Which is why all of this talk is dumb, they're not cutting. They're going monetize the debt. I'd rather have lower taxes while they do it.
Middle class tax cuts
- Thread starter UncleMark
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As I have stated, tax rates, especially the top marginal tax rate, is how you prevent the bubbles.
Also, we've solved healthcare on this board before. You lower the amount the RUC can increase prices year over year, from CPI +1 to CPI -1. And ensure the private market follows.
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Are we really convinced we can repeat this period again given the change in demographics (domestically and globally), technological boom and shift in global consumption and economic factors?
I am. Obviously, politics and economic literacy are the biggest challenge.
The interesting part of this current period is the changing dynamics of the workforce. In my example, I talked about how the tax code was used to artificially stimulate aggregate demand, but it also stimulated labor demand. Right now, and for the near term, labor demand is naturally stimulated.
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Just to play a little devil's advocate here: the top marginal income tax rate in 1990 was 28%. The top marginal income tax rate when the dot-com bubble formed some years later was 39.6%.
If raising the top marginal tax rate is how you prevent bubbles, why didn't raising the top rate by 11.6% prevent that particular bubble?
FTR, I think we'll probably always have bubbles of one kind or another. I'm not sure we could prevent them -- or if it's even worth what it would take in order to do so. I'm simply saying that (a) nobody should by patting themselves on the back for any temporary conditions they bring about (such as a spike in tax revenues), and (b) we can't look at those situations as something we can expect to have permanently, or even when it's convenient.
Can you explain your thoughts on why the EITC created a benefit? Tax receipts rose nicely from '96-'00, much quicker his first term.
Part of that was driven by the growth in real median wages
One can surmise that the growth in productivity, fueled by the dot-com boom was a contributor to that. While appearing insignificant, labor productivity in the late 90s was quite a bit higher than the 2010s.
That's a somewhat different debate.
The point was mainly about govt revenue.... Typically during stronger economic periods with low unemployment you would see revenues running in the higher range as % of GDP. At least at or above the long run average, which I believe is about 17.5%.
During the supposedly great Trump years it was stuck in the low 16 range. And we're basically back to that again now.
But, to be clear, that is because you think there is opportunity to improve taxation via increases, efficiencies, etc. vs. seeing that same type of multi-year growth, right?
This is a pretty fair argument.
If our policymakers are going to punt to the Fed to "raise" the funds to service our debt in order to avoid having to bite the bullet on taxes and spending, making the money people earn and have accumulated lose value, it seems both rational and fair for people to insist on taxes staying low.
If elected leaders can't deal with the burden in the interest of their own political preservation, why should taxpayers?
You think tax rates would have avoided the irresponsibility that resulted in the 2008 recession?
Because the ratio of investment to consumption was still off. That’s what a bubble is. The price of an asset getting much higher than the value of the underlying asset.
In the 20's the top marginal rate was 20%. Big bubble. 92+ until '60. No bubbles. Rates fell to 50% to '70. Still no bubbles. Rates fell below 50 in '81. Bubble in '87. We had the dot com bubble. Then cut top rates by 5%. 2nd biggest bubble. That’s the anecdotal evidence.
A priori evidence is just as strong. Investments are generally not tax deductible. Labor and equipment are.
As with anything else, you could point to any number of things that played some kind of a role in precipitating events.
But, sometimes, that's like pointing to an aircraft carrier sailing alongside some tugboats and saying "Well, they're all playing a role in displacing the water." And that's true, they are.
Here's future Fed Chair Ben Bernanke saying what I'm saying, back in 2005, when people were trying to claim that it was policy choices that got us that brief respite of fiscal balance.
"The greatest single cause of the fiscal surplus of the 1990s was the stock market bubble, which led to an unsustainably high level of economic activity and tax revenues," said Ben S. Bernanke, the chairman of Bush's Council of Economic Advisers.
Together with the 2001 terrorist attacks and the war on terror, the collapse the bubble was the major cause of the shift toward deficits after 2000, said Bernanke, who is attending the conference.
There have been fully fleshed analyses of this, too. But, all you really need to know is that the states experienced similar bursts in tax revenues. And why would some federal policy change cause that?
No. I think you could see similar growth.
At some point, the problem becomes real growth. How do you increase wages without increasing inflation? If we could agree that markets only know the supply of money it has, not where the money originated. Then we see that it's difficult to have a certain population's participation in a market grow, no matter the cause, and not incur inflation.
Edit: When the EITC hit. Those poor people spent the money. The velocity of M1 increased, and the same dollar was taxed multiple times on the way up the ladder. But eventually prices rise due to the increased participation. Supply ultimately has a hard time responding in a timely fashion.
Edit 2: And the ultimate result was a decrease in the tax base/revenue. If you would have cut the EITC in half and made the code slightly more progressive, you would have had a better outcome. A little slower/more sustainable growth, half the hit to the tax base, and a more sustainable economy.
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The bubble in the 20s was caused by terrible -- almost perfectly backwards, really -- monetary policy shifts. It wasn't caused by low tax rates. If that were the case, low tax jurisdictions all over the planet would constantly be seeing bubbles. And they don't.
More Bernanke, this time recognizing that Milton Friedman and Anna Schwartz had appropriately fingered the nascent Fed in setting that entire catastrophe off in their book "A Monetary History of the United States". It's a long and moderately wonky speech -- that is totally worth reading. But here are some summation snippets from Bernanke that gather it up nicely.
As everyone here knows, in their Monetary History Friedman and Schwartz made the case that the economic collapse of 1929-33 was the product of the nation's monetary mechanism gone wrong. Contradicting the received wisdom at the time that they wrote, which held that money was a passive player in the events of the 1930s, Friedman and Schwartz argued that "the contraction is in fact a tragic testimonial to the importance of monetary forces [p. 300; all page references refer to Friedman and Schwartz, 1963].
Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.
Friedman and Schwartz were kind of scoffed at when that book came out in 1963. The prevailing view in their field at that time was, basically, your view.
We increase the number of workers.
When we tax income, rates are not as important as the total national income, correct? We need more of that. We’ve brought into this country 10-20 million foreigners during Biden’s term, mostly working age males. They need to work and pay income taxes, not receive a “middle class tax cut” which often means EITC.
I’ve heard Trump talk more than once about the revenue tariffs produce, yet that seems to be a dirtty word. Not all tariffs need to be like Smoot Hawley. Biden kept most of Trumps tarries intact. Seems like Tariffs on certain kinds of imports is not at all a bad idea.
It really doesn't serve a whole lot of purpose to measure these sorts of things in dollars -- not even adjusted for inflation. It has to be done in % of GDP to have rational context.They may be collecting a lower percentage but their revenue is still going up. I don't know what caused the dip in 2023.
That said, I also don't think we can gain anything useful by making comparisons to a bubble period (or a bust period, for that matter). But we're having more and more of these things...and I think we should expect to continue to, so long as we don't get our fiscal house in order in a responsible way.
But I long ago lost hope that this would ever happen. Too much political incentive not to do that.
Poor monetary policy was certainly a huge part of the problem. No argument here.
Are you saying that if you decrease a person in the top tax bracket's tax liability by 50% for 15 years, an overwhelming amount of it wouldn't go into investments?
Did the monetary policy drastically change pre 2007, or post 2007?
Well, before of course. And aggressive monetary policy was certainly a factor in that. But, even with those policies, I don't think that bubble happens without (a) the (deliberate) breakdown in mortgage lending risk controls, (b) the implicit notion that any additional risk could be absorbed by the government, its sponsored organizations, or (later) newfangled under-collateralized derivative instruments that bundlers could use to mitigate default risk...all of which created the false impression that lenders could take on the additional risk, and capture those benefits, without ever having to carry its burden. That's a helluva way to bring about what happened.
I always link back to this 1999 NYT piece -- where a guy actually predicted this very thing happening when the GSEs reluctantly decided to underwrite crap mortgages. If only somebody who mattered had been listening to him.
''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''
Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.
''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''
Do tell, Peter.What's funny is that, even after the house of cards came crashing down, this guy still had critics insisting he was wrong. We have a real problem in this country with policies that sound good to lots of people....but are not actually sound. And reducing the requirements to qualify for a mortgage loan, and believing the additional risk can be sloughed off to pixies and unicorns, is right up there with them.
It was Chesterton's fence -- mortgage style.
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BTW, there are some other doozy paragraphs from that 1999 NYT piece -- that are remarkable to read with the gift of hindsight.
Why did the GSEs reduce their lending standards? Well, according to them at the time, they were responding to pressure from three places:
1) The Clinton Administration, with the goal of expanding home ownership
2) Their own shareholders, who wanted the increased profits
3) Banks...so that they could close more loans, nabbing the fees and shedding the risk.
Why did the GSEs reduce their lending standards? Well, according to them at the time, they were responding to pressure from three places:
1) The Clinton Administration, with the goal of expanding home ownership
2) Their own shareholders, who wanted the increased profits
3) Banks...so that they could close more loans, nabbing the fees and shedding the risk.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.
Seems like just about everybody wanted this to happen. The federal government, Wall Street, commercial banks and mortgage lenders, high-risk borrowers. What would've been said about somebody who thought it wasn't such a great idea?
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Craze, good to see you added Wall Street to the list of contributors to the 2008 financial crisis.
Also, I wanted to answer your question.
Yes, pretty much any funds that high-earners/high-wealth people have over and above their consumption (and charitable giving) will go into capital investment.
That doesn't mean those funds are invested poorly -- by either pumping or buying into overpriced assets. You think Warren Buffett has amassed a $150B fortune doing this? His investment strategy has always been the polar opposite of that.
And I don't think Hawaiian real estate prices are in a bubble because Larry Ellison bought almost all of Lanai for $300M back ten years ago. But, yes, he has to park his money somewhere...just like everybody does. But I don't think having an abundance of risk capital is a very good argument for the government to hike taxes.
Can anybody argue with a straight face that governments are more efficient allocators of funds than private individuals and organizations with a direct interest in the outcome? Naturally, only government can do certain necessary things for society. So I'm not arguing for anarchy or an end to taxes or anything like that. Taxes will always be a necessary evil for a civilized, just, and prosperous society. But that certainly doesn't mean that more government spending and taxation is necessarily preferable to people allocating their assets as they'd see fit. We ought to err on the side of the latter.
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I've always included them in it -- they've always been fingered as a culprit in this article (and other, deeper analyses of what all transpired there) that I've linked numerous times.
I think it was like a domino effect -- or a planets aligning effect. And there is no question at all that Wall Street was part of it -- in multiple ways. They are always going to be looking at ways to make money....which is fine, so long as the risks and incentives are all properly placed. In this case, we deliberately reassigned the risks so that virtually all interested parties could gain while avoiding that burden.
The sin wasn't Wall Street wanting to make money -- that's what it always will do. The sin was convincing ourselves that it was virtuous to remove the sensible barriers to home lending that were there for good reason, not to keep people out of homes.
Most people look at their tax rate and think, "my taxes are too high." And some people look at taxes as a form of funding government. And say, " taxes wouldn't have to be so high, if spending was under control."
What I'm trying to point out is that there is utility inside the tax code. It serves other purposes whether people realize it or not.
Bubbles abound. Everything a person can invest in is inflated. Real estate, housing, farm land, the stock market. The stock market lost $17T in '08. And the fed had to bail us out, and this will persist until the balance of investment and consumption is restored.
Once again, there were no major bubbles when America was great. That wasn't an accident.
Edit: It's a matter of function not fairness.
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It was the Fed’s intervention which set the ‘08 meltdown in motion - not just by reducing lending standards, but by implicitly backing the loans made under the relaxed standards. And, sure enough, they followed through with the bailout.
If we’re concerned about investment and consumption being decoupled, shouldn’t we understand why it does?
The government wanted something out of the deal and they basically gave investors, lenders, and other interested parties all the incentive they needed to take reckless actions.
By Fed, I mean Federal reserve.
We do know why and how.
I don't disagree with your assessment of the role the federal government played wrt the housing crisis. Let’s not forget, we all got bailed out in a sense. I'm sure a portion of that 17T was yours and many others on this board. If politicians would be better stewards, there would be much less need for Federal reserve intervention. I think we can all agree on that.
Noted. I get sloppy with the term sometimes -- sometimes I mean the FRB, others I mean the Federal government writ large.
No doubt about it. It's become such a convenient avenue for policymakers to have their cake and eat it too -- which is ideal for their career survival, but not ideal for anybody else. And I haven't seen any indication from the Fed that it's losing its willingness to accommodate them -- even as we've experienced inflation, Treasury downgrades, etc.
Anyway, I'm pretty resigned to the likelihood that taxes will be, on balance, higher for the next 30 years than they've been for the past 30 years. The voters' message has been to keep on the current path of spending and insufficient taxes to pay the bills. It should come as no surprise that the pols have obliged us. Voters usually aren't terribly put off by tax hikes, as long as they only hit somebody else. That said, I do think that any austerity measures we end up taking should hit both sides of the ledger.
I don't think these are mutually exclusive statements. I can think my taxes are too high, which I do, relative to the value I get from government. Simultaneously, I can also believe there is utility in a tax code and do not subscribe to a flat tax theory.
I think it's a bit disingenuous though to claim that income tax burdens have dramatically dropped vs. shifted. For example, in 1947, state and local tax receipts accounted for 4.9% of Gross Domestic Income vs. 9.0% for Federal income tax receipts. In 2023, state and local accounted for 9.0% vs. 10.6% federal. In other words, the net change was only 19.9% down to 19.6%. While I agree that in today's terms those dollar figures aren't insignificant, there isn't a dramatic difference given the shift towards more state and local tax burden.
This is categorically inaccurate though. There were plenty of recessions (late 40s, mid 50s, late 50s, early 60s). Other than 2008-9, which was a year-long recession, nothing else stands out as being different.
Agreed, but also behaviors have changed. There is a fundamental shift in the number of things we require. I've been arguing for years that people want less volume of things and we aren't going back. The cell phone replaces so many different prior items, eReaders can hold an entire library full of paper that goes to waste, etc.
I definitely agree with this. And it's an important difference going forward as well. Good call!
Soylent Green and Logan’s Run.We need more elder abuse!
I agree with your first paragraph.
Your math isn't adding up in the second. I think I know what you're getting at.
I would defend myself in the third by saying, sure there were recessions, not asset bubbles, and/but for different reasons. For example, the worst recession was in the 50's. The reasons given are Eisenhower's lack of defense spending, and people kept cars longer, and built less homes due to relatively high interest rates. Which brings up the push/pull system(which we've discussed beforethe fed used previously.
I thought we were on topic?
Did you ever give me your opinion on the best bourbon for an old fashioned? I asked you specifically. (There. That’s off topic.)
Are you a deficit hawk? If so, are you okay with middle class tax cuts. knowing full well that spending cuts won't happen?
I'm the wrong guy to ask about bourbon. Back in the day if I was drinking bourbon it was Early Times. Out of a hip flask.
I'm looking forward to my raise this year. Thanks guys. It's not much, but every bit helps. Keep it up! I'm pulling for you!
Most bourbons make for a bad old-fashioned, because bourbons tend to have a sickly fruit-forward flavor that can become overpowering under the influence of all the sugar that gets added to that particular cocktail. Use a bourbon with a rye-heavy mash bill, like Basil Hayden's, because the spicier flavor of the whiskey will better contrast the added sugar and fruit garnish.
Don't go to Wisconsin. They make them with brandy and 7up. Have to specifically ask for a whiskey one
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