Posts made in November, 2008

• Remember The Laffer Curve?

  The Next Right

  "Cutting taxes increases economic growth, which in turn increases government revenue."

  I have heard that phrase more times than I can count from more Republicans than I even remember.

  It has been the central theme with which the Republicans have built their reputation, and basically the only thing that they have done in Washington that has matched up with their rhetoric.

  There’s a problem, though. And I want you to keep in mind when I say this, that I am a libertarian-Republican who would just as well like to see the income tax abolished. I repeat, I hate taxes, and if it were up to me I would lower them as far as possible – so if you somehow take this article to mean I am advocating tax raising, or increasingly progressive taxation or anything of the kind, please take a Valium and come back to read the article again later when your hysteria has gone away. We need to talk seriously about public policy if the Republican party is ever going to climb out of its hole.

  Now, here’s the secret. It doesn’t work like that.

  Oh, mind you, the economic growth argument is certainly true. You allow people to keep more of their own money, and you will in fact see a growth in consumer spending, which will lead to growth in business, and so on and so forth.

  But, then we come to that tricky part about "growing government revenue". This, sadly, is not actually true – and if the Republican party wants to govern well when it eventually gets back into power (notice I said govern well, not "keep power") they need to understand this, so they don’t repeat the same foolish mistakes they made in the 2000s.

  To prove what I’m talking about, lets start by talking about the Laffer Curve.

  The Laffer Curve is central to the ideas inherent in supply side economics. In its most basic form, it is a bell curve that describes points where tax revenues are their highest, and when raising or lowering those rates will increase or decrease revenue to the government.

  It argues that there is a point where once you start increasing taxes, you actually do not increase revenue, because you are actually punitively taxing people to the point where it decreases their incentive to work, thus lowering revenues overall as fewer people contribute taxes or climb up the income ladder.

  Similarly, if you are in such an area of the bell curve (obviously, to the right of the crest) and you cut taxes, you are actually going to increase revenue to the government because more people will have a reason to work, and those people who do work will see higher profits which will allow them to re-invest into companies and employees, allowing them to hire new people and grow their business, which will of course increase new tax revenue going to the government.

  But, what Republicans have long ignored with their (justifiably) militant stance on taxation, is what happens when you go to the left of "t" on the Laffer Curve. Ah yes – taxes go down, but at that point so do revenues. According to the holy grail of supply side economics, there is a point where you lower taxes that it will no longer garner you increased revenue.

  Just think of it logically. If taxation was set at a 5% flat rate on income nation wide, do you really think lowering it to 4% would result in more money flowing to the federal government? No – of course not, because at that point the capitalists who are in the private sector churning out the products and services of the economy don’t see much of a difference in their bottom lines to a 1% drop in their income tax. It might provide for a little additional money to spend on a small project, or hire a few people, but in terms of the economy, its a small drop in the bucket that won’t end up leading to more revenue for the government – all that will happen is the lower tax rate will mean less money streams into the government.

  Laffer believed that. Reagan believed that. Any self-respecting supply sider who really knows what the philosophy is about believes it. I believe it. Its just how it goes.

  So the question really is – what is "t". In other words, what is that magic point on the Laffer Curve where tax revenues are optimized for their greatest revenue benefit to the government.

  We need to identify that not to set our tax rates there, but instead so we can identify what will happen when we cut taxes.

  When Ronald Reagan took office, the upper tax bracket in this country was 70%. That’s right, seven out of every ten dollars you made were you in that bracket went to the government. The 1981 tax bill dropped that number significantly to 50%. When he signed the 1986 tax reform bill, that top rate dropped to 28%.

  Obviously, cutting taxes when they sit at 70% for the top bracket is likely to spur growth, expand business, and lead to (after some time) more tax revenue streaming into the government due to the increased availability of capital that has expanded the tax base.

  But, where is that "t" level? Is it lower, or higher than where George W. Bush found it in 2000 (top bracket was at 39.6%).

  I think that as time has passed, it has become rather obvious that we are in an area of the Laffer Curve that is to the left of the "t" line, which of course means that cutting taxes are likely to decrease revenue.

  The best way to measure the effect of a change in tax policy is to compare tax receipts as a percent of GDP, because with a naturally growing economy (as ours is), we will basically always take in more in tax receipts than we did the previous year due to that growth, so that doesn’t tell us much. What we need to find out is if a tax cut/raise has increased receipts as a percentage of GDP, or decreased it.

  If tax cuts lead to revenue growth, then receipts as a percentage of GDP would end up going up. If they didn’t go up, then the government would have received more revenue had taxes stayed where they were.

  In other words, if taxes were at 35% and accounted for 30% of GDP the government would have collected a certain amount of money. If we then cut that rate to 30%, and tax revenues go down to say 28% of GDP, then we now know that while we are in fact gaining more tax revenue than we had the previous year, had we left taxes at 35%, we would have actually increased the amount of money coming into the government by more than we did get at 30%.

  In real terms, if we collected 2 trillion dollars under 30% taxes, than we may have ended up with 2.3 trillion under a 35% scheme, because of how much, relating to GDP, that is.

  And, that is exactly what has happened with the Bush tax cuts, which more or less proves the point that we are on the left side of the Laffer Curve.

  Between 2000 and 2002 (post Bush tax cut), total receipts fell 10.3 percent relative to GDP, from 29.2 percent to 26.2 percent. The magnitude of that decline in total receipts since 2000 is unmatched since World War II, and it is directly related to the tax cuts. The 2003 acceleration of the tax cuts produced similar numbers.

  So what does all this mean? Should we raise taxes so we can get near that magic "t" line and optimize our tax revenue?

  No. Of course not – that is absurd. In fact, I’d love to see taxes whacked down further, by a lot.

  What Republicans need to understand, however, is that their tax rhetoric is completely divorced from reality. Tax cuts are easy enough to sell to people without deluding yourself into thinking that the magic of economic growth will suddenly result in higher tax receipts. It does on the right side of the Laffer Curve, but not on the left side – and I think its obvious we are currently sitting on the left side of the curve.

  Now, what tax cuts actually do, is grow GDP and expand economic growth. There is no reason to take that quantifiable, proven and true economic concept, and then pollute it by saying tax revenues would rise higher because of that expansion of GDP and growth. Again – yes, we’ll get more revenue, but we won’t be getting more as a percentage of GDP.

  The only argument that can be made to the contrary is that GDP may increase so dramatically that even though receipts as a percentage of GDP go down, the growth of GDP means that lower percentage still accounts for a higher revenue amount into the federal government than a higher tax rate would have.

  A fair argument, but the amount of growth of GDP would have to be ungodly for that to mathematically be true.

  The faulty assumption that we have all been flying through life believing to our core since the 1980s is directly responsible for Bush’s foolish budget management.

  We are hovering around 11 trillion dollars of publicly held debt today (only to go higher with bailout after bailout coming down the pike) because we thought cutting taxes was the end all be all to economic policy. Why get your hands dirty cutting school lunch programs et all when you honestly believe your revenue stream will be better if you cut taxes anyway?

  Its not. We can’t just cut taxes and wash our hands of things. It doesn’t work like that at this level anymore – not on the left side of the curve. Cutting taxes helps grow GDP and generates new economic activity, but at that level it is not increasing government revenue as a percentage of GDP, its decreasing it.

  And that’s okay. That’s good, actually! We should love that, and want to see more of it. We should want to drive that Laffer Curve as far left as possible so that as many people can keep as much of their own money as possible.

  But, by ignoring the actual effect of cutting taxes, it has left Republicans everywhere with the assumption that they won’t have to get their hands dirty with that nasty business of cutting government spending. "Just cut taxes, and we’ll get more money – we won’t have to cut anything and make people mad at us", the compassionate conservative may say.

  Idiocy.

  Cutting taxes will decrease the growth of revenue into the federal government. Its an easy sell, no need to hamstring yourself by buying into the idea that we’ll make more money by taxing people less. That may have been true during the 1960s Kennedy tax cuts, or the 1980s Reagan tax cuts, but we have reached an equilibrium now where that is no longer true.

  So lets be honest with ourselves, and continue to advocate the slashing and burning of the tax code, but show the stones to actually do what will be necessary to do at the same time – cut spending.

  The budget has to be balanced. We can no longer spend like this – its simply Chinese monopoly money at this point, and we have to start to retire the debt.

  We’ll never get there by cutting taxes, and then retiring to the study for a smoke and a congratulatory foot massage. We have to get elbow deep in the messy work of taking the red pen to the federal monster. We have got to cut taxes and also cut spending, to get our budget back in balance.

  Cutting taxes and running away from the hard work is an ultimate act of political cowardice, and is one of the major reasons why George W. Bush’s presidency has been a disappointment. When the GOP talks about cutting taxes to increase revenue so we can be "fiscally responsible", it has all the credibility of Hannibal Lector with a bottle of Chianti.

  We all know it isn’t true, not its time to be adults, be honest with ourselves about the reality of public policy, and push a fiscally conservative agenda that understands that reality and makes it work practically for the American people. Hack the tax code down as far as you possibly can, just understand what you’ll be doing to the budget, and plan your spending accordingly.

  Cut it.

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• Orange Juice Helping To Monitor The Election Chatter?

  The Next Right

  Greetings once again folks – lets all take a couple seconds off staring at the television to chat about what really matters today – orange juice.

  If you don’t mind endulging me a bit in a bit of lighthearted fun (something I believe everyone on the right could use today, that’s for sure), this is pretty cool.

  Here where I work at New Media Strategies, we have teamed up with Tropicana to do something fun for election night.

  What fun could an orange juice company and a new media firm have with an election? Glad you asked.

  We’ve come up with a cool way to follow the election in a somewhat unorthadox way. You see, what we came up with was the creation of a live Twitter analysis of what people are talking about in relation to the election for the duration of election night. As a result, the “Not Red, Not Blue, But 100% Orange” campaign has begun.

  It is a really cool website that we can use to keep tabs on who’s winning the chatter wars during the election – Election Tweets, Freshly Squeezed. You can make it show what you want: show only tweets about Obama or McCain, about both, or about one but not the other. If you want to compare the current conversational landscape against a full day’s worth of tweets, or even three days, you can do that, too.

  Just go to An Orange America to check out the fun.  As the returns come in and we likely sink further and further into our glasses of adult beverages, why not spike some OJ and at least see what other people are saying about election night!

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• How The GOP Is Repeating The Mistakes Of The British Right

  The Next Right

  NOTE:  Originally posted at Political Capital

  On the eve of an expected landslide sweeping Barack Obama into the Oval Office and congressional Democrats to majorities in both houses of Congress, many pundits have predicted a long period in the political wilderness for Republicans in national politics.

  Not so far away in the UK the British Conservative Party has only recently recovered from its own journey to the dark side. In 1997 the Tory party was destroyed at the polls after 18 years in power and has been out of power ever since.

  Whilst there are obvious and clear differences between the two sister parties, and the nations they aspire to govern, the circumstances of the 1997 and 2008 defeats are remarkably similar.

  In the late ‘90s Tories were tempted to believe that the public were duped. That an inexperienced and inspirational young left wing leader had taken advantage of the divisions of the governing party and the credulity of the electorate to instigate what would become a far left regime.

  A more sober assessment is the successes of the 1980s Thatcher revolution led to hubris and terrible mistakes. The party survived divisions over European policy and riots that followed the idiotic introduction of the Poll Tax through the dramatic defenestration of Margaret Thatcher, allowing the genial John Major to win an unexpected General Election victory in 1992.

  It was the financial collapse of Black Wednesday in September 1992, when the pound crashed out of the European Exchange rates mechanism, and the ensuing recession that really killed Conservative hopes. Combined with party wars over its approach to the European Union (a relatively trivial matter compared to the 3 million unemployed) the recession not only tore the party away from the centre of political discourse but also created a massive rift between the modern British nation and the world the Conservative Government lived in.

  To compound the matter there was the ever present “sleaze”, a string of Conservative MPs were exposed in sex scandals that would have made Larry Craig and Mark Foley blush, reaching its apotheosis with the strange autoerotic death of Stephen Milligan.

  Even worse was the grubby stain of corruption, in 1994 it emerged that lobbyist Ian Greer had bribed Conservative MPs to ask questions in parliament on behalf of Egyptian retail mogul Mohammed Fayed. To compound matters a cabinet minister (Jonathan Aitken) was accused of conducting secret deals with Saudi princes, Aitken was later jailed for perjury – unlike Scooter Libby, Aitken did not get his sentence commuted.

  So many of the ingredients are the same that it becomes difficult to see how the Republicans can avoid the fate of their transatlantic colleagues. Sometimes parties just deserve to lose, but that is far from being the bad news.

  The disaster that the GOP of 2008 and the Tories of 1997 share is the fundamentals of the political background, both fell massively behind their opponents in levels of support from younger voters and crucially struggled to deal with the changing mores of a modern nation.

  One of tomorrow’s most interesting results will be the outcome of California’s Proposition 8 on marriage equality. The idea that by 2008 there would not only be legally recognized civil unions in the UK but openly homosexual cabinet ministers would have been an anathema to many Conservatives, but not to the British public. One of the ways in which British Conservatives have begun to turn the page in recent years is making peace with issues such as this.

  The issue of gay marriage matters not just because of the dangers of leaving behind an increasingly socially liberal electorate, but because of the fundamental contradiction in the modern conservative movement that it exposes. In a time of increasing family breakdown Conservatives should be promoting marriage as the primary family unit because of the legal and public commitment that it entails. Yet conservatives have pandered to their religious base in the search for easy votes, somehow the GOP has become a party at ease with telling people what to do.

  It is when parties deviate from their fundamental intellectual core that they suffer the most. The most important example of this in the current administration is public spending. Whilst tax cuts helped to keep the American economy growing their pre-requisite – low public spending – was ignored. It’s harder to demonise big government liberals when you have spent eight years turning a health budget surplus into a massive deficit, a deficit which represents a massive tax burden on future generations in the form of interest payments to Chinese bankers.

  In Britain the ideological departure had serious underpinnings and serious consequences. The pragmatic conservatism of the previous 150 years was eschewed in exchange for the dynamic monetarism, privatisation and market liberalisation of the Thatcher revolution. To succeed once more the GOP must rediscover its own ideological core, an ideology that is found not in the anti-intellectual city-dweller baiting of Sarah Palin but in integrity in government, individual freedom and not just low taxes but low spending.

  The Tories have, recently, appeared to turn the corner, and are now consistently ahead of Labour in the opinion polls. Following their third consecutive election defeat in 2005 they nominated a young, modern leader in David Cameron. In the past three years the Conservatives have ‘decontaminated’ their brand, a focus on environmental issues and a rejection of upfront promises of tax cuts drew the headlines but the underlying change was more important.

  The British Conservative party has changed, not a shift in policies but actual change. It has become a party that loves the country as it is now, and not as it wishes it was in 1983. The right-wing talk radio blowhards who think the answer is simply to hate the modern world more and scream at it harder are not part of the problem, they are the problem. If Republicans are to avoid the fate of their British counterparts then they need to develop a narrative for modern American that places the one true conservative principle – that of liberty – at the heart of the nation’s future.

  EDITORS NOTE:  Edward is a guest columnist, sending us his thoughts from the United Kingdom.  He is a member of the British Conservative Party, and has witnessed first hand the destruction of the British Right, and how it has rebuilt itself from the ground up.  We are grateful to him for his perspective, and hope to bring you many more articles from our friends across the pond in the future.

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