Economics, Taxes and Spending

We’re all in trouble if even professors can’t grasp basic tax issues

Image credit: Shutterstock

Image credit: Shutterstock

I was listening a week or so ago to a C-Span broadcast of an event at George Mason University at which three speakers were analyzing the upcoming debate over the so-called fiscal cliff. One of the panel participants, a professor at George Mason who shall remain nameless, said something shockingly wrong, but it elicited no comments from the other panelists or the audience. The statement was that it would be extremely difficult to reach an agreement with Republicans on deficit reduction because “Republicans generally believe something that is just not true—that increasing taxes will not increase revenue.”

To give this professor the benefit of the doubt, I’ll assume he’s just ignorant. The alternative is worse–that he is so biased in his political outlook that it prevents him comprehending very simple ideas. In either case, this is very troubling. It shows that an educated person, as most professors are, does not have the basic knowledge about economics necessary to understand the current debate over taxes. Above all, it suggests the seriousness of the problem the GOP faces in making its case.

For avoidance of doubt, as the lawyers say, here’s what Republicans mean when they say that they do not want to raise tax rates. Of course, if taxes go up that will produce more revenue. There is no question about this. There is an argument, however, accepted by most Republicans, that if taxes go up it will not raise as much revenue as projected, because of (i) tax avoidance and (ii) reduced investment and work by taxpayers; but that does not mean that increased taxes will not increase revenue.

Our benighted professor might have been confused by a misinterpretation of the so-called Laffer curve, which holds that there are two points on a taxation curve at which the government receives no revenue from a tax—0% and 100%. This statement is undoubtedly true, but no one knows—including professor Laffer—where on the curve tax revenue is maximized. It is not true, as our professor may believe, that revenues can be immediately increased by reducing taxes.

“Immediately” is the key word here. When Republicans argue for tax cuts, they do say—and with justification that I won’t go into here—that over time tax cuts will produce more revenue than tax increases. This is because tax cuts—again, over time—tend to reduce tax avoidance and encourage more work and investment, which in turn produce income for people and hence more tax revenue.

Given the level to which education has fallen in much of the country, it’s possible to believe that some people cannot understand the difference between the short term and long term results of a tax cut, but if this degree of ignorance has reached the professoriat, we’re all in trouble.

3 thoughts on “We’re all in trouble if even professors can’t grasp basic tax issues

  1. During the comparable period for the Reagan Recovery, GDP grew at the annualized rate of about 5.7%, almost 3 times faster. For all of 1984, GDP grew at about 7%. And let us not forget that the earlier recovery was launched from an economic terrain of 21% interest rates, a collapsed S&L industry and 11% unemployment–far worse than the economic and financial circumstances surrounding the more recent Failure to Launch.

    Most economists expect the Q4/12 GDP growth rate to plunge to just 1.6% with the increasing possibility that all bets are off (the Cliff) for any growth at all in 2013.

  2. I fear that Mr. Wallison has a comprehension problem with the English language. The professor made a claim about what Republicans _believe_ about tax increases. He may well be wrong about that, but it’s not the same thing as being wrong about economics _per se_. The professor believes that there exists a level of tax increase that will increase revenue over and above current revenue. Mr. Wallison cited no claim by the professor that an X% tax increase will lead to an X% revenue increase, rather than a Y% revenue increase where 0<Y<X. And Mr. Wallison even agreed that the latter can be true! If the professor is guilty of misrepresenting the views of Republicans, Mr. Wallison is equally guilty of misrepresenting the words of the professor and constructing a strawman argument.

    Even if it's true that a tax cut now will produce more revenue in (say) the sixth year after the cut than some alternate policy, remember that for the prior five years your revenues were lower – and thus adding to the deficit. If a tax cut spurs growth, it needs to do it fast enough to avoid going off a Greek debt cliff. And if your response is, "Cut spending even further to compensate", remember that this will result in more unemployment, reducing demand and risking a return into recession. That in turn would further reduce revenues.

  3. When Reagan increased taxes via closing loopholes in the tax code – it increased revenues – enough to keep a major deficit from growing.

    In terms of increased tax revenues – why is closing loopholes any different than increasing the tax rate?

    both end up increasing taxes on people the former, a select group, the later – everyone in the tax brackets.

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