Huckabee's Fiscal Restraint?

One long-standing 2008 controversy is over the nature of Huckabee's tax hikes and cuts, the context, and impact they may have had on Arkansan voters. He has managed to make enemies with two influential organizations: the libertarian CATO Institute and the venerable conservative economic lobbying group the Club for Growth (the latter of which I'm a member).

I've long had criticisms on some Huckabee positions. The remarkably articulate Governor has gone Dan Quayle a couple of times on fiscal issues ("I support Free Trade, but it must be Fair Trade"), and his baseless income inequality rhetoric is disturbing.

However, as I learned when dealing with the customer relations desk at Wal-Mart, rhetoric is secondary to the bottom line. That line is policy action. Extraordinarily admirable policy stances such as the FairTax have earned a good deal of respect for the Governor from me. Nothing in the Club's report, when conisdered in context, would keep me from voting in for him in a general election.

Dick Morris, for whom I have limited respect--but occasionally he's insightful, had some interesting refutation in this week's column:

A recent column by Bob Novak excoriated Huckabee for a “47 percent increase in state tax burden.” But during Huckabee’s years in office, total state tax burden — all 50 states combined — rose by twice as much: 98 percent, increasing from $743 billion in 1993 to $1.47 trillion in 2005.

In Arkansas, the income tax when he took office was 1 percent for the poorest taxpayers and 7 percent for the richest, exactly where it stood when he left the statehouse 11 years later. But, in the interim, he doubled the standard deduction and the child care credit, repealed capital gains taxes for home sales, lowered the capital gains rate, expanded the homestead exemption and set up tax-free savings accounts for medical care and college tuition.

Most impressively, when he had to pass an income tax surcharge amid the drop in revenues after Sept. 11, 2001, he repealed it three years later when he didn’t need it any longer.

He raised the sales tax one cent in 11 years and did that only after the courts ordered him to do so. (He also got voter approval for a one-eighth-of-one-cent hike for parks and recreation.)

He wants to repeal the income tax, abolish the IRS and institute a “fair tax” based on consumption, and opposes any tax increase for Social Security.

Letter to Congressmen & Letter to Editor: Tax Cuts

Dear Senator/Representative,

The profound consequence of the 2001 and 2003 tax rate cuts has been felt by Arkansans, and is consistent with historical precedent dating back to Reagan and Kennedy. Over-taxation reduces economic stimulus and the elasticity of taxable income. As a fifteen-year-old policy enthusiast, I'm deeply interested in seeing our local economy continue to benefit from economic stimulus provided by these reforms. Yet, we're faced the the likelihood of their expiration, along with the tax hike associated with that and the expansion of the Alternative Minimum Tax (AMT). I would urge you to provide support to make the tax reform permanent. We all feel the positive effects of pro-growth, pro-family tax rate cuts. Low unemployment, historically high sustained GDP growth rates, as well as increasing productivity and compensation.

Reductions in the capital gains tax and income tax stimulate economic growth, alleviate unemployment, bolster incentive for capital investment, and improve the elasticity of taxable income. This was historically demonstrated in the Kennedy and Reagan administrations, where we saw economic growth without substantial reductions in revenue. We see that freeing up the economy and allowing for the added stimulus of lower marginal rates and capital gains tax, we improve output, lower unemployment, and create a more friendly environment toward enterprise. The distortion effect of taxes is large, in fact, there is some empirical literature (e.g. Romer, Berkley 2007) to suggest that each one percent increase in exogenous tax rates reduced output by three percent.

While we bemoan the increasing federal debt, which is a policy concern, we need to remember that 87% of the accrued deficit increase since 2000 has been caused by heightened spending, with only 13% viably held accountable to tax rate cuts. Additionally, if we examine the federal debt pro rata, it is consistent with historical average federal debt held by the public as a percent of the GDP (for the past forty years that figure has been around 35%).

As we attempt to maximize revenue while providing the lowest possible marginal rates across the board, and imperative economic parameter deals with the elasticity of taxable income. A recent empirical work by Gruber and Saez in The Journal of Public Economics elucidated that the elasticity of taxable income is substantially effected by marginal tax rates of higher income brackets. What this means is that the arithmetic reduction in revenue caused by lower tax rates is offset by the alleviation of the dead-weight loss the taxes had in the first place. This economic effect allows us to cut taxes more easily, and in the long run, lose little revenue. Some estimates of skyrocketing budget deficits if we make the Bush tax cuts permanent fail to account for this offset, which the economic community acknowledges. Low-end estimates come from sources such as Mankiw and Weinzierl (Journal of Public Economics 2006) which estimated a parameter of 0.5, and higher estimates by Kimball and Shapiro (Yale 2004) have been even more favorable toward tax cuts.

The final objection to making President Bush's tax cuts permanent comes in the form of objecting to "tax cuts for the rich." This uses a grossly disproportionate methodology that overlooks a couple of things. First, while the higher-income earners were quantitatively affected more by the cuts, this is in part because we're dealing with larger sums of money, and also because the necessary capital gains tax reduction disproportionately affected them. That reduction, however, proved vital in providing for job growth and economic stimulus. More importantly, the tax cuts shifted the tax burden more to the wealthy. The rich pay a larger portion of income taxes today than they did before the cuts, and the poor pay less. Everyone's taxes were cut, and everyone benefited.

I would urge you to support these pro-growth policies, and support making the bush tax cuts permanent.

Best regards,

Will Simpson

The following letter was published in the Stone County Leader.

To the editor,

If you and your spouse are an elderly couple earning $40,000 a year, your taxes will go up from $583 to $1,489 in 2011. If you’re a woman, you could be one of the 83 million American women who could see their taxes rise by an average of $2,068. The tax cuts proposed by the Bush administration drew on a long and rich history of policy precedent, empirical literature, and proven success. They bolstered a sluggish economic prognosis into a stalwart economy with stable GDP growth, historically low unemployment, and climbing productivity and compensation. Yet, today, the democratic congressional majority’s legislative agenda explicitly declares a desire to raise American’s tax burden by allowing this reform to expire.

Two common myths exist regarding this tax reform. The first is that it exacerbates budget deficits. At least in the short term, we do see a slight loss in revenue, but the arithmetic loss from the reduced rate is offset because tax cuts alleviate some deadweight loss the taxes had in the first place. In common man terms, you won’t necessarily lose significant amounts of revenue. As a matter of fact, the Congressional Budget Office (CBO) has stated revenues for FY 2007 are exceeding last year’s by nearly $250 billion, That increase represents the second-highest growth rate (13%) in the past twenty-five years; four to five times the inflation rate. April saw one of the largest surpluses in recent decades. This is called the economic effect. Estimates for a parameter of offset by Kimball and Shapiro (Yale 2004) were favorable to tax cuts, coming close to 0.7 (meaning we recover seven tenths of the loss). In the long run, some marginal rate and capital gains reductions can even increase revenue. Many models that forecast huge revenue drops if we don’t raise taxes discount not only the basic distortion effect of taxes, but also the elasticity of taxable income (how we can enlarge the economic pie so to speak). An empirical work by Gruber and Saez (Journal of Public Economics 2002) showed that marginal tax rate cuts and capital gains reform drastically improved this elasticity. In short, the current budget deficit cannot be attributed to tax cuts, but to spending.

The second popular myth is that tax cuts are only for the rich. On the contrary, the Bush tax cuts actually shifted the tax burden more toward the wealthy! CBO numbers show that pre-tax cut, the highest 20% of income earners' tax dollars accounted for 81.2% of total federal revenues collected. Post reform, the highest 20% of income earners paid 85.3% of taxes collected. The middle twenty percent dropped from contributing 5.7% to 4.7% of revenue. The numbers are antithetical to the rhetoric of the left.

The historical precedent for tax reform is undeniable. If you look at Department of Commerce statistics before and after the Reagan Administration tax cuts, in the four years prior to the cuts real annual income tax revenue growth was at -2.8%. After the cuts it was at +2.7%. Do the same thing comparing real GDP growth and you get 0.9% compared to 4.8%. We’re seeing the same scenario unfolding today. The Bush tax reform has incubated an environment for growth. Please assure our Senators and Representative that the people of Arkansas are firmly supportive of successful tax reform, and Congress cannot allow these measures to expire.

Will Simpson
Mountain View, AR

May Jobs: 44nd Consecutive Month of Growth

The economy added 157,000 jobs in May, making it the 44th consecutive month of job growth.

“We had a very weak performance in the first three months of the year,” observes Richard Yamarone of Argus Research, “but now we’re in the middle of the year and economic conditions are extremely bright.”

Jared Bernstein, senior economist with the Economic Policy Institute, notes that “[t]hough job growth of this magnitude is moderate, if it persists, it is likely fast enough to provide consumers with the needed income growth to propel the economy forward in coming months.”

But we still need to raise taxes?

Happy Income Redistribution Day

It's the most wonderful time of the year.

I'm quite convinced that if elections were held in April instead of September, Steve Forbes would have nabbed the nomination in either '96 or '00.

In following up the last post, the more carping there is about low-skill households and low-income families being left behind in the tax debate, some new Heritage research is interesting.

if the costs of direct and means-tested benefits, education, and population-based services alone were counted, the average low-skill household had a fis­cal deficit of $22,449 (expenditures of $32,138 minus $9,689 in taxes). The net fiscal deficit of the average low-skill household actually exceeded the household's earnings. If interest and other financial obligations relating to past government activities were added as well, the average deficit per household rose to $27,301.

Quick Response

In regard to a friend's inquiry as to why I consider "tax cuts for the rich" a frivolous political slogan, I'll throw together my thoughts as briefly as possible.

To lament "tax cuts for the rich," you're looking at it in a statistically inaccurate gross numerical sense. To see the true ramifications of the cuts, we need to accept a methodology that properly looks at proportionate numbers and see where the tax burden has been shifted. Like Hoover Institute economist Dr. Thomas Sowell said of the "tax cuts for the rich" mantra, it, like most political slogans, is based on "slippery words and sloppy thinking."

A preface to my arguments below: Lower income households had their tax rates cut under the GOP's 2001 and 2003 cuts. I personally know families who have benefited greatly from these measures. The reforms to the marriage penalty tax and child tax credit were extremely pro-family and pro-low income families.

Harvard Economics Professor N. Gregory Mankiw, Ph.D., posted this popular story that explains it in layman's terms on his blog.

As we attempt to maximize revenue while providing the lowest possible marginal rates across the board, and imperative economic parameter deals with the elasticity of taxable income. A recent empirical work by Gruber and Saez in The Journal of Public Economics elucidated that, "We estimate that this overall elasticity is primarily due to a very elastic response of taxable income for taxpayers who have incomes above $100,000 per year, who have an elasticity of 0.57, while for those with incomes below $100,000 per year the elasticity is less than one-third as large....We then derive optimal income tax structures using these elasticities. Our estimates suggest that the optimal system for most redistributional preferences consists of a large demogrant that is rapidly taxed away for low income taxpayers, with lower marginal rates at higher income levels."

From a purely quantitative view of raw numbers, the tax cuts disproportionately alleviated total tax revenue from higher income brackets, as it lowered all brackets, yet brought the top bracket closer to equilibrium. But when we're dealing with a progressive tax rate, the higher income earners will always have their taxes effected more than the lower income earners, as a percentage modification has higher numerical ramifications to a larger sum than a smaller sum.

However, if we examine the true impact of the tax reform, we find the tax burden was shifted more toward the high income earners. What this means is the "rich" pay for more public spending now than they did before tax rate cuts, and the low income earners pay less than they did before. According to the Congressional Budget Office, in 2000 (prior to the Bush rate cuts of 2001 and 2003), the highest 20% of income earners' tax dollars accounted for 81.2% of total federal revenues collected. Post tax cuts, in 2004, the highest 20% of income earners paid 85.3% of taxes collected. The second highest twenty percent went from paying 18.5% to 18.8%, while the middle twenty percent (the mighty middle class) dropped from contributing 5.7% to 4.7% of revenue. The second lowest twenty percent of income earners had a substantial benefit, seeing their portion of revenue go negative, meaning they receive more benefits than they pay in taxes, the change being from 1.1% to -0.9%. The lowest 20% went from -1.6% to -2.9%, an impressive number.

Cumulatively, the economic consensus and rational conclusion of the 2001 and 2003 cuts are twofold. First (and foremost), the economic stimulus provided by the cuts was substantial, and a contributing factor to the rapid economic growth of the past three years. This point wasn't contested. Second, the tax rate cuts positively impacted both the rich and the poor, modifying the elasticity to achieve maximum efficiency bracket allocation, while shifting the proportional burden farther toward the rich (even though they paid a lower dollar sum).

Recession "Hopes" Getting Thinner

For all caterwauling of a 2007 recession, the economy really isn't cooperating. While the chance of a recession over the next few years remains, the causality may be in a different ballpark than the current threats.

March reports show unemployment is down to 4.4%. The Wall Street Journal explains:

U.S. financial markets were closed Friday, which was just as well for those on Wall Street and in Washington who've been betting on a recession. The bullish employment report for March would have ruined their Easter weekend.

Everyone else, however, can rejoice that the economy created 180,000 net new jobs, along with upward revisions of 32,000 for January and February. The unemployment rate fell to 4.4%, down from 4.7% a year earlier and matching the lowest rate in six years. Since mid-2003 and the passage of the second round of the Bush tax cuts, the U.S. economy has added 7.8 million jobs.

David Malprass, Chief Economist at Bear Stearns & Co., predicted in this weeks Forbes that

The next recession--probably a ways off-- is more likely to be caused by the normal government-directed growth killers, taxes and inflation, than by a business cycle. Washington as halready put into law histories biggest tax increase, which goes into effect January 1, 2011, increases on income, capital gains, and dividend taxes scored at $4 trillion (based on Washington's silly assumption that there's no economic impact from taxes).

(See post below for more on 2011 tax hikes)

Consistent with historical precedent--most recently the economy's stability through Katrina and high gas prices-- Congress should steer clear of the protectionist policy lure, make Bush's tax cuts permanent (then seek legitimate tax reform), and avoid recessions blamed on cyclical markets.

Gingrich's Economics

As the 2001 and 2003 tax rate cuts are set to expire, and we see no move in the Democratic Leadership to drop their opposition to renewing the cuts, we're faced with some of the largest tax hikes in over a decade. Newt Gingrich summarizes the GOP's $800 million tax hike estimate thusly:

... You're a family of four earning $60,000 a year: Your income-tax bill will rise 61% in 2011, from $3,030 to $4,893.

... You're an elderly couple earning $40,000 a year: Your taxes will go up by 156% in 2011, from $583 to $1,489.

... You're a woman: You could be one of the 83 million American women who could see their taxes rise by an average of $2,068.

... You're married: You could be one of the 48 million married couples who will pay an average of $2,899 more under the liberal tax increase.

... You have kids: 42 million families with children will pay an average of $2,181 more in taxes.

... You're a small-business owner: 26 million small-business owners will get a tax bill for an average of $3,960 more than before.

• The 10% Tax Bracket Will Become 15%: More than five million families and individuals who previously owed no taxes will become subject to taxation.Marriage
• Marriage Penalty Relief Will Be Eliminated $466 in additional taxes in 2011.
• The Child Tax Credit Will Be Cut in Half: 31 million Americans will pay an average of $859 more in taxes in 2011.

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Those numbers are likely inflated to some degree, but the impact of not making the 2001 and 2003 rate cuts permanent are profound. The GOP's $800m figure should be reassessed in light of the lack of probability that Democrats will allow the AMT's impact to expand. An effectual AMT hike would have severe political backlash, in addition to the predicted tax hike, that Reid and Pelosi likely won't endure. Removing that the figure falls to $300-400m (figure used by Robert D. Novak). Still frightening and substantial.