taxes, deficits, debt, and gimmicks
TRANSCRIPT
Taxes, Deficits, Debt, and Gimmicks
Antony Davies Duquesne University
www.antonydavies.org
Tax Gimmicks: How government hides what it does
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.
Gimmick #1: Withheld Taxes
2011: $850 billion in withholdings = 40% of federal revenues
How much do you spend a month on gasoline?
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.
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.
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.
Source: Bureau of Labor Sta/s/cs Produced by: Antony Davies, Duquesne University
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
Payroll tax cut takes effect
Average = 57.5% Average = 57.5%
No increase in employment following the payroll tax cut.
Gimmick #3: Statutory vs. Economic Tax Incidence
The government can only set the statutory burden of a tax. It has no control over the economic burden. • Employer-paid taxes
• Corporate taxes
• Luxury taxes
Gimmick #3: Statutory vs. Economic Tax Incidence
A buyer and seller are haggling over the price of a used car.
$7,500 $6,500
Gimmick #3: Statutory vs. Economic Tax Incidence
A buyer and seller are haggling over the price of a used car.
$7,000 Buyer pays $7,000
Seller earns $7,000
Gimmick #3: Statutory vs. Economic Tax Incidence
Government imposes a $1,000 tax on car sales (to be paid by the seller).
$7,500
$7,000 – $1,000 $6,000
$7,000
$6,500
Gimmick #3: Statutory vs. Economic Tax Incidence
$7,500
Buyer pays $7,500
Seller earns $6,500 (after tax)
Gimmick #3: Statutory vs. Economic Tax Incidence
Each pays $500 of the tax.
Buyer pays $7,000
Seller earns $7,000
No Tax
Buyer pays $7,500
Seller earns $6,500 (after tax)
$1,000 Tax on Seller
Gimmick #3: Statutory vs. Economic Tax Incidence
Government imposes a $1,000 tax on car purchases (to be paid by the buyer).
$6,500
$7,000 + $1,000 $8,000
$7,000
$7,500
Gimmick #3: Statutory vs. Economic Tax Incidence
$6,500
Buyer pays $7,500 (including tax)
Seller earns $6,500
Gimmick #3: Statutory vs. Economic Tax Incidence
Each pays $500 of the tax.
Buyer pays $7,000
Seller earns $7,000
No Tax
Buyer pays $7,500 (including tax)
Seller earns $6,500
$1,000 Tax on Buyer
Gimmick #3: Statutory vs. Economic Tax Incidence
Government cannot control who pays the tax.
Tax Revenues: What does raising taxes get us?
Source: Tax Policy Center (Urban Ins/tute and Brookings Ins/tute), Bureau of Economic Analysis Produced by: Antony Davies, Duquesne University
Source: Tax Policy Center (Urban Ins/tute and Brookings Ins/tute), Bureau of Economic Analysis Produced by: Antony Davies, Duquesne University
Source: Tax Policy Center (Urban Ins/tute and Brookings Ins/tute), Bureau of Economic Analysis Produced by: Antony Davies, Duquesne University
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
Source: Tax Policy Center (Urban Ins/tute and Brookings Ins/tute), Bureau of Economic Analysis Produced by: Antony Davies, Duquesne University
Fair Shares: Who is paying taxes?
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
Children 112 days
10% to 20% 41 days 20% to 40% 47 days 40% to 60% 24 days 60% to 80% 10 days 80% to 100% 18 hours
Deficit Day
The larger economic problem involves the “not yet” rich.
How did we get here?
Source: Bureau of Labor Sta/s/cs Produced by: Antony Davies, Duquesne University
Source: Bureau of Labor Sta/s/cs Produced by: Antony Davies, Duquesne University
Source: Bureau of Labor Sta/s/cs Produced by: Antony Davies, Duquesne University
Does debt maTer?
Dangers of so much debt • Too easy to lose track of what’s important.
$300 million = 45 minutes.
$300 million cut in Community Development Block Grants.
= 2 days
Dangers of so much debt • Too easy to lose track of what’s important.
• Pressure on Federal Reserve to keep interest rates low.
+1% =
Source: Bureau of Economic Analysis, US Department of the Treasury
Since 1962, interest rate on the debt has averaged 6% +/-‐ 2%.
The interest rate on the debt was 5% just ten years ago.
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.
Source: Bureau of Economic Analysis, US Department of the Treasury
Interest on the debt remains at 2.6% indefinitely.
Interest consumes 19% of tax revenue in 2012.
Interest consumes 40% of tax revenue in 2050.
Assumes growths from 1970 to present conMnue Annual tax revenue growth is 5.9% Annual non-‐interest spending growth is 6.7%
Source: Bureau of Economic Analysis, US Department of the Treasury
Suppose interest on the debt rises to 5% over the next ten years.
Interest consumes 19% of tax revenue in 2012.
Interest consumes 100% of tax revenue in 2046.
Assumes growths from 1970 to present conMnue Annual tax revenue growth is 5.9% Annual non-‐interest spending growth is 6.7%
Taxes, Deficits, Debt, and Gimmicks
Antony Davies Duquesne University
www.antonydavies.org
Where are we going?
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.
Source: Congressional Budget Office Produced by: Antony Davies, Duquesne University
Und
eresMm
ate
OveresMmate
Source: Congressional Budget Office Produced by: Antony Davies, Duquesne University
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
Actual federal spending is greater than CBO projecMons.
Und
eresMm
ate
OveresMmate
Source: Congressional Budget Office Produced by: Antony Davies, Duquesne University
Actual debt is significantly higher than CBO projecMons.
Und
eresMm
ate
OveresMmate
Source: Congressional Budget Office Produced by: Antony Davies, Duquesne University
Actual debt is significantly higher than CBO projecMons.
Und
eresMm
ate
OveresMmate
What does this mean? CBO’s current forecast for 2016: Federal Revenue $3.8 trillion
Public debt will be 102% of GDP. Total debt outstanding will be 116% of GDP.
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
= $3.3 trillion
Forecast error correcMon
x 0.90
How about some sWmulus!
TARP = $356 b.
SMmulus = $578 b.
Federal Reserve = $1,500 b.
Financial IniMaMves = $366 b.
Housing IniMaMves = $130 b.
Data Source: money.cnn.com/news/storysupplement/economy/bailouPracker/
Total (net) sMmulus = $3 trillion
Unemployment Rate: 6% 7% 8% 9% 10%
Total (net) stimulus = $3 trillion
Historically, how has the economy reacted to stimulus spending?
-‐4%
-‐3%
-‐2%
-‐1%
0%
1%
2%
3%
4%
-‐6% -‐4% -‐2% 0% 2% 4% 6%
RGDP
per Cap
ita Growth
Change in Federal Outlays as % of GDP
More econ
omic acMvity
SMmulus Spending and Economic Growth
More government spending
-‐4%
-‐3%
-‐2%
-‐1%
0%
1%
2%
3%
4%
-‐6% -‐4% -‐2% 0% 2% 4% 6%
RGDP
per Cap
ita Growth
Change in Federal Outlays as % of GDP
SMmulus Spending and Economic Growth
If stimulus spending worked, we should see a relationship like this.
More econ
omic acMvity
More government spending
-‐4%
-‐3%
-‐2%
-‐1%
0%
1%
2%
3%
4%
-‐6% -‐4% -‐2% 0% 2% 4% 6%
RGDP
per Cap
ita Growth
Change in Federal Outlays as % of GDP
Increased government spending does not appear to increase economic acMvity.
SMmulus Spending and Economic Growth (1954.1 to 2011.1)
Data Source: Bureau of Economic Analysis, Na/onal Income and Product Accounts
Maybe stimulus spending doesn’t have an immediate effect.
What is the effect over time?
-‐4%
-‐3%
-‐2%
-‐1%
0%
1%
2%
3%
4%
-‐6% -‐4% -‐2% 0% 2% 4% 6%
RGDP
per Cap
ita Growth 1 Year Later
Change in Federal Outlays as % of GDP
Increased government spending does not appear to increase economic acMvity one year in the future.
SMmulus Spending and Economic Growth (1954.1 to 2011.1)
Data Source: Bureau of Economic Analysis, Na/onal Income and Product Accounts
-‐4%
-‐3%
-‐2%
-‐1%
0%
1%
2%
3%
4%
-‐6% -‐4% -‐2% 0% 2% 4% 6%
RGDP
per Cap
ita Growth 1 Year Later
Change in Federal Outlays as % of GDP
Increased government spending does not appear to increase economic acMvity one year in the future.
SMmulus Spending and Economic Growth (1954.1 to 2011.1)
Data Source: Bureau of Economic Analysis, Na/onal Income and Product Accounts
Maybe stimulus spending’s effects are cumulative.
What is the cumulative effect?
-‐2%
-‐1%
-‐1%
0%
1%
1%
2%
2%
3%
-‐1.0% -‐0.5% 0.0% 0.5% 1.0% 1.5% 2.0%
RGDP
per Cap
ita Growth (4
QMA)
Change in Federal Outlays as % of GDP (4Q Moving Average)
Increased government spending appears to have a negaMve cumulaMve effect over 4 quarters.
SMmulus Spending and Economic Growth (1954.1 to 2011.1)
Data Source: Bureau of Economic Analysis, Na/onal Income and Product Accounts
-‐2%
-‐1%
-‐1%
0%
1%
1%
2%
2%
3%
-‐1.0% -‐0.5% 0.0% 0.5% 1.0% 1.5% 2.0%
RGDP
per Cap
ita Growth (4
QMA)
Change in Federal Outlays as % of GDP (4Q Moving Average)
Increased government spending appears to have a negaMve cumulaMve effect over 4 quarters.
SMmulus Spending and Economic Growth (1954.1 to 2011.1)
Data Source: Bureau of Economic Analysis, Na/onal Income and Product Accounts