From: pjm@anegada.sps.mot.com (Patrick J. McGuinness)
Subject: Re: The end of the Reagan Era
Organization: Motorola Inc., Austin TX
Distribution: usa,tx
Date: Fri, 6 Nov 1992 17:13:51 GMT

(fred j mccall 575-3539) writes:
>Patrick J. McGuinness) writes:
>>(fred j mccall 575-3539) writes:
>>>Patrick J. McGuinness) writes:
>>>Explain something to me.  If the new taxes will raise practically no
>>>money, why should they have any economic impact at all?  After all,
>>>the economy isn't losing any money, so why should there be problems?
>
>>This is a good question. There are two answers:
>
>>1. Impact of regulation. The study looked at the overall impact of
>>Clinton's plan, including some regulatory changes. The impact of a
>>regulation, say to insist on a payroll percentage to go for training, or to pay
>>for health care for employees, is much larger in its impact on jobs within
>>that business that would be suggested by the revenues gained.
>
>Let me get this straight.  Training workers so they are more
>productive and better at their jobs hurts productivity?  I don't THINK
>so.  What assumptions were they using to arrive at these conclusions,
>with regard to economic growth impacts with and without the plan,
>etc.? 

Regulations add costs to businesses, in hiring, they get factored
into capital goods. example:
Regulations in L.A. concerning paint and varnish fumes, for environmental
reasons, virtually wiped out the furniture business there. It moved
elsewhere, like a lot of other CA businesses. Some of it went to Mexico.
As for training, that's not the only regulation involved, but
maybe we should force you to spend half your working time in a class.
Would you get the same amount done? 

>>2. The Laffer curve. The tax increases on the higher incomes and on
>>business will backfire to some extent because people in that bracket will
>>move to non-taxable income, change their economic behavior.
>>The already high tax and regulatory burden will, if increased, lead to
>>a number of further job losses. This in turn will - hey presto -
>>reduce taxable income. The effect occurred in the boating industry.
>>As a consequence of the luxury tax on yaghts, passed in 1990, over
>>10,000 jobs were lost in that industry alone. The net effect on
>>Federal tax revenues was negative.
>
>Hell, nobody even knows what the shape of the Laffer curve is, *IF* we
>assume that it exists, which is far from solidly proven.
This is not true.

> What
>evidence there is points to there not being any major detrimental
>affects until marginal taxation hits around 70%.

Please cite your sources.  You're talking through your hat.
I can give evidence that directly contradicts this.

>Now, I'm not sure I buy that, either,
You shouldn't. It's false.

>but your 'explanation' isn't backed by accept theory
>OR by facts.
It has been shown amply empiricially and otherwise.

>>Similarly, Clinton may go after foreign companies, and force them to "pay
>>their share". However, foreign investment has created hundreds of thousands
>>of jobs in this country in recent years. If this tax drives them
>>back to their own countries, the gains in higher taxes could be wiped
>>out by job losses (leading to tax revenue losses there).
>
>There is the possibility of some impact from this; however, it will
>likely still be more profitable to produce things locally and pay the
>tax than it would be to operate elsewhere and ship the stuff in.  This
>is the same reason that American multinationals operate in (and pay
>taxes in) various foreign nations.

*At the margin*, it will induce foreign companies to go elsewhere.
I think we agree on that.  (I am not implying that every company
will simply pack up and leave.)

>>>The only way both the things you're saying can be true is if you are
>>>making some economically fairly radical assumptions about the shape of
>>>various demand curves.  I simply don't buy it.
>
>>The assumptions made about responses to economic stimuli are well-founded,
>>and are based on empirical studies of economic behavior.
>
>Not if you're assuming the Laffer curve positively exists and is
>shaped such that a 5% increase in marginal tax rates to 36% is going
>to have all these adverse effects, they weren't.  The assumptions in
>that case were extreme supply-side fringe, and you just left the
>territory of 'non-partisan commission'.

You are building a strawman .... I guess I shouldn't have used the "Laffer
curve" term, since it seems to have set off a knee-jerk reaction.
*All* they did was factor in taxpayer responses to tax rate changes
and regulatory changes.  This is hardly "partisan", they are just using
empirical evidence that is out there and factoring it in to their analysis.

This is in contrast to the "static" analysis that the Congress normally
orders up for their tax changes. Congress does this so the impact of
higher taxes doesn't look as bad. BUT ... it is totally economic fairyland,
and even the one's making the numbers know that.  To defend themselves, they
say what you've said "well, we don't know the exact effect,
so we will pretend they don't exist".
This is only partially true; they can make better estimates if they wanted.

>>The point is that Clinton's plans will fail to raise the predicted revenue
>>in part *because* of its negative impact on the economy.
>>The two are tied together.
>>(The other "in part" is just he used unfoundedly optimistic numbers.)
>
>But still less optimistic than have classically been used by the
>'conservative supply-side' Administrations.

You'll have to clue me in here ... please cite something to support
your statement. Like numbers, please.
In all of the tax changes made, in 1981, and 1990, for example,
neo-classical ('supply-side' if you will) estimates were more
on target then the fairyland static analysis.


Pat

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