Very interesting analysis by Robert H. Frank — in addition to being an economics Prof at Cornell, he is the coauthor a textbook — "Principles of Microeconomics" — with new Fed Chair Ben S. Bernanke.
It may be a fool’s errand to try to draw any conclusions about the new Fed Chief by what his co-author writes, but its certainly interesting to see his analysis:
"A careful reading of the evidence suggests that even the wealthy have been made worse off, on balance, by recent tax cuts. The private benefits of these cuts have been much smaller, and their indirect costs much larger, than many recipients appear to have anticipated . . ."
For example, deficits have led to cuts in federal financing for basic scientific research, even as the United States’ share of global patents granted continues to decline. Such cuts threaten the very basis of our long-term economic prosperity. As Senator Pete Domenici, Republican of New Mexico, said: "We thought we’d keep the high-end jobs, and others would take the low-end jobs. We’re now on track to a second-rate economy and a second-rate country."
Large deficits also threaten our public health. Thus, despite the increasing threat from micro-organisms like E. coli 0157, the government inspects beef processing plants at only a quarter the rate it did in the early 1980’s. Poor people have died from eating contaminated beef but so have rich people.
Citing revenue shortfalls, the nation postpones maintenance of its streets and highways, even though doing so means having to spend two to five times as much on repairs in the long run. In the short run, bad roads cause thousands of accidents each year, many of them fatal. Poor people die in these accidents but so do rich people. When a pothole destroys a tire and wheel, replacements cost only $63 for a Ford Escort but $1,569 for a Porsche 911.
Deficits have also compromised the nation’s security. In 2004, for example, the Bush administration reduced financing for the Energy Department’s program to secure loosely guarded nuclear stockpiles in the former Soviet Union by 8 percent. Sam Nunn, the former United States senator, now heads a private foundation whose mission is to raise private donations to expedite this effort. And despite the rational fear that terrorists may try to detonate a nuclear bomb in an American city, most cargo containers continue to enter the nation’s ports without inspection."
All the exmaples mustered so far are pretty straight forward and obvious. I have found that the area where most laypeople have some difficulty comprehending the enormity of the problem is trade and budget deficits:
"Large federal budget deficits and low household savings rates have also forced our government to borrow more than $650 billion each year, primarily from China, Japan and South Korea. These loans must be repaid in full, with interest. The resulting financial burden, plus the risks associated with increased international monetary instability, fall disproportionately on the rich.
At the president’s behest, Congress has already enacted tax cuts that will result in some $2 trillion in revenue losses by 2010. According to one recent estimate, 52.5 percent of these cuts will have gone to the top 5 percent of earners by the time the enabling legislation is fully phased in. Republicans in Congress are now calling for an additional $69 billion in tax cuts aimed largely at high-income families.
With the economy already at full employment, no one pretends these cuts are needed to stimulate spending. Nor is there any evidence that further cuts would summon outpourings of additional effort and risk taking. Nor, finally, does anyone deny that further cuts would increase the already high costs associated with larger federal budget deficits.
Moralists often urge the wealthy to imagine how easily their lives could have turned out differently, to adopt a more forgiving posture toward those less prosperous. But top earners might also wish to consider evidence that their own families would have been better off, in purely practical terms, had it not been for the tax cuts of recent years.
Fascinating stuff. I wonder what Bernanke’s views are on these and other related issues . . .
Sometimes, a Tax Cut for the Wealthy Can Hurt the Wealthy
By ROBERT H. FRANK
NYT, November 24, 2005
Not buying this. According to this arguement one could target an optimum income level where the services received by the government are equivalent to the taxes paid. I highly doubt that equilibrium point is somewhere within the top 5%, regardless of how much their 911 tire and rim replacement cost is. As for the lack of government R&D- the utility of such expenditures is questionable. Projects such as the Apollo missions forced private industry to push the envelope- innovation didn’t take place within the government.
The real issue here is whether the costs in America, particularly at the high end, are justified when compared with other countries. Is a $60 haircut in Manhattan equal to a $5 haircut ( a good one) in Shenzhen? How much of this differential impacts GDP in a false manner?
This is highly suspect and runs counter to common sense.
Let’s see…a university professor cited by the New York Times doesn’t like tax cuts. Hmmmm…
Wanna bet he voted for Kerry?
The Left loves higher taxes and this strikes me as just more left-wing propaganda.
Andrew: “Projects such as the Apollo missions forced private industry to push the envelope- innovation didn’t take place within the government.”
Yeah, but that’s precisely the point — private industry pushed the envelope because the govt provided the basics and set a baseline. Would private industry otherwise have done it?
And quite a bit of private industry R&D was paid for by the taxpayer — either through govt contracts, or tax breaks. And in academia through NSF/DARPA grants. The Internet is based in large part on DARPA financed R&D.
Robert Frank has written several articles/books with Bernanke. Not sure how this makes him a left wing liberal. Anyone who feels the need to politicize every opinion or observation is seriously ignorant, imo. Every American can be both liberal and conservative. Take George Bush for example, one of the most liberal spending Presidents in US history. Nation building, also a very liberally progressive policy. If George Bush can be both liberal and conservative why cant every American? Too many hypcrites? Yes.
I think that is about the most ridiculous article on taxes I have read to date. Hard to believe the liberal loving NYT printed it. It appears the big time spenders will use anything to tax us into oblivion.
First, our budget deficits and total debt as a percent of GDP are not at unreasonable levels historically or in comparison to the rest of the world. Not that I like running any kind of debt. But, prudent use of debt (Not that our government is terribly prudent at anything) is used by major corporations to finance large projects, keep free cash flow at levels to meet business demand and to take advantage of cheap money. Why should Uncle Sammy be any different? With rates still at 50 year lows, why not leverage the global savings glut? People line up at the door to buy our debt in droves at ridiculously low rates. Heck, as low as short term rates. People want to hold long term debt with no premium over short term rates, I’d say let those silly fools finance our glutenous spending. It’s almost foolish not to take advantage of that fact. Secondly, our debt creation is used for investment in our futures. It doesn’t vanish into air. While people may dispute this, many of the discretionary programs in the Federal budget are targeted towards investment. So, we benefit today and in the future with a prudent use of debt. Yes, I understand the argument that private industry can accomplish the same thing at a more efficient rate of return by lowering taxes. And that is what Bush has effectively done by cutting taxes. He’s given money back to the private sector to invest. Hence, we get the double whammy. Private industry investment with tax cuts and government investment via prudent deficits. Thirdly, the greedy bastards in Washington never know when to quit spending. Even budget cuts are lies. They are really doing little more than cutting the rate of growth by some pathetic amount to the right of the decimal point.
I’m a firm believer the only way to get any relief on the government spending side at all is to run deficits. Preferably created by tax cuts. And because they spend without end in Washington is no reason to raise taxes. It simply fuels the spending binge into even more government spending as we’ve seen in all historical cycles. Not a one of these people are qualified to run any business. Where the heck is the Line Item Veto? Dead with Reagan. That’s where it is.
The column is interesting only for the fact that it exposed his connection to Bernanke. The rest was garbage. Wrote my response here:
Tax cuts? What tax cuts? Given that we’re running huge deficits, these so called tax cuts are just tax deferrals to shift our taxes to our descendents.
Of course, our descendents can always monetize this debt so the real losers will be those left holding this debt.
I’m kinda surprised at the responses to this: Some people actual discussed the article’s points and commented on the economics of it — while others essentially were reduced to name calling.
Go back and reread the comments and you will see what I mean.
I have open comments in order to faciliate an intelligent discussion — not a political smackdown.
Please keep it civil.
Prof. Frank’s contention that the tax cuts have led to spending cuts in things he thinks are beneficial is questionable. After all, the tax cuts have not been accompanied by restraint in spending but rather by an acceleration in spending.
It does seem that his blaming the reasonable reductions in marginal tax rates & taxes on risk capital for spending decisions he doesn’t like does imply a lack of objectivity. (I’m surprised he could find items in the budget that actually were cut.)
As a microeconomist, Frank should know that gov’t doesn’t spend money where it most reasonably should but rather where the politically well-connected want the loot directed. Raising taxes will not correct that.
The guy makes a pretty good point about investing money in science and research. We invested billions in developing the Internet, which eventually helped contribute to one of the largest increass in productivity in history. Whoe knows what we are missing out on by forgoing all that research and investment? We are just inviting other countries to overtake us on the technology front. People will argue that the free market will take care of innovation, but look at WiFi, Broadband, and Cell phones. In many Asian countries, you can talke on your cell phone in the subways, while in the US you cannot even get a decent signal at the headquarters of Verizon and the CEO of Verizon asks “why would anyone want to use their cell phone at home?”. In many Asian countries WiFi is already ubiquitous, which only incrases productivity even more. These hi-tech innovations are the new infrastructure on which the new economic dynasties will be built. They are annalogous to the highway system, Airports, and Sea Ports in the early 20th century, and telecom in the latter part of the century. While The U.S. dilly-dally’s around trying to “let the market figure it out” with half a dozen different cell phone technologies, and passing state laws to outlaw municipal WiFi (Texas), etc, these Asian countries a busy inplementing solutions and building this infrastructure to compete in the 21st century. The ideologues who demand that “the market” is a panacea that will fix everything, despite obvious proof to the contrary, will be in for a big shock when China and South Korea start to east our lunch in the global marketplace because their 21st century infrastructure is fully developed, even though finaced publicly.
To those of you who think the ones financing the US deficit are suckers:
If the US deflates its debt and affects their economic stability, they will fight back. That’s what wars are made of and the world has gotten smaller.
In its first 100 years, the US thrived thanks to its industrious people and the exploitation of its vast resources. Two world wars put America on the pedestal. Ever since then, the US has resorted to exploiting other countries’ resources to expand its economy and preserve its environment. But beware, the exploited are gaining clout.
“Tax cuts? What tax cuts? Given that we’re running huge deficits, these so called tax cuts are just tax deferrals to shift our taxes to our descendents.”
Thank god someone gets it. The GOP has lost its moral compass.
Sure intrepid, but Frank is no dummy either.
No, he’s saying ‘yeah maybe the wealthy do get most of the tax cuts but its not their fault they’ll suffer as a result.’
But with guys like Fisher around, you aren’t going to get any attention unless you punch it out there. [ btw, bottom of the ninth I make it.]
You figure its a clever pitch to the wealthy to ease up on the tax cuts that are unwittingly bleeding them to death? You figure they might buy this?
Ok, send your generous donations to ‘Help the Over Tax-Cutted Wealthy to help all of us through this soft patch.
I’ve seen this blog on the blogroll on some ideological rightwing sites, I think that may be where the ‘political smackdown’ style is coming from.
I agree, what tax cut? 4 percentage points maybe? If that’s the Republican’s idea of a real tax cut, I might have to take that other crap into account when I vote next time (wars, values, etc.)
Oh, and my state taxes didn’t get cut so those roads better be tip top.
I can’t believe that article was written by a serious person.
“Thank god someone gets it. The GOP has lost its moral compass.”
Yes, for not for the reasons you list. Tax cuts aren’t the culprit for the current federal fiscal problems. The feds don’t have a revenue problem — it’s growing faster than projected — they have a spending problem. Even with the current go-go spending environment the deficit is still under 3% of GDP — who knows what it would be if there was even a hint of restraint in Washington?
Tax Cuts That Benefit Nobody
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A couple of interesting posts bridging politics and business… Have the wealthy been made worse off by tax cuts? Corporate Tax Breaks often don’t work. (I agree that spending that money to spur entrepreneurship is probably a better use) Democrats…
Colin, actually we do have a revenue problem..The tax cuts of 2001 brought down our tax revenue to 16% of GDP where it has historically hovered about 20% of GDP. These cuts, in my opinion have calcified into a structural deficit problem…Think about it, we are growing over 4% right now and we are only going to get deeper in debt over the next decade and productivity is off the charts!
Not to get fundamental ECON 101 on us all, but there are “opportunity costs” to tax cuts…that is forgone revenue we COULD use for other purposes…either soending or investment (depending upon which political view you have).
Colin, actually we do have a revenue problem..The tax cuts of 2001 brought down our tax revenue to 16% of GDP where it has historically hovered about 20% of GDP. These cuts, in my opinion have calcified into a structural deficit problem…Think about it, we are growing over 4% right now and we are only going to get deeper in debt over the next decade and productivity is off the charts! How much more do we have to grow by, and how much more efficient and productive do we need to be?
Not to get fundamental ECON 101 on us all, but there are “opportunity costs” to tax cuts…that is forgone revenue we COULD use for other purposes…either spending or investment (depending upon which political view you have).