmicks

  1. 1. Taxes, Deficits, Debt, and Gimmicks Antony Davies Duquesne University www.antonydavies.org
  2. 2. Tax  Gimmicks:  How  government  hides  what  it  does  
  3. 3. Gimmick  #1:  Withheld  Taxes  Endowment  effect:  People  value  things  more  once  their  property  rights  to   those  things  have  been  established.     à  The  pain  of  paying  $10  is  worse  than  is  the  pain  of  not   receiving  $10.  
  4. 4. Gimmick  #1:  Withheld  Taxes   2011:  $850  billion  in  withholdings  =  40%  of  federal   revenues   How  much  do  you  spend  a  month  on  gasoline?  
  5. 5. Gimmick  #2:  Temporary  Taxes  How  they  arrive    Voters  tolerate  new  taxes  that  go  toward  addressing  the  emergency.  Why  taxes  aren’t  temporary    People  get  used  to  paying  the  tax.    Government  gets  used  to  receiving  the  revenue.    
  6. 6. Gimmick  #2:  Temporary  Tax  Cuts  Why  tax  cuts  are  temporary    PoliMcal  triple-­‐dipping:   •  Get  credit  for  cuOng  taxes,   •  “Temporariness”  miMgates  complaints  about  ballooning  deficits,   •  Cuts  expire  when  other  party  is  in  power.      Why  they  don’t  perform  as  promised    People  make  long-­‐term  decisions  based  on  anMcipated  long-­‐term  income  and  expenses.     à  Temporary  tax  cuts  don’t  affect  long-­‐term  income  and  expenses.  
  7. 7. Gimmick  #2:  Temporary  Tax  Cuts  Households:  Pay  down  debt  now  to  offset  anMcipated  future  tax  increase.    Businesses:  Hiring  that  isn’t  profitable  before  the  tax  cut  won’t  be  aWer  the  tax  cut.  
  8. 8. Payroll  tax  cut  takes  effect   Average  =  9.6%   Average  =  9.0%  0.6  percentage  point  decline  in  unemployment  following  the  payroll  tax  cut.   Source:  Bureau  of  Labor  Sta/s/cs   Produced  by:  Antony  Davies,  Duquesne  University  
  9. 9. Payroll  tax  cut  takes  effect   No  increase  in  employment   following  the  payroll  tax  cut.  Average  =  57.5%   Average  =  57.5%   Source:  Bureau  of  Labor  Sta/s/cs   Produced  by:  Antony  Davies,  Duquesne  University  
  10. 10. Gimmick  #3:  Statutory  vs.  Economic  Tax  Incidence  The government can only set the statutory burden of a tax. It has nocontrol over the economic burden.•  Employer-paid taxes•  Corporate taxes•  Luxury taxes
  11. 11. Gimmick  #3:  Statutory  vs.  Economic  Tax  Incidence  A buyer and seller are haggling over the price of a used car.  $6,500   $7,500  
  12. 12. Gimmick  #3:  Statutory  vs.  Economic  Tax  Incidence  A buyer and seller are haggling over the price of a used car. Buyer pays $7,000 $7,000   Seller earns $7,000
  13. 13. Gimmick  #3:  Statutory  vs.  Economic  Tax  Incidence  Government imposes a $1,000 tax on car sales (to be paid by the seller).$7,000        $7,000   –  $1,000      $6,000    $6,500   $7,500  
  14. 14. Gimmick  #3:  Statutory  vs.  Economic  Tax  Incidence   Buyer pays $7,500 $7,500   Seller earns $6,500 (after tax)
  15. 15. Gimmick  #3:  Statutory  vs.  Economic  Tax  Incidence   No Tax $1,000 Tax on SellerBuyer pays $7,000 Buyer pays $7,500 Seller earns $7,000 Seller earns $6,500 (after tax) Each pays $500 of the tax.
  16. 16. Gimmick  #3:  Statutory  vs.  Economic  Tax  Incidence  Government imposes a $1,000 tax on car purchases (to be paid by thebuyer). $7,000        $7,000   +  $1,000      $8,000    $6,500   $7,500  
  17. 17. Gimmick  #3:  Statutory  vs.  Economic  Tax  Incidence   Buyer pays $7,500 (including tax) $6,500   Seller earns $6,500
  18. 18. Gimmick  #3:  Statutory  vs.  Economic  Tax  Incidence   No Tax $1,000 Tax on BuyerBuyer pays $7,000 Buyer pays $7,500 (including tax) Seller earns $7,000 Seller earns $6,500 Each pays $500 of the tax.
  19. 19. Gimmick  #3:  Statutory  vs.  Economic  Tax  Incidence   Government cannot control who pays the tax.
  20. 20. Tax  Revenues:  What  does  raising  taxes  get  us?  
  21. 21. Source:  Tax  Policy  Center  (Urban  Ins/tute  and  Brookings  Ins/tute),  Bureau  of  Economic  Analysis   Produced  by:  Antony  Davies,  Duquesne  University  
  22. 22. Source:  Tax  Policy  Center  (Urban  Ins/tute  and  Brookings  Ins/tute),  Bureau  of  Economic  Analysis   Produced  by:  Antony  Davies,  Duquesne  University  
  23. 23. Source:  Tax  Policy  Center  (Urban  Ins/tute  and  Brookings  Ins/tute),  Bureau  of  Economic  Analysis   Produced  by:  Antony  Davies,  Duquesne  University  
  24. 24. Source:  Tax  Policy  Center  (Urban  Ins/tute  and  Brookings  Ins/tute),  Bureau  of  Economic  Analysis,  Barro  and  Redlick  (2009)   Produced  by:  Antony  Davies,  Duquesne  University  
  25. 25. Source:  Tax  Policy  Center  (Urban  Ins/tute  and  Brookings  Ins/tute),  Bureau  of  Economic  Analysis   Produced  by:  Antony  Davies,  Duquesne  University  
  26. 26. Fair  Shares:  Who  is  paying  taxes?  
  27. 27. How  much  government  spending  do  people  fund  with  their  tax  dollars?   Top  1%  56  days   2%  to  5%  44  days   5%  to  10%  31  days   10%  to  20%  41  days   20%  to  40%  47  days   40%  to  60%  24  days   60%  to  80%  10  days   Deficit  Day   80%  to  100%  18  hours   Children      112  days  
  28. 28. The  larger  economic  problem  involves  the  “not  yet”  rich.  
  29. 29. How  did  we  get  here?  
  30. 30. Source:  Bureau  of  Labor  Sta/s/cs  Produced  by:  Antony  Davies,  Duquesne  University  
  31. 31. Source:  Bureau  of  Labor  Sta/s/cs  Produced  by:  Antony  Davies,  Duquesne  University  
  32. 32. Source:  Bureau  of  Labor  Sta/s/cs  Produced  by:  Antony  Davies,  Duquesne  University  
  33. 33. Does  debt  maTer?  
  34. 34. Dangers  of  so  much  debt    •  Too  easy  to  lose  track  of  what’s  important.   $300  million  cut  in  Community   Development  Block  Grants.   $300  million  =  45  minutes.   =    2  days  
  35. 35. Dangers  of  so  much  debt    •  Too  easy  to  lose  track  of  what’s  important.  •  Pressure  on  Federal  Reserve  to  keep  interest  rates  low.   +1%    =  
  36. 36. Since  1962,  interest  rate  on  the  debt  has  averaged    6%  +/-­‐  2%.   The  interest  rate  on  the  debt  was  5%  just  ten  years  ago.   Source:  Bureau  of  Economic  Analysis,  US  Department  of  the  Treasury    
  37. 37. Dangers  of  so  much  debt    •  Too  easy  to  lose  track  of  what’s  important.  •  Pressure  on  Federal  Reserve  to  keep  interest  rates  low.    •  Quickly  approaching  a  point  of  no  return.  
  38. 38. Interest  on  the  debt  remains  at  2.6%  indefinitely.   Interest  consumes  40%   of  tax  revenue  in  2050.   Interest  consumes  19%   of  tax  revenue  in  2012.  Assumes  growths  from  1970  to  present  conMnue   Source:  Bureau  of  Economic  Analysis,  US  Department  of  the  Treasury  Annual  tax  revenue  growth  is  5.9%    Annual  non-­‐interest  spending  growth  is  6.7%  
  39. 39. Suppose  interest  on  the  debt  rises  to  5%  over  the  next  ten  years.   Interest  consumes  100%   of  tax  revenue  in  2046.   Interest  consumes  19%   of  tax  revenue  in  2012.  Assumes  growths  from  1970  to  present  conMnue   Source:  Bureau  of  Economic  Analysis,  US  Department  of  the  Treasury  Annual  tax  revenue  growth  is  5.9%    Annual  non-­‐interest  spending  growth  is  6.7%  
  40. 40. Taxes, Deficits, Debt, and Gimmicks Antony Davies Duquesne University www.antonydavies.org
  41. 41. Where  are  we  going?  
  42. 42. CBO  Forecasts   CBO (154 forecasts, 1997 – 2011) •  Overestimated revenues by 10% four years out. •  Overestimated revenues by 15% ten years out. •  Underestimated outlays by 12% four years out. •  Underestimated outlays by 30% ten years out.
  43. 43. OveresMmate   UnderesMmate   Source:  Congressional  Budget  Office  Produced  by:  Antony  Davies,  Duquesne  University  
  44. 44. Take  CBO’s  6-­‐year  out  projecMon  and   mulMply  by  0.87  to  get  an  unbiased  forecast.  Actual  tax  revenues  are  less  than  CBO  projecMons.   Source:  Congressional  Budget  Office   Produced  by:  Antony  Davies,  Duquesne  University  
  45. 45. OveresMmate   UnderesMmate  Actual  federal  spending  is  greater  than  CBO  projecMons.   Source:  Congressional  Budget  Office   Produced  by:  Antony  Davies,  Duquesne  University  
  46. 46. Actual  debt  is  significantly  higher  than  CBO  projecMons.   OveresMmate   UnderesMmate   Source:  Congressional  Budget  Office   Produced  by:  Antony  Davies,  Duquesne  University  
  47. 47. Actual  debt  is  significantly  higher  than  CBO  projecMons.   OveresMmate   UnderesMmate   Source:  Congressional  Budget  Office   Produced  by:  Antony  Davies,  Duquesne  University  
  48. 48. What  does  this  mean?     Forecast  error  correcMon    CBO’s  current  forecast  for  2016:    Federal  Revenue  $3.8  trillion  x  0.90   =    $3.3  trillion    Federal  Outlays  $4.3  trillion  x  1.12    =    $5.0  trillion  Deficit  $0.5  trillion                                    $1.7  trillion    Public  Debt  $13.2  trillion  x  1.43    =    $18.9  trillion  Gross  Debt  $18.4  trillion  x  1.17    =    $21.5  trillion  Public  debt  will  be  102%  of  GDP.  Total  debt  outstanding  will  be  116%  of  GDP.  
  49. 49. How  about  some  sWmulus!  
  50. 50. Federal  Reserve  =   $1,500  b.   TARP  =  $356  b.   Financial  IniMaMves  =  Total  (net)  sMmulus  =  $3  trillion   $366  b.   Housing  IniMaMves  =   $130  b.  SMmulus  =  $578  b.   Data  Source:  money.cnn.com/news/storysupplement/economy/bailouPracker/  
  51. 51. Total  (net)  stimulus  =  $3  trillion 10% 8% Unemployment Rate: 7% 6% 9%
  52. 52. Historically, how has the economy reacted to stimulus spending?
  53. 53. SMmulus  Spending  and  Economic  Growth   4% 3% More  economic  acMvity   2%RGDP  per  Capita  Growth 1% 0% -­‐6% -­‐4% -­‐2% 0% 2% 4% 6% -­‐1% -­‐2% -­‐3% More  government  spending   -­‐4% Change  in  Federal  Outlays  as  %  of  GDP
  54. 54. SMmulus  Spending  and  Economic  Growth   4% 3% More  economic  acMvity   2%RGDP  per  Capita  Growth If stimulus spending 1% worked, we should see a relationship like this. 0% -­‐6% -­‐4% -­‐2% 0% 2% 4% 6% -­‐1% -­‐2% -­‐3% More  government  spending   -­‐4% Change  in  Federal  Outlays  as  %  of  GDP
  55. 55. SMmulus  Spending  and  Economic  Growth  (1954.1  to  2011.1)   4% 3% 2% RGDP  per  Capita  Growth 1% 0% -­‐6% -­‐4% -­‐2% 0% 2% 4% 6% -­‐1% -­‐2% -­‐3% Increased  government  spending  does  not   appear  to  increase  economic  acMvity.   -­‐4% Change  in  Federal  Outlays  as  %  of  GDPData  Source:  Bureau  of  Economic  Analysis,  Na/onal  Income  and  Product  Accounts  
  56. 56. Maybe stimulus spending doesn’t have an immediate effect. What is the effect over time?
  57. 57. SMmulus  Spending  and  Economic  Growth  (1954.1  to  2011.1)   4% 3% RGDP  per  Capita  Growth  1  Year  Later 2% 1% 0% -­‐6% -­‐4% -­‐2% 0% 2% 4% 6% -­‐1% -­‐2% Increased  government  spending  does   -­‐3% not  appear  to  increase  economic   acMvity  one  year  in  the  future.   -­‐4% Change  in  Federal  Outlays  as  %  of  GDPData  Source:  Bureau  of  Economic  Analysis,  Na/onal  Income  and  Product  Accounts  
  58. 58. SMmulus  Spending  and  Economic  Growth  (1954.1  to  2011.1)   4% 3% RGDP  per  Capita  Growth  1  Year  Later 2% 1% 0% -­‐6% -­‐4% -­‐2% 0% 2% 4% 6% -­‐1% -­‐2% Increased  government  spending  does   -­‐3% not  appear  to  increase  economic   acMvity  one  year  in  the  future.   -­‐4% Change  in  Federal  Outlays  as  %  of  GDPData  Source:  Bureau  of  Economic  Analysis,  Na/onal  Income  and  Product  Accounts  
  59. 59. Maybe stimulus spending’s effects are cumulative. What is the cumulative effect?
  60. 60. SMmulus  Spending  and  Economic  Growth  (1954.1  to  2011.1)   3% Increased  government  spending   2% appears  to  have  a  negaMve   cumulaMve  effect  over  4  quarters.   RGDP  per  Capita  Growth  (4QMA) 2% 1% 1% 0% -­‐1.0% -­‐0.5% 0.0% 0.5% 1.0% 1.5% 2.0% -­‐1% -­‐1% -­‐2% Change  in  Federal  Outlays  as  %  of  GDP  (4Q  Moving  Average)Data  Source:  Bureau  of  Economic  Analysis,  Na/onal  Income  and  Product  Accounts  
  61. 61. SMmulus  Spending  and  Economic  Growth  (1954.1  to  2011.1)   3% Increased  government  spending   2% appears  to  have  a  negaMve   cumulaMve  effect  over  4  quarters.   RGDP  per  Capita  Growth  (4QMA) 2% 1% 1% 0% -­‐1.0% -­‐0.5% 0.0% 0.5% 1.0% 1.5% 2.0% -­‐1% -­‐1% -­‐2% Change  in  Federal  Outlays  as  %  of  GDP  (4Q  Moving  Average)Data  Source:  Bureau  of  Economic  Analysis,  Na/onal  Income  and  Product  Accounts  

×