Friday, September 17, 2010

Krugman's Tax-Cut Dishonesty

I wondered when Paul Krugman was going to make his misleading points about the upcoming tax increases, and he did not waste time. Today, he once again provides more fodder for the "Krugman Truth Squad," as well as giving me an excuse to sit on my couch and write yet another blog post.

First, let me provide a Krugman statement and then go from there:
So, about those tax cuts: back in 2001, the Bush administration bundled huge tax cuts for wealthy Americans with much smaller tax cuts for the middle class, then pretended that it was mainly offering tax breaks to ordinary families. Meanwhile, it circumvented Senate rules intended to prevent irresponsible fiscal actions — rules that would have forced it to find spending cuts to offset its $1.3 trillion tax cut — by putting an expiration date of Dec. 31, 2010, on the whole bill. And the witching hour is now upon us. If Congress doesn’t act, the Bush tax cuts will turn into a pumpkin at the end of this year, with tax rates reverting to Clinton-era levels.

In response, President Obama is proposing legislation that would keep tax rates essentially unchanged for 98 percent of Americans but allow rates on the richest 2 percent to rise. But Republicans are threatening to block that legislation, effectively raising taxes on the middle class, unless they get tax breaks for their wealthy friends.

That’s an extraordinary step. Almost everyone agrees that raising taxes on the middle class in the middle of an economic slump is a bad idea, unless the effects are offset by other job-creation programs — and Republicans are blocking those, too. So the G.O.P. is, in effect, threatening to plunge the U.S. economy back into recession unless Democrats pay up. (Emphasis mine)
As I note below, Krugman already is on the record as calling for the repeal of ALL of the tax-rate cuts from the last decade, and then taking the money and having the government spend it. (Guess what, Paul? If government takes the money, it will spend it, period.) So, is Krugman now claiming that raising taxes (since we already know government WILL spend that new revenue) will cause the economy to go downhill? And this after earlier calling for expiration of ALL lower tax rates? The guy needs to make up his mind.

OK, let us look at the actual rate cuts. This recent AP article does a good job of explaining what actually will occur, as opposed to Krugman's partisan rant:
Here's some pressure for lawmakers: If they don't reach agreement on extending soon-to-expire Bush-era tax cuts, nearly all their constituents back home will get big tax increases.

A typical family of four with a household income of $50,000 a year would have to pay $2,900 more in taxes in 2011, according to a new analysis by Deloitte Tax LLP, a tax consulting firm. The same family making $100,000 a year would see its taxes rise by $4,500.

Wealthier families face even bigger tax hikes. A family of four making $500,000 a year would pay $10,800 more in taxes. The same family making $1 million a year would get a tax increase of $52,300.

The estimates are based on total household income, including wages, capital gains and qualified dividends. The estimated tax bills take into account typical deductions at each income level.

Democrats have been arguing for much of the past decade that tax cuts enacted in 2001 and 2003 under former President George W. Bush provided a windfall for the wealthy. That's true, but they also reduced taxes for the working poor, the middle class, and just about everyone in between. (Emphasis mine)
So, according to Krugman, for a family making $100K a year, $4,500 is just chump change, a tiny sliver of cash. I don't think so. Tax rates were cut at every level of income and one of the ironic results was that the tax payments became even more progressive than they had been before, with about half of all U.S. households paying no federal income tax at all. (However, they do pay Social Security tax, which for many families takes more money from them than does the federal income tax.)

Furthermore, Krugman recently called for raising ALL taxes at all levels:
If we could wave away political reality, I’d let all the Bush tax cuts expire, and use the improvement in the budget outlook to justify a large, temporary increase in public spending.
Let me translate: If the government takes a bigger bite of taxes during the recession, then it can spend more money, and we will be better off than before. Now, I'm not sure how that works, and maybe the Great One Can explain to me how this would help lead us back to prosperity and full-employment, but I'm confused.

Furthermore, if raising all tax rates to take more income would be good for the economy, why not a tax of 100 percent? I mean, just think of all the wonderful things government can do for us if it just has enough money to spend!

One of the hard realities that is about to hit American families is that at all levels, they will be paying substantially more in taxes than before, once the current rates expire. Krugman has been denying this reality for years, claiming that the cut in the top rate from 39.6 percent to 35 percent has been responsible for almost all of the federal deficit. This is nonsense, pure nonsense, and it is nonsense on its face.

So, Krugman wants it both ways. He wants to claim that if government takes a bigger chunk of money from all of us -- and then spends it on "jobs programs" -- the economy will improve. If the tax rates for everyone but those making past the $200K threshold are kept at current levels, the economy will improve.

So, which is it? Now, I am not going to say that if the second option listed above is implemented, that the economy will plunge into oblivion. Furthermore, government spending, no matter how it is financed, is a tax, period. The money may not come from direct revenues, but nonetheless it is a tax.

(Yes, yes, I know that Chartalists have declared that when it comes to government gaining revenues, the Law of Scarcity is repealed, but we are dealing with economics here, not fantasy.)

In the end, Krugman wants us to believe a number of things that are mutually-exclusive. By disguising it in a partisan rant, he is able to present the "Good Democrats versus Evil Republicans" morality play that no doubt will make his groupies happy, but he does so by engaging simply in partisan politics, not economics.


Daniel Hewitt said...

"Tax rates were cut at every level of income and one of the ironic results was that the tax payments became even more progressive than they had been before, with about half of all U.S. households paying no federal income tax at all."

This is surprising to me - what source did you use?

William L. Anderson said...

I just included a link to the news story with that statistic. Thanks for asking that question, as you were correct to ask it. Here is the link that I posted.

Daniel Hewitt said...

Thanks. I went looking for some more data and found this, and it does support the statement that taxes became more progressive under Bush. And I'm still surprised!

Bob Roddis said...

I'm just shocked to learn that Krugman and the liberal media have been misleading us for almost a decade on this tax issue.


M. Johnson said...

Are taxes zero sum? I don't think so. A rise in the rates will not necessarily yield more tax dollars.

William L. Anderson said...

Mr. Johnson, you are exactly right. What Krugman was saying was that if the government takes the extra money in higher taxes and then spends it, somehow the "multiplier" effect of government spending will bring more prosperity than private spending.

In grad school, we learned the Keynesian "balanced-budget multiplier" in which a dollar of taxes spent had a greater economic effects than a dollar spent by individuals not in government.

Another Anonymous said...

Professor Anderson: Chartalists do not say that scarcity has been repealed - they just observe that at times like now, where the government is slamming on the brakes by overtaxation, it is money, and hence jobs which are scarce, not resources. Murphy's linked article just repeats much of the incoherent and logically impossible, false mainstream mythology about how government finance works. He comes a lot closer when he calls government a giant counterfeiter.

The main economic effect of all the bond issuance BS governments engage in for no real reason is psychological warfare. The object is to hide the facts that governments in fact do not and logically cannot borrow money in their own currency, that governments create money in any amount at will by spending and destroy it at will by taxing, and that these are the only ways net money can be created or destroyed.

jason h said...

"Chartalists do not say that scarcity has been repealed"

Well not explicitly, that would be embarrassing for a so called economist. However when you redefine savings as the accumulation of freshly printed notes that the gov't doesn't 'destroy' through taxation, you are ignoring scarcity.

You falsely equate the accumulation of notes with the storage of scarce resources.

Furthermore the MMTer's definition of private savings implies that the gov't somehow produces resources by issuing notes, which is at odds with the reality that the gov't consumes resources which then become unavailable to the private sector.

Another Anonymous said...

As far as I can see, MMT/Chartalists try to use standard, traditional definitions. Who doesn't mean financial savings by "savings"? If they're different from Austrians', well, that is the Austrians' problem.

I think people should focus on the scarcity of things that are actually, uhh, scarce. These days, that is these freshly printed notes. If you think they are worthless, please send me some. the gov't somehow produces resources by issuing notes in effect, that is what happens; print the money, use it to pay for the obvious beneficial, indeed necessary work - and you mobilize the resources, labor foremost, which are being squandered recklessly by current high tax, low spending, rely on the private sector policies. Anybody can quit their government job, thereby lowering government spending, and go to work for the private sector if they want, so labor, the most important resource, does not become unavailable to the private sector if we use these new notes to fund a new New Deal, which would be highly successful, just like the old one.