Thursday, January 11, 2007

The Times' Economic Illiteracy

In "Tax Cuts and Consequences" in today's New York Times, the editorialists pick up on a CBO study purporting to show that higher-income earners have disproportionately benefited from the Bush tax cuts. In a strict sense, yes, of course they have. Because higher-income earners make higher-than-average incomes, it's little surprise that slashing 5 percent off the capital gains tax, for instance, will help this income bracket realize a greater tax benefit than those earning less off capital assets.

The article is useful, though, in highlighting just how illiterate the Times is when it comes to economics. The piece leads, for example, by saying: "The tax system in the United States is supposed to mitigate inequality." No, that's what a socialist tax system does. The purpose of America's tax system is to collect enough money to fund the government. Nothing more, nothing less. As Ronald Reagan said, "We cannot have ... a tax policy ... [that] is engineered by people who view the tax as a means of achieving changes in our social structure."

The editorial goes on to make the usual claims about how, were only rich people taxed more, income inequality would evaporate. The fact of the matter is, no one hates low taxes more than The New York Times, and this editorial is merely the latest in its campaign to move America toward their envisioned socialist wonderland.

Last year after Congress extended President Bush's tax cuts, The Times’ editorial page was at it again, once again revealing that economic literacy is not among its virtues.

That editorial attempted to disprove the fact that Bush’s lowered rates have generated so much growth in tax revenues that they've more than “paid for” themselves -- something The Times calls “seriously delusional.”

To justify its love affair with high taxes, this is a point The Times belabors constantly. An April 11 editorial wrote, “Contrary to the claims of tax-cut supporters, there is no meaningful evidence that the low investor tax rates spur the economy, and, in so doing, pay for themselves.”

But if anyone is delusional, it’s The Times. One simply needs to look at government receipts to see whether this is true.

In 2003, the year Bush’s “Jobs and Growth” tax act went into effect, the federal government collected a little less than $1.7 trillion in taxes. For fiscal year 2006, the government expects to collect a little less than $2.3 trillion.

That’s an increase of $600 billion. While the slice of the pie might be smaller, the pie has grown much larger. This, bear in mind, has all happened while the other variables affecting the economy besides taxes — disruptions like hurricanes and high energy prices — have been almost uniformly negative.

State revenues have also shot up from the Bush tax cuts, rising 9 percent last year and 8 percent in 2004.

But The Times’ economic illiteracy is far more expansive than misunderstanding tax revenues.

On March 21, The Times weighed in on the federal deficit, arguing Bush’s tax cuts should be repealed. “Republicans want voters to believe that the deficit is the result of spending increases alone — not tax cuts. That’s false. The swing from a $236 billion budget surplus in 2000 to a $371 billion deficit today is a huge deterioration in the nation’s fiscal balance, equal to 5.3 percent of the economy. Of that, fully 62 percent is due to lower tax revenues.”

Claiming that 62 percent of the change in the federal fiscal balance over six years is due to tax cuts makes less than no sense. In 2000, the federal government spent $1,789 billion. In 2005, the federal government spent $2,470.

Yes, it's ridiculous, but consider this: What if Congress had held spending steady since 2000? We’d currently be a more than half-trillion surplus.

It’s not complicated, which makes The Times’ inability to understand all the more embarrassing.

On Jan. 30, 2006, The Times weighed in on America’s “trade deficit.” After warning against allowing foreigners to continue investing in our economy at their current, heavy rate, The Times gets upset that its theory isn’t panning out in reality: “The dollar, which theoretically should have declined under the debt load in 2005, was buoyed last year by foreigners’ willingness to park their cash in higher-yielding dollar-based assets while other developed economies sputtered.”

Perhaps the problem isn’t with foreigners investing their money in America, but with The Times’ theory that doing so causes higher interest rates and thus weakens the dollar. Foreigners invest in American assets because America remains an attractive place to invest. And as Americans become wealthier every day, foreign goods are being imported at record rates. This is why the global economy does well when America does well.

So attacks on the phony “trade deficit” amount to attacks on global wealth creation.

In the same editorial, The Times says the U.S.’ recent powerhouse performance is owed to Americans’ enhanced ability to “borrow and spend” due to “the housing boom.”

Such an explanation mistakes causes with effects. Housing prices increased because demand increased. Demand increased because of Americans’ rising purchasing power, brought on by new wealth and a then-strong dollar.

Arguing that it’s the other way around is a mistake of the highest order.

The Times then compounds the mistake by indulging in another lefty economic canard: “Deeply in debt, individual Americans can’t be expected to keep borrowing and spending.” Accordingly, The Times sees economic collapse on the horizon.

But this is brutally dishonest. Individual debt cannot be reasonably assessed without looking at assets. And here, Americans are going gangbusters. The average American household’s balance sheet — the value of its cash, stocks, bonds, real estate, etc., minus debt — is at a record high. Net household worth is $51 trillion. The Times’ claims notwithstanding, Americans are hardly going broke. ($12.1 trillion of this, according to the American Shareholders Association, is owed to the Bush tax cuts.)

And it gets worse. In a Nov. 15, 2005 editorial on the federal deficit, The Times decried Republican attempts to pass “a new round of ridiculous tax reductions for the wealthy.”

Clarification about tax cuts for “the rich” is overdue. For starters, the reductions of twice-taxed capital — corporate dividends and individual capital gains — benefits the investor class, which now encompasses nearly 60 percent of American households. Surely The Times isn’t suggesting that more than half of America is now “wealthy”?

Besides, the investor class increasingly transcends class barriers. While 93 percent of Americans earning more than $75,000 a year own equities, 56 percent of those earning up to $75,000 own stocks and 30 percent of those making less than $50,000 do, too. These tax cuts help people of all income brackets.

And, if we’re to take seriously The Times’ stated interests in enriching the underclass, increasing their representation in the investor class is a no-brainer.

The high percentage of equity-wielding senior citizens are also well-served by capital market growth; as are owners of 401(k)s, IRAs, pensions, employees of universities with endowments and people economically linked with anyone above. I.e., everyone.

Secondly, the Bush tax cuts did not disproportionately benefit the wealthy, as whines The Times again this week. The nation’s top 1 percent of earners now pay approximately 35% of taxes. Absent the Bush tax cuts, the Treasury Department estimates their share would fall to 30.5 percent. This is consistent with Reagan’s tax cuts, which resulted in the nation’s richest 1 percent seeing their tax obligation climb from 17.5 in 1981 percent to 27.5 percent in 1988. Also, Bush’s tax cuts led to more than two million low-income taxpayers seeing their tax obligations evaporate entirely.

The Times also never misses a chance to call for higher taxes. In a Sept. 19, 2005 editorial on Bush’s pledge to spend “whatever it takes” to rebuild a Katrina-ravaged Gulf Coast, The Times insisted that tax hikes were the only “responsible” way to pay for the reconstruction. When Katrina threatened to raise gas prices, the Times recommended higher gas taxes to finance research into alternative fuels. When the higher gas prices failed to ruin the economy as the Times had predicted and receded much earlier than expected, the Times called for gas tax hike to intentionally keep it prohibitively expensive.

The New York Times: All the economic illiteracy that’s fit to print!

3 comments:

David said...

n 2003, the year Bush’s “Jobs and Growth” tax act went into effect, the federal government collected a little less than $1.7 trillion in taxes. For fiscal year 2006, the government expects to collect a little less than $2.3 trillion.

That’s an increase of $600 billion. While the slice of the pie might be smaller, the pie has grown much larger. This, bear in mind, has all happened while the other variables affecting the economy besides taxes — disruptions like hurricanes and high energy prices — have been almost uniformly negative.


For being as righteous as you are, you're pretty vulnerable to criticism. In 2003, the USG spent $2.1T, and in 2007, that number is projected to be $2.7T, or about $600B.

Keynes, by way of ECON 101: Macroeconomics, would tell us that money multiplies because fractions of it are saved and fractions are respent (and in the US, we respend a lot of it). Since we tax that circulation, we would expect to see increased tax receipts from that spending.

tom said...

And that explains why Keynes can claim responsibility for stagflation. Under this theory, all one needs to do -- which is what Nixon did in following Keynes's teachings -- is increase the money supply, which, he thought, would lead to greater spending and more jobs and more growth. Instead it created massive inflation. The Fed has recently been keeping money tight, and while yes, tax receipts will climb again in 2007, it has nothing to do with increased circulation.

David said...

All I'm saying is that:

"... it has nothing to do with increased circulation."

Is a VERY strong position to take.