December PFD "Pro" Analysis

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December PFD "Pro" Analysis

Postby lsabino » Tue Nov 13, 2012 2:35 pm

Hey, PFers! It’s that time again – the new December topic has been announced and it’s, “Resolved: The United States should prioritize tax increases over spending cuts.” This topic is very timely – it addresses the upcoming “fiscal cliff” which will confront lawmakers as soon as January. The fiscal cliff is a combination of expiring tax cuts and expiring spending packages that will go out of effect at the beginning of 2013. Analysts, particularly the Congressional Budget Office, predict that, if all these policies lapse simultaneously, the economy will be plunged back into recession. In the coming months, an age-old debate between fiscal liberals and fiscal conservatives will become more relevant than ever: is economy recovery better facilitated by higher taxes (and more government spending) or lower taxes (and cuts to government spending).

Today, we’re outlining some major topic arguments to give you a start on preparing your December "pro" case. We’ll start with arguments for higher taxes:

Offense:

1. Tax increases come out of savings; spending cuts can’t.
Many advocates for higher taxes argue that it’ll take a relatively larger increase in taxes to be felt as a ripple through the economy as opposed to a spending cut. The reasons have to do with the ways in which the average family spends its money. Christina Romer explains:

Christina D. Romer, “The Rock and the Hard Place on the Deficit,” The New York Times, July 2, 2011.
There is a basic reason why government spending changes probably have a larger short-term impact than tax changes. When a household’s tax bill rises by, say, $100, that household typically pays for part of that increase by reducing its savings. Its spending tends to fall by less than $100. But when the government cuts spending by $100, overall demand goes down by that full amount. Wealthier households typically pay for more of a tax increase out of savings, and so they reduce their spending less than ordinary households. This implies that tax increases on wealthy households probably have less effect on the economy than those on the poor or the middle class. All of this argues against any form of fiscal austerity just now. Even some deficit hawks warn that immediate tax increases or spending cuts could push the economy back into recession. Far better to pass a plan that phases in spending cuts or tax increases over time. But if federal policy makers do decide to reduce the deficit immediately, reducing spending alone would probably be the most damaging to the recovery. Raising taxes for the wealthy would be least likely to reduce overall demand and raise unemployment.


The logic behind this argument is that, in cases where the tax cuts are applied to the upper class or upper-middle class, many families will not choose to adjust their spending habits in response to the taxes. They would rather pay for the tax increases out of savings. That is, instead of spending $100.00 less per month on, say, cable, they’re more likely to keep cable television and just put less money into long-term savings for retirement. Spending cuts, however, fulfill a specific government purpose and will be absent in full as soon as they are eliminated. Their absence will be felt more because there’s not a similar mechanism to compensate (like savings).

2. Reduces revenue for public goods.
Another argument advanced by advocates of higher taxes is that the government needs direct revenue to pay for long-term, necessary, and expensive projects that private corporations wouldn’t be as interested in funding. Dave Johnson explains:

Dave Johnson, “Conservative Tax Tricks – Did Tax Cuts Grow the Economy?” Campaign for America’s Future, April 18, 2011.
Reagan Tax Cuts Ronald Reagan applied ideology to our government's finances and cut taxes from the then-top rate of 70% down to 50%, and then, later, to 28%. (George HW Bush raised top tax rates to 31%.) The top corporate tax rate was cut in 1987 from 46% to 40% and the next year to 34%. It turned out that if only (and a unicorn) didn't work out so well when it hit the wall of reality. Now We, the People are suffering the consequences. Conservatives say that the economy boomed, and more revenue came in because of the tax cuts. What actually happened was government deficits and the resulting accumulated debt exploded, while our defunded government has since been unable to maintain the infrastructure and public structures (laws, courts, regulations, protections, schools, etc...) that keep our economy competitive and our standard of living high. All you have to do is look at the record. Let's do that here. In 1981 -- Carter's last budget year -- the on-budget (not from Social Security) tax receipts were $469 billion which was a 16% increase over the prior year. 1982 tax receipts were $474.3 billion, down to 1.1% over 1981, and the on-budget deficit shot up to $120 billion, a shocking increase of 62% in a single year! 1983 receipts were $453.2 billion, a drop of 4.4%, creating a deficit of $208 BILLION -- an increase of 73%! In just those two years following the tax cuts our debt increased by $328 billion! Then Tax Increases A panicked Congress passed the 1984 Deficit Reduction Act, the largest tax increase in our history. (Not so much on the wealthy, of course.) Tax receipts climbed to $500.3 billion, a 10.4% increase, and the deficit shrank almost 11% to $185.6 billion. But this was still very high. So in 1985 Congress passed the Gramm-Rudmann-Hollings Anti-Deficit Act, and in 1985 tax receipts were $548 billion, a 9.5% increase. But by then the huge military spending increases and the interest on the debt were kicking in -- "structural" deficits were established -- and the deficit increased to $221 billion, an increase of 19%. (The "Tax Rates And Growth Over Time" charts below show that economic growth declined.) When conservatives tell you, "Reagan cut taxes and revenue increased," they don't mention those huge tax increases. Nor do they mention the revenue drop following the tax cuts. The size of the economy increases over time anyway, so there is a natural rate of increase that occurred as well. Saying the Reagan tax cuts increased revenue is like saying you skipped lunch and gained a few pounds, without mentioning the 12-course dinner with three deserts.


Christina Romer elaborates:

Christina D. Romer, “The Rock and the Hard Place on the Deficit,” The New York Times, July 2, 2011.
Government spending on things like basic scientific research, education and infrastructure, on the other hand, helps increase future productivity. This type of spending often produces high social returns, but the private sector is unlikely to step up if the government pulls back. Case studies described in a recent survey found that less than half of the returns from research-and-development spending were captured by the private investor, so corporations shy away from such endeavors. Cutting federal funds for R.& D. would leave a void and could have significant long-run effects on growth.


Several arguments here:

1. The government is responsible for certain public works that are critical to ensure the economy is stable. It’s important to recognize that taxes don’t just go to fund government officials’ salaries and other random expenses. Taxes also go towards systems on which we all depend: schools, roads, courts, scientific research grants, etc. Low taxes means that these priorities receive comparatively less funding. Without the maintenance of these necessary public works, the economy won’t function as well and our standard of living (where we expect functional roads, public transportation, free public education, etc.) will suffer.

2. Tax revenue is critical for those functions because private companies prefer an investment environment with government support and/or more lucrative fields. Proponents of higher taxes also argue, as Romer does, that private companies will not necessarily take over these industries if the government stops funding them. In fact, in some cases private industry is afraid to invest in something that won’t guarantee them a return on their investment (a failing public school, roads and bridges that service isolated communities). Unlike the government, private corporations need to be sure they’ll not only make their money back but also make a profit on top of that. For this reason, they generally don’t invest in these programs – particularly those implicated in the fiscal cliff, like national defense of unemployment insurance.

3. The “fiscal cliff” is more of a tax issue than a spending issue.
Another important thing to consider is that the fiscal cliff is not made up of equal parts tax cuts and government spending. The programs at issue contribute to a potential recession to varying degrees. This potentially implicates how “reverse causal” renewing them would be. Dylan Matthews here argues that the effect of high-income tax cuts expiring would be minimal as compared to comparable reductions in government spending:

Dylan Matthews, “CBO: Letting upper-income tax cuts expire would barely hurt economy,” November 8, 2012, Ezra Klein’s Wonkblog, Washington Post.
The above shows how big each policy is as a share of the total impact of the cliff. Some policies are more important on the budget side than the GDP side. Letting the high-income Bush tax cuts lapse, for example, generates $42 billion in 2013 but hardly hurts GDP at all. By contrast, the defense cuts amount to $24 billion but hurts growth by 0.4 percent — quadruple the high-income cuts’ impact. The report also drives home how much the cliff is a tax phenomenon. The sequester makes up less than 13 percent of the total deficit reduction the cliff accomplishes. The other 87 percent, except for the expiration of the unemployment insurance extension, is all tax increases: income, estate and capital gains increases from not renewing the Bush-era tax cuts, payroll tax increases from letting those cuts expire, and expiring stimulus tax credits (included in the payroll/unemployment insurance category in the above chart).


4. Measures used to calculate the benefit of tax cuts are inaccurate and destabilizing to markets.
It’s difficult to measure what the effects of tax cuts will be on the economy for several reasons: Unlike directed government spending, it’s unclear where money from tax cuts will go. For example, if the government spends $2 billion dollars on bridges, we know almost all of that will go to bridges. If the government cuts taxes by that much, individuals may choose to invest the money they no longer have to pay in taxes on bridges. They may, however, choose to buy themselves new cars. Some economists question the benefit of tax cuts for this reason – it’s really uncertain what the effect will be because the newfound money will be spent according to individual choice. Piannin and Boak explain how the limitations of this model can hurt predictability:

Eric Piannin and Josh Boak, “Do Tax Cuts Spur Economic Growth? The GOP Thinks So.” November 9, 2012, The Fiscal Times.
Here’s Republican House Speaker John Boehner’s promise for cutting the deficit and avoiding the fiscal cliff: Trim tax rates and close deductions and loopholes, under the assumption that a simpler tax code spurs vibrant economic growth that adds hundreds of billions of dollars in new revenues. “By working together and creating a fairer, simpler, cleaner tax code, we can give our country a stronger, healthier economy,” Boehner told the media Wednesday. “A stronger economy means more revenue, which is what the president seeks.” But that theory – dating back to Reagan’s “supply-side” economics of the 1980s – doesn’t hold up. Economists and former congressional staffers say the historical record shows that the tax cuts almost never pay for themselves, let alone reduce the deficit. The policy gets sold as reducing the deficit by what’s called “dynamic scoring” – that is, economic models that give upbeat estimates of how tax cuts affect the behavior of businesses, investors and consumers. It’s an open secret that this type of budgetary scoring is notoriously inaccurate. Any plan relying on it could increase anxieties about government efforts to rein-in the deficit and sidestep the fiscal cliff. “The markets would view this as unrestrained deficit increases that are masked by kind of questionable predictions,” said John L. Buckley, a professor at Georgetown University Law School who was formerly the chief Democratic tax counsel for the House Ways and Means Committee. “If you have another tax cut with a pretend dynamic scoring estimate attached, I don’t think the markets would see that any differently than a pure tax cut.” Buckley has done an exhaustive study of reforms starting with the Economic Recovery Tax Act of 1981 and the Tax Reform Act of 1986. He found that subsequent events never lived up to the ambitious claims made at the time about the positive impact of lower tax rates on investment, savings, wages, economic growth and federal revenues. “If dynamic scoring is used to determine budget estimates, there is a risk that financial markets will no longer accept budget estimates on faith,” Buckley said. Market skepticism already abounds about the estimates being used by government officials. With President Obama’s reelection on Tuesday, formal negotiations will soon begin with congressional leaders over how to reduce the deficit and avoid a year-end calamity of more than $600 billion worth of tax increases and spending cuts that threaten to send the economy into another tailspin.


A few arguments here:
1. Investors, businesses, etc. need to be able to predict what will happen in the economy. If investors are afraid that economic projections will be unreliable (as those that rely on tax cuts often are), they may be afraid to invest because they don’t know what the outcome will be. This climate of uncertainty makes everyone afraid to take financial risks which are necessary for the tax cuts equation to work out.
2. Skepticism may not be a one-time thing. That’s especially bad because, if there’s a prediction of what would happen as the result of a tax cut, and it’s incorrect, people may not trust these predictions in the future. That could cause a longer-term uncertainty problem as explained above, making the impacts indefinite.

Defense:
1. Spending changes haven’t been studied properly in context.
Many advocates of tax cuts point out that past tax cuts have been improperly assumed to help the economy when, in reality, other factors were much more responsible. They argue that this means data collected by tax cut advocates is wrong. You can use these types of arguments in debates to answer statistics and studies on the other side.

Christina Romer explains how past data on spending is flawed:

Christina D. Romer, “The Rock and the Hard Place on the Deficit,” The New York Times, July 2, 2011.
If there were a similar study on government spending, it would likely show that spending cuts also have larger effects than conventionally believed. Like tax actions, spending changes are often correlated with other factors affecting economic activity. For example, large cuts in military spending, like those after World War II and the Korean War, were typically accompanied by the end of wartime taxes and production controls. Those probably lessened the economic impact of the spending cuts, leading many researchers to underestimate the reductions’ effects.


She goes on to add that the same is true of data that indicates high taxes discourage hard work and investment:

Christina D. Romer, “The Rock and the Hard Place on the Deficit,” The New York Times, July 2, 2011.
Higher tax rates reduce the rewards of work and investing. This can have supply-side effects that lower economic growth over decades. But a large number of academic studies has found that these effects are relatively small. An excellent survey due to be published in the Journal of Economic Literature found that raising current tax rates by 10 percent would reduce reported income — the end result of work and entrepreneurial effort — by less than 2 percent. That is far less than what was hypothesized by prominent Reagan-era supply-siders like Arthur B. Laffer. He and others postulated that raising taxes 10 percent would ultimately reduce income by more than 10 percent, leading to a decline in tax revenue.


Finally, Piannin and Boak explain how data on tax cuts helping the economy has been potentially confusing because other things were happening in the economy at the same time. Economists that saw positive effects around the same time as tax cuts may have been seeing the effects of other policies instead; it’s a simple correlation vs. causation argument.

Eric Piannin and Josh Boak, “Do Tax Cuts Spur Economic Growth? The GOP Thinks So.” November 9, 2012, The Fiscal Times.
Previous administrations – including Ronald Reagan’s – were similarly optimistic. The Economic Recovery Tax Act of 1981 cut individual tax rates by 23 percent over three years, with an immediate reduction in the top marginal rate from 70 to 50 percent. The Senate Finance Committee report recommending its enactment said the package would drive economic growth, business investment, and personal savings. Those predictions did not come true, according to research by Buckley, the Georgetown University tax expert. The personal savings rate dropped from 11.3 percent in 1981 to 7.5 percent in 1986. The reduced marginal tax also had no discernible positive effects on labor supply or consumer demand. Martin Feldstein, chair of the Council of Economic Advisers for President Reagan, and CBO Director Douglas Elmendorf concluded that the economic recovery after 1981 was not a "result of a consumer boom financed by reductions in the personal income tax" and that there was "no support for the proposition that the recovery reflected an increase in the supply of labor induced by the reduction in personal taxes." Rather, they credited expansionary monetary policy as the "primary cause of increased output."


For a more nuanced discussion of some potential mixed half-measures, see Chad Stone, “A Realistic Target for Deficit Reduction,” U.S. News and World Report, November 8, 2012.

I think this has some counterplan potential, but I didn’t include it because the author’s recommendations don’t fit quite as neatly into the topic as worded.

That’s all for today! Happy PRO-ing! We’ll be back tomorrow with our CON analysis! As always, you’re free to send all your cases to lauren.sabino@ncpa.org for a free critique or ask follow-up questions in this thread!
lsabino
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