Response to Paul Krugman’s pro-deficit rhetoric
by John T. Reed

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Email from a reader

Dear John,
have you read Paul Krugman's blog and column? He pointed out many opinions about US deficit, most of it contradictory to your opinions. One of the newest: http://www.nytimes.com/2010/07/16/opinion/16krugman.html?ref=paulkrugman

Some pieces from that column:
"But this past Monday Jon Kyl of Arizona, the second-ranking Republican in the Senate, was asked the obvious question: if deficits are so worrisome, what about the budgetary cost of extending the Bush tax cuts for the wealthy, which the Obama administration wants to let expire but Republicans want to make permanent? What should replace $650 billion or more in lost revenue over the next decade?
His answer was breathtaking: “You do need to offset the cost of increased spending. And that’s what Republicans object to. But you should never have to offset the cost of a deliberate decision to reduce tax rates on Americans.” So $30 billion in aid to the unemployed is unaffordable, but 20 times that much in tax cuts for the rich doesn’t count."

and also, 3 paragraphs after that:
"It’s not true, of course. Ronald Reagan said that his tax cuts would reduce deficits, then presided over a near-tripling of federal debt. When Bill Clinton raised taxes on top incomes, conservatives predicted economic disaster; what actually followed was an economic boom and a remarkable swing from budget deficit to surplus. Then the Bush tax cuts came along, helping turn that surplus into a persistent deficit, even before the crash. "

Any opinion about that?

My answer

Some tax cuts increase tax revenue. Others do not. It depends on the nature of the tax and how high the rate is before the cut.

Capital gains tax rate increases, for example, generally lower tax revenues from that tax because those with capital gains can generally sit on them until the capital gains tax rate is again lowered in the future. Capital gains tax rate cuts, on the other hand, are well known to cause a jump in revenues collected from that tax for the opposite reason.

The notion that Reagan created prosperity by tax rate cuts and Clinton created prosperity by tax rate increases is bullshit. When Reagan was elected, the national debt to GDP ratio was 31.9%. It has since skyrocketed and his monster (at the time) deficits gave the Democrats courage to create their own monster defiits.When criticized, they pointed to Reagan’s deficits. Before Reagan, they could not do that and were afraid to run big deficits as a result. Reagan prosperity came from deliberately causing a recession to kill inflation, which worked. Clinton prosperity came from the Republicans taking back Congress for the first time in decades two years into Clinton’s first term. Also, Clinton created prosperity by signing some bills that Dems hated like welfare reform which was a big success until Obama quietly repealed it in the stimulus package. Apparently giving free money to blacks is very high on is priority list and the fact that even liberals admitted that welfare reform worked is irrelevant to Obama. Clinton also signed NAFTA which his union supporters hated.

It is analogous to the government’s take in state lotteries. When they try to increase the percentage take too much, people stop playing the lotteries because they do not win the small and medium amounts often enough and get discouraged. The revenue-maximizing percentage seems to be around 20%.

Similarly, you can see the phenomenon is various state tax rates. The states with the highest tax rates of all kinds drive business to other states. MD recently raised tax rates on those who made more than one million per year. The next year, they collected less taxes from those people than before the rate increase because the number of such people in the state suddenly dropped precipitously.

The higher the tax rate, the more incentive to use both legal and illegal ways to lower the amount paid.

There is no black market in, say, Irish Spring soap. That’s because there is no extraordinary tax on it. But there is a black market in heavily taxed items like cigarettes is high tax states like New York. North Carolina, has few taxes on tobacco. They grow it there. There is no black market selling of tobacco products in North Carolina. But they export to the black market states.

This “high tax rates lower tax revenues” phenomenon has erroneously been called the Laffer Curve. Laffer himself says Adam Smith was the first to observe it in his 1776 book Wealth of Nations.

Think about it. At both a zero tax rate and a 100% tax rate the government gets no tax revenues. The reason is different. in the 100% case, people refuse to work in taxable jobs. People would also refuse to work if the tax rate were 99%. A few might if the tax rate were 98%, but the vast majority would not, and so on. Obviously, there is some optimum tax rate that maximizes the government’s tax revenues. Below that they get less revenue because they take less. But they also get less revenue above that point because people start to fight back with tax shelters, cheating, doing more do-it-yourself work, loafing, and so on.

Tax cuts and government spending increases are not the same when it comes to the deficit. Government spending increases are almost always bad—almost always make deficits worse—because the private sector does almost everything far more efficiently than the public sector. So government spending is wasteful and increases the national debt. There was recently (mid July 2010) an op-ed in the Wall Street Journal about how Sweden’s economy suffered when they increased government’s share of GDP too much. It was written by Swedish officials.

During the 2008 primaries, there was a debate moderated by George Stephanopoulos, a former Clinton White House Staffer and Charlie Gibson, probably a Democrat. Obama made an ass out of himself when asked why he would raise capital gains tax rates knowing that always reduces the revenues from that tax. Three times, Stephanopoulos or Gibson explained it to Obama. Finally Obama sputtered that lowering revenues from the capital gains tax by raising its rate would be okay for “fairness” reasons. Idiot!

But whether tax cuts are good or bad for the deficit and tax revenue depends.

If you want more of something, subsidize it. If you want less of something, tax it. We subsidize unemployment, wasteful government agencies that were supposed to make a profit like USPS and Amtrak, retirement, health care. We tax profits and income.

Paul Krugman is lying socialist scum. He won the Nobel Prize, but in economics. The Nobel Prize is meaningful in the hard sciences like physics. But in political subjects like peace and economics, it’s become just a small group of ultra-left Swedish socialists patting their fellow socialists around the world on the head.

‘Unsustainable’

As I said in my new book How to Protect Your Life Savings from Hyperinflation & Depression, and many times here in my headline news articles, everyone from Arthur Laffer to current Fed Chairman Ben Bernanke to Barack Obama agree that current levels of U.S. government spending and borrowing are “unsustainable.” That means, they will have to stop. That will happen when the bond market refuses to buy anymore U.S. bonds because they think the probability of ever getting paid back the money is too low. That could happen tomorrow. If the world bond market had a brain, it would have happened ten or more years ago. I sold all my U.S. government bonds which were all TIPs.

I guess I need to stop saying “everybody” and note that Paul Krugman thinks endless deficit spending in the trillion dollars a year range is sustainable. Or at least he says he believes that. But Krugman does not count. He is a socialist propagandist, not an economist.

I just threw this together on the spur of the moment. I will add to it and ask readers to send me pertinent stuff like this reader did.