Saturday, June 25, 2011

I don't think that number means what you think it means

We all have our foibles - mine is that I take pride in thinking carefully about things and trying to base my opinions on real data rather than knee-jerk emotion.  So when a conservative friend pointed out that the Bush tax cuts resulted in an "unprecedented" increase in tax revenues of $785 billion between 2004 and 2007, I decided that I needed to pause and re-examine my thinking.  Here's what I found.

From the Washington Times, it was reported that
"From 2004 to 2007, federal tax revenues increased by $785 billion, the largest four-year increase in American history."[1]
I decided to see if these numbers were correct.  Indeed, if you go to the IRS website and download tax revenue spreadsheets[2], you can find the tax revenue data.  A graph of revenues between 2003 and 2007 looks like...
If you take the 2007 receipts ($2396 billion) and subtract the 2003 receipts ($1650 billion) the results is $746 billion, which is close to the $785 billion claim.  So now let's see if this is indeed "unprecedented."  If we get the IRS data going back to 1995 - which is readily available online at the same site, we can graph it as...

The increase from 1997-2000 with the Clinton tax increases was $524 billion - a massive 42% increase, so it looks like bravo for Bush!

But do these numbers really mean what conservatives claim?  Do these numbers really show that tax cuts increase tax revenue?  Let's revisit the basic argument that was made to support the Bush tax cuts - when taxes are decreased, the GDP will grow, and a smaller tax rate of a larger number will provide more taxes. That is, the GDP pie grows so much larger that the government can take a thinner slice and actually have more.

Before we proceed, let's ask a question: what constitutes meaningful growth in the GDP?  If inflation is 10% and the GDP grows by 5% has the economy grown?  If the population grows by 10% and the GDP grows by 5% is our society increasing its productivity?

Let's apply two very simple rules - the first I call the Weimar Republic Rule, the second is the Pie Rule. The Weimar Republic Rule is that government doesn't get economic growth credit for devaluing the currency.  You can't compare money numbers from two different years without adjusting for inflation.  Otherwise, you could say that the Weimar Republic collected 100 times more taxes in 1923 than in 1922 - which may be true, but says nothing about real growth of tax revenues.

The Pie Rule is best illustrated by example - let's say your company provides free pie at lunch and your manager tells you: "Great news, our pies will now be 25% bigger." That sounds like a win for the employees - until you find out that  the number of  employees has been increased by 50%.  So the Pie Rule is that government doesn't get economic growth credit for simply increasing the population.

By applying these two rules, we can decide whether or not the raw IRS data for 2004-2007 provides evidence that the tax cuts increased revenue.

First, let's apply the Weimar Republic Rule . Adjusting for inflation using data from [3], the revenue figure in 1995 dollars[4] looks like
During 2004-2007, inflation adjusted tax receipts increased by $394 billion while the Clinton increase from 1997-2000 was $349 billion.  Applying the Weimar Republic Rule the Bush tax cuts still seem to outperform the Clinton tax increase, but by just 12% rather than the 42% we got with the raw data.

Of course, our population increased between 1997 and 2007, so to apply the Pie Rule we can look at the tax revenue per person.  The US population by year can be obtained from the Census Bureau[5], which gives us...

For 2004-2007, the tax revenue per person increased by $933, but in 1997-2000 the revenue per person increased by $1133.  That is, after the Bush tax cuts we saw an increase in tax revenues that was 17% less per person than the increase in revenues after the Clinton tax increase.  The GDP pie may have gotten larger, but the government didn't get its promised bigger piece.

Of course, the big difference is that by 2000, Clinton's tax increases produced a budget surplus.  By 2007, Bush and the GOP turned the surplus into a massive deficit.

At the present tax rates, tax cuts do not produce more revenue.  If the Laffer Curve is really something more than a figment of the supply-side imagination, then we are demonstrably on the uphill side where tax cuts reduce revenue and tax increases provide more revenue.





[4] For example, the inflation rate of 2.81% in 1995 means that the 1996 raw net taxes is multiplied by 0.9719 to get 1995 dollars.  With an inflation rate of 2.93% in 1996, the 1997 raw net taxes are multiplied by 0.9719 x 0.9707 = 0.9434 to get the 1997 tax in 1995 dollars - that is, you have to decrement each year for all the previous years to get back to 1995 dollars.


Thursday, June 16, 2011

How conservative ideas won

Yesterday I ran into myself at Starbucks.  That is, I almost ran into myself - I was careful not to touch me since I wasn't sure who was matter and who was anti-matter.  Ever since reading Neal Stephenson's Anathem I've been wary of parallel universe cross-over.  Anyway, it looked like I was really depressed, so I asked "Why so glum?" 
     "The conservative ideas have won,"  was the response from me.
     I tried to comfort me by saying, "We hear the same in this world, but I don't agree".
     I got a confused look from me. "How can you not agree?" My voice was incredulous, almost angry. "All the evidence is on their side!  After all, President Reagan cut taxes, deregulated savings and loans, increased military spending and balanced the budget.  Inflation remained below 2% and the economy grew at 5% per year.  George H.W. Bush continued the policies, and by the end of his term we'd paid off the national debt."
     I looked like I was about to cry.  But I choked it back and continued, "We had a chance with Clinton to show how liberalism works, but we blew it.  We re-regulated the savings and loan industry, causing their collapse and a $124 billion bailout.  We kept in place the depression-era laws that separated investment and commercial banks, resulting in the collapse of Bear Stearns and Lehmann Brothers - this time almost annihilating the economy and requiring a $750 billion bailout.  To top it off, under Clinton we raised taxes - which led to 8 years of recession, massive deficits and declining wages for average Americans.  Then George W. Bush came in and fixed all that.  He cut taxes to the lowest in history, and what his father once called 'Voodoo Economics' actually worked!  The wages of average Americans rose, the economy boomed - everyone got richer.  In each year of GWBs presidency, job creation was greater than during any other presidency."
     "Wow", I said.  "Those are really tough facts." I was becoming despondent as well. "It's hard to argue against policies that prove so successful."  
    Parallel me agreed, "Liberal tax policies never balanced the budget and we've run out of excuses.  I think we'll just have to admit the conservatives were right."
    Then I had a thought to cheer me up, "Wait a minute, what about the internet boom?  Didn't your liberals get credit for Al Gore opening the government computer infrastructure for commercial use?  Didn't that ignite a creative renaissance and commercial expansion?"
    There was a pause.  It was as if this idea was too bizarre to be believed, "Gore? Don't be ridiculous, that was Cheney's policy!  Gore said that since the internet was created with government money, it shouldn't compete with industry and should remain solely for the use of the military and scientists.  Gore thought that if the internet was important, private industry would create it."
    It was my turn to be incredulous, "But that sounds like a Republican policy!"
    I shook my head in disgust, "You don't understand, the GOP is flexible and pragmatic.  They look for policies that actually produce results; they don't blindly stick to ideology when the facts disagree. They understand that sometimes economic advances have to be built on government investments in infrastructure."
    The conversation reached a standstill.  I decided it was my turn to explain what happened in this world.  At first, I wasn't believed.  It didn't seem possible that things could be so different.  When I concluded, it was clear I needed to sit and think for awhile. Parallel me stirred the dregs of his cappuccino and said,
     "So let me get this straight. After the deficits of Reagan, the balanced budget of Clinton, declining wages under GWB, and financial collapses due to deregulation, your Republicans claim their ideas have won?"
     I gave me a shake of my head and a sheepish look, "Yes, it defies logic, but that's their claim."
     I saw me smile.  A strange smile, starting with small twitch at one corner and then turning into a big grin. "Then there's hope for liberalism in my world after all. Facts don't matter!"
     I saw me skip out of Starbucks and vanish.

     That was when I realized - it's my world that's anti-matter.

Sunday, June 5, 2011

6th grade predictions

Back in Mr Eerkes class (6th grade), one of our writing assignments was to predict the future. We wrote one line about each person in the class, then we cut up the paper and traded predictions. Here's the predictions about me that I found in an old envelope:

An all pro on the piano and another Dr. Jeckle. (Bruce)

Is a scientist & still like to wear the hat he wore 26 years ago. (Teresa R)

Is a computer deisioner (Kellie)

Poses nude for mechanics illustrated. (TH)

A mad scientist in Sedro Woolly (Jenny)

A lawyer (Pete)

Five-O cop (Robert)

Scintist of the Air Force and now desinging a new rocket (unsigned)

A genious Professer (unsigned)

Owns a funeral chapel and a run down grave yard (Jeff Baker)

A Olympic Judge (unsigned)

Photographer for playboy. (Cary)

An exellant Naval air base scientist. (unsigned)

Becomes an architec. (unsigned)

Scientist at a newly built rocket base on Whidbey Island. (unsigned)

A proffer in Scince (Saimi)

Playboy and an actor that took Rock Hudsons place. (unsigned)

Bionic Man Doc. (unsigned)

Is a writer of a dictionary (Libbey)

Is on a Coast Guard cutter down in San Francisco. He is a pilot of a chopper on board the cutter (me)