Our financial system is crumbling this week.

[vinsanity]

Interesting piece in today's WSJ examining Hauser's Law, which essentially says that historical data strongly suggest that federal tax receipts will always fall just short of 20% of GDP. Keep taxes too low and revenue falls. Raise taxes too high and the economy slows, loopholes get exploited, and receipts lag.

In other words, increases in federal tax rates, especially higher marginal rates, do not produce additional revenue. Despite a variety of tax regimes over the past 80 years, federal receipts have approached but never exceeded 20% of GDP. The tax base, like an organism, responds to changes in tax law by adjusting itself, thanks in no small part to our convoluted tax code.

Interesting premise, Adam Smith would likely agree.

Too bad Smith didn't have the data available to him then. He probably would have taken a long hard look at taxation and how it alters behavior.

Well I tend to agree with some other economists that "the reason that the invisible hand often seems invisible is that it is often not there." (Joseph E. Stiglitz)

I agree that if you raise taxes people spend more money to get out of them and that it may not affect tax revenues as much, but I'm skeptical that 20% is some magic barrier. As some statheads would say-sample size.

Anyways, it seems like an interesting premise, and I agree with it to some extent. As a republican once said to me, 'If you make it cheaper for me to pay my taxes than get out of them, I'll pay them'.

[Hungary Jack]

Interesting piece in today's WSJ examining Hauser's Law, which essentially says that historical data strongly suggest that federal tax receipts will always fall just short of 20% of GDP. Keep taxes too low and revenue falls. Raise taxes too high and the economy slows, loopholes get exploited, and receipts lag.

In other words, increases in federal tax rates, especially higher marginal rates, do not produce additional revenue. Despite a variety of tax regimes over the past 80 years, federal receipts have approached but never exceeded 20% of GDP. The tax base, like an organism, responds to changes in tax law by adjusting itself, thanks in no small part to our convoluted tax code.

Interesting premise, Adam Smith would likely agree.

Too bad Smith didn't have the data available to him then. He probably would have taken a long hard look at taxation and how it alters behavior.

Well I tend to agree with some other economists that "the reason that the invisible hand often seems invisible is that it is often not there." (Joseph E. Stiglitz)

I agree that if you raise taxes people spend more money to get out of them and that it may not affect tax revenues as much, but I'm skeptical that 20% is some magic barrier. As some statheads would say-sample size.

Anyways, it seems like an interesting premise, and I agree with it to some extent. As a republican once said to me, 'If you make it cheaper for me to pay my taxes than get out of them, I'll pay them'.

I don't think sample size is the issue, as it's an empirical observation based on federal tax receipts as a percentage of GDP from 1929 through 2009. Starting about 1949, the percentage approaches 20, but never exceeds it (as far I can tell from the printed graphic).

I don't think tax-dodging (although there is plenty of this) is the issue here as much as the optimal levels of taxation (and this government spending). Unfortunately the current tax code, at 70,000 pages, makes it easier to dodge taxes, but this tax code was not always this convoluted. One omission of the study is an examination of federal receipts from personal vs. corporate taxes.

The piece's main thrust is that budget planning should not assume that higher taxes will always lead to higher federal receipts. The piece notes that the current CBO projections show federal receipts reaching 19.6% of GDP in 2020, which would be an exception to 80 years of empirical patterns.

Perhaps one way to bring more clarity to forecasting is to simplify the tax code to eliminate the opportunities for gaming the system, at which point we might get a better sense of what changing tax regimes do to economic growth.

[vinsanity]

Interesting piece in today's WSJ examining Hauser's Law, which essentially says that historical data strongly suggest that federal tax receipts will always fall just short of 20% of GDP. Keep taxes too low and revenue falls. Raise taxes too high and the economy slows, loopholes get exploited, and receipts lag.

In other words, increases in federal tax rates, especially higher marginal rates, do not produce additional revenue. Despite a variety of tax regimes over the past 80 years, federal receipts have approached but never exceeded 20% of GDP. The tax base, like an organism, responds to changes in tax law by adjusting itself, thanks in no small part to our convoluted tax code.

Interesting premise, Adam Smith would likely agree.

Too bad Smith didn't have the data available to him then. He probably would have taken a long hard look at taxation and how it alters behavior.

Well I tend to agree with some other economists that "the reason that the invisible hand often seems invisible is that it is often not there." (Joseph E. Stiglitz)

I agree that if you raise taxes people spend more money to get out of them and that it may not affect tax revenues as much, but I'm skeptical that 20% is some magic barrier. As some statheads would say-sample size.

Anyways, it seems like an interesting premise, and I agree with it to some extent. As a republican once said to me, 'If you make it cheaper for me to pay my taxes than get out of them, I'll pay them'.

I don't think sample size is the issue, as it's an empirical observation based on federal tax receipts as a percentage of GDP from 1929 through 2009. Starting about 1949, the percentage approaches 20, but never exceeds it (as far I can tell from the printed graphic).

It was tongue-in-cheek, but at the same time it's based on 80 pieces of data, we call 80 plate appearances or even 80 games as small sample size in baseball, no? Part of what I was getting at is through the last 80 years we've always sort of done the same thing (lower or raise taxes by very small intervals, seemingly taxing growth and cutting during a recession, but I could be wrong there) and so our tax revenue doesn't drastically change. Rarely, if ever, do we give a change enough time to really percolate and see it's effects, we tamper and tinker with every facet of the economy every year and I think it makes it harder to see what works. So when one person cuts one tax (say income tax) that gets cut because of a tax increase that happened years prior and might just now be taking effect. So when the market/economy moves is it moving based on future values and future ideas of our economy because of an announced tax cut? Or is it moving because of the money consumers have/don't have because of a previous cut/hike that just went in to effect?

I don't think tax-dodging (although there is plenty of this) is the issue here as much as the optimal levels of taxation (and this government spending). Unfortunately the current tax code, at 70,000 pages, makes it easier to dodge taxes, but this tax code was not always this convoluted. One omission of the study is an examination of federal receipts from personal vs. corporate taxes.

I didn't mean it as dodging/evasion as much as (and what he meant was) saying you make $100k. And owe the feds $35k in taxes. Well if you can pay an accountant to do your taxes for say $5000, but he saves you $10K in taxes you'd be stupid not to do it. You pay the fed $25k and the accountant $5k. But if you owned the fed $28K and an accountant would charge you the same $5, but only save you $4k, it's cheaper to just pay the $28, in taxes.

I don't buy it cause you're just gonna pay that person almost no matter what, unless the government just sent you a bill like the Electric company.

The piece's main thrust is that budget planning should not assume that higher taxes will always lead to higher federal receipts. The piece notes that the current CBO projections show federal receipts reaching 19.6% of GDP in 2020, which would be an exception to 80 years of empirical patterns.

Perhaps one way to bring more clarity to forecasting is to simplify the tax code to eliminate the opportunities for gaming the system, at which point we might get a better sense of what changing tax regimes do to economic growth.

I agree the CBO is probably over-estimating the tax revenues, but if we are smart enough to see that tax increases don't necessarily lead to tax revenues (which is a pretty commonly held economic belief), I'd like to think they are. And the second comment is spot on.

[Hungary Jack]

I'd certainly buy the argument that simplifying the tax code should be a mechanism by which the government can capture at least some of wealth transfer from individuals and corporations to tax accountants due to the high cost of complexity. And maybe this should be the starting point for any type of Congressional effort to raise revenues without putting the crimps on the economy.

One estimate by the Tax Foundation pegged compliance cost in 2005 at $265 B, and $338 B in 2009. That's real money. Certainly not enough to close a $2 T gap, but a good start.

[vinsanity]

I'd certainly buy the argument that simplifying the tax code should be a mechanism by which the government can capture at least some of wealth transfer from individuals and corporations to tax accountants due to the high cost of complexity. And maybe this should be the starting point for any type of Congressional effort to raise revenues without putting the crimps on the economy.

One estimate by the Tax Foundation pegged compliance cost in 2005 at $265 B, and $338 B in 2009. That's real money. Certainly not enough to close a $2 T gap, but a good start.

I think compliance is hurt by complicated tax code, but unless you did away with almost all other taxes and did a straight you owe x% of what you made, it wouldn't totally kill compliance costs. Dent, and by not means an insignificant amount of dollars, the cost but not rid it.

And I'm not sure how much I buy it, because right now the tax accountants are employed. Believe it or not but bureaucracy employs people. What would happen if all of the tax accountants and HR Block employees were laid off?

I think it's been said before, but we've become a service based economy more than a production based economy. People are becoming 'too good' for blue collar jobs, if cut a a field that has such a narrow field of knowledge it's going to be harder to keep employment up. It's a real house of cards right now.

PS - I like your facts, numbers and seem to be well read. If you haven't noted I'm throwing complete junk out here.

[Arthur Dent]

One omission of the study is an examination of federal receipts from personal vs. corporate taxes.

Or, in fact, any examination of where revenue actually comes from at all. If you really wanted to find evidence for this neo-Laffer Curve, a start would be to compare income tax revenue to income tax rates.

Let me perform my own version of this "analysis". Here's total federal spending plotted vs gdp. Notice that it's always near the 20% line. Conclusion: despite large changes in spending on Medicare, doctors have adjusted their behavior to maintain their income. Bulletproof, this analysis is.

[Hungary Jack]

I'd certainly buy the argument that simplifying the tax code should be a mechanism by which the government can capture at least some of wealth transfer from individuals and corporations to tax accountants due to the high cost of complexity. And maybe this should be the starting point for any type of Congressional effort to raise revenues without putting the crimps on the economy.

One estimate by the Tax Foundation pegged compliance cost in 2005 at $265 B, and $338 B in 2009. That's real money. Certainly not enough to close a $2 T gap, but a good start.

I think compliance is hurt by complicated tax code, but unless you did away with almost all other taxes and did a straight you owe x% of what you made, it wouldn't totally kill compliance costs. Dent, and by not means an insignificant amount of dollars, the cost but not rid it.

And I'm not sure how much I buy it, because right now the tax accountants are employed. Believe it or not but bureaucracy employs people. What would happen if all of the tax accountants and HR Block employees were laid off?

I think it's been said before, but we've become a service based economy more than a production based economy. People are becoming 'too good' for blue collar jobs, if cut a a field that has such a narrow field of knowledge it's going to be harder to keep employment up. It's a real house of cards right now.

PS - I like your facts, numbers and seem to be well read. If you haven't noted I'm throwing complete junk out here.

Obviously the federal government could not hope to capture all of the surplus currently captured by tax accountants. I cannot imagine it would be more than 50% of it. But our tax code apparently is a significant drag on the economy.

Which segues to the second point: what is the point of the taxpaying public providing welfare to a relatively small part of the tax compliance industry? This is hugely inefficient. We would be better just sending checks directly to the.

So yes, changes to the tax code that put selected people out of work is bad, but not bad enough that it negates the broader good. And these people can be retrained and employed in new areas.

[heyzeus]

So I'm thinking about the economy and where we're at now, and I really have no idea. The analogy I think works is that the gaping cut across our forehead has at least stopped gushing blood, but it's also not really healing up too quickly. And it could get infected if it lingers, and then we probably end up losing our head.

GDP has been increasing the last 2 quarters, which is good. Exports are up, also good. The last thing I read indicated we're gaining more jobs than we are losing. But we're also adding few private sector jobs - most of the gains were in temporary census work.

The phrase "jobless recovery" gained popularity after the early 2000s recession. I don't think it was a fad. The march of technological advances is accelerating, and it allows two big things: More work and production to be done by fewer people, and second, for that work to be done in other places where labor is much much cheaper. Suddenly even "information industry" jobs like law can, for certain time-consuming tasks like document review, be outsourced to other countries. I think unemployment is going to be a major lingering factor, and a much bigger threat to our recovery than the mounting debt.

I'm curious what people think though.

[slide_into_first]

"But there were a couple of interesting moves in Asia; BNM (Bank Negara Malaysia) increased rates 25bps again to 2.75% as growth continued to surge. Likewise the BOK (Bank of Korea) increased rates for the first time in in 2 years, lifting the rate 25bps to 2.25%, having held at 2% for about 17 months. The actions are consistent with the view of a 3-tiered economic recovery; the fast growing emerging markets, the selected developed economies, and the languishing advanced economies."

http://seekingalpha.com/article/213897- ... macro-view

[Hungary Jack]

So I'm thinking about the economy and where we're at now, and I really have no idea. The analogy I think works is that the gaping cut across our forehead has at least stopped gushing blood, but it's also not really healing up too quickly. And it could get infected if it lingers, and then we probably end up losing our head.

GDP has been increasing the last 2 quarters, which is good. Exports are up, also good. The last thing I read indicated we're gaining more jobs than we are losing. But we're also adding few private sector jobs - most of the gains were in temporary census work.

The phrase "jobless recovery" gained popularity after the early 2000s recession. I don't think it was a fad. The march of technological advances is accelerating, and it allows two big things: More work and production to be done by fewer people, and second, for that work to be done in other places where labor is much much cheaper. Suddenly even "information industry" jobs like law can, for certain time-consuming tasks like document review, be outsourced to other countries. I think unemployment is going to be a major lingering factor, and a much bigger threat to our recovery than the mounting debt.

I'm curious what people think though.

The economy has some good things going for it, but until consumer spending improves, it's going to be pretty skittish. Most public companies are in decent shape with low debt loads and operating profits, but they aren't really hiring. This Business Roundtable stuff about companies not investing doesn't make a lot of sense because there is plenty of spare capacity in most industries, especially in housing and commercial construction.

The key driver is employment, and it's not growing right now to get consumer spending to the point where companies feel confident enough about demand to start hiring again. It's a bit of a catch-22. But when companies reach a comfort level with demand, I don't see much that will hold them back. I was hoping that Congress would extend the unemployment benefits (one of the few deficit-building programs I can tolerate) to help with consumer demand, but it looks dead in the water now.