Wednesday, July 9, 2008

Economics funnies!

Yikes, McCain's ignorance of economics really knows no bounds. This is him on taxes and revenues:

ROBERTS: Senator, you can't get over the fact, though, that extending the Bush
tax cuts, as you want to do, and adding in your tax cuts do take the deficit
number -- we actually go from a $70 billion surplus to a $445 billion deficit.

MCCAIN: You can't seem to get over the fact that it's spending that's out of
control. And you restrain spending and also you can't get over the fact that
historically when you raise people's taxes, guess what, revenue goes down. Every
time we cut capital gains taxes, there has been an increase in revenue.
I'm glad
to have this discussion with you, and obviously you disagree, but the facts are
that when you keep taxes low, when you restrain spending, as we did in 1982 when
Ronald Reagan came to office, then the economy grows. We've created 46 million
new jobs since 1982, because of lower taxes, but the spending got out of
control, and that obviously caused the deficit, which then caused us to have to
borrow money from China, et cetera, et cetera. And that's our problem that we
have today, is spending and not keeping taxes low and stimulating the economy.

I don't know if McCain really believes that lowering taxes will bring in more money, but he seems to be confusing capital gains taxes with overall income taxes, which are two very different things. It is true that when the capital gains tax rate is slashed, revenues often spike the following year, and when it is raised, the opposite occurs. This is because investors and businessmen (the people most like to show substantial capital gains income) can simply defer realization of their capital gains until a time when the tax rate is more favorable. Therefore, it's not too surprising that we may see a short term spike in revenues the year after the rate is cut, as investors scurry to cash in their capital gains while the tax rate is low.

Sources: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis; Department of the Treasury.

We can see that rate cuts do indeed result in the expected spike in realizations.

However, there is no evidence that a lower rate increases revenues over the long term. Higher taxes may lead investors to purchase less stocks or real estate, but it is far from clear that this disincentive offsets the loss of revenues from a lower tax rate.

Anyway, I digress.

It seems as though McCain has read or heard that cutting capital gains taxes can increase revenues, which is misleading at best, and has applied that to all taxes, which takes us into the realm of the absurd. Cutting individual income taxes, as Bush did, most certainly does not raise revenues, not even over the short term, because people don't have any flexibility over when they can pay them, and even if they do spur some economic growth, that growth will take years to manifest and the increased incomes probably won't offset the decline in revenues anyway. Paul Krugman has a nice, simple graph to illustrate this.

(Real revenues per capita on the y-axis)

Whatever the case may be, McCain clearly does not know what he's talking about. Extending the Bush tax cuts and implementing his own would be disastrous for deficit reduction. The "wasteful spending" that he goes on and on about pales in comparison to the absurd policies that he advocates.

But that's not all, boys and girls. No sir, not content with making a fool of himself on taxes, McCain had to produce this potentially disastrous quote:

I'd like to start out by giving you a little straight talk. Under the
present set-up, because we've mortgaged our children's futures, you will not
have Social Security benefits that present-day retirees have unless we fix it.
And Americans have got to understand that.

Americans have got to understand that we are paying present-day
retirees with the taxes paid by young workers in America today. And that's a
It's an absolute disgrace, and it's got to be fixed.

Um, okay....actually, that's how Social Security has always worked. So is he saying that Social Security is a disgrace? Because I'm sure that will play well in Florida...

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