Five Republican Myths About Taxes

The last Republican debate exposed some of the GOP myths about taxes. Okay, so not all were discussed in the debate per se, but a few were, and the others are pretty much part of the implicit assumptions in the Republican mainstream. A short list must include these ideas:

1. Corporate taxes are high in the US
2.  Lower taxes boost investment
3. 50% don't pay taxes, including immigrants
4. A flat tax would simplify the tax code
5. Reducing taxes could still finance big government

But it is well-known that reality has a liberal bias, so facts do not bode well for these GOP talking points. The common strategy in these positions is to purposely misrepresent the truth with statistics (Disraeli’s third kind of lie, as per his dictum that there are three kinds of lies, lies, damned lies and statistics).

The corporate tax rate is indeed high in the US, but as noted by the Center on Budget and Policy Priorities (CBPP): “The U.S. corporate tax code includes a host of special provisions that significantly reduce the taxes that most corporations owe… Largely because of these preferences, the corporate tax base is very narrow.” So the tax rate is high, but corporations don’t pay much.

Number two is the Holy Grail of supply-side economics. But at this point it should really be relegated to the annals of crazy science. There is no shred of evidence, as noted by Mark Thoma. By the way, all the evidence on investment is that it responds to the level of activity, the so-called accelerator.

While the correct number, again according to the CBPP, would be more like 40% of people don’t pay taxes in normal times, it is still the case that the vast majority does pay taxes. Not income taxes, but payroll and sales taxes, which are, by the way, regressive. And they pay state and local taxes too. For the vast majority of the labor force payroll taxes, not income, is the biggest burden on their paycheck. And immigrants do pay sales taxes, and often payroll taxes too.

Alan Blinder has noted (subscription required; or read Jared Bernstein here) that the complexities of the tax code do not come from multiple tax brackets and that a flat tax rate would not simplify the tax system, besides being regressive. Complexities derive from what is defined to be taxable income instead.

Finally, you might think 5 it’s a typo, since Republicans are not for Big Government. So they would NOT suggest that lower taxes can finance big government. In fact, as shown by Jeffrey Frankel here (scroll down for his talk, and go here for more recent data) every Republican president since Ford has increased spending and deficits while every Democratic president has done the opposite, and that includes Obama after the fiscal package passed in 2009. So they are for big government (for corporations and war), and the idea is that cutting taxes would still allow to fund for that. It would certainly lead to higher deficits and debt, which of course they would only favor during a Republican presidency. But arguably that’s their point, to increase debt so that they can claim that government spending must be restrained, and privatize Social Security.

PS: Mike Isaacson of the great blog Vulgar Economics reminded of the death tax. And I'm sure I missed other myths too.

Foreign and external debt: not the same

In this whole discussion of the debt-ceiling limit the distinction between foreign debt (that is denominated in foreign currency) and external debt (owned by foreigners) has been often lost.  In the case of the US around 30% of Treasury securities are held by foreigners or around half if you discount the ones held by US governmental institutions (see data here). A country can default on its foreign debt, but not on the external debt denominated in domestic currency.

There is a fear (to some extent manufactured) about the Chinese taking over the country, and not just by pundits and late night comedians, as if the US would be unable to repay debt denominated in a currency that the US can produce.  Even Krugman has been excessively guarded on the issue. While noting correctly that the US is not Greece he said:

"So the US has much less debt than Greece. Also worth noting is the pattern over time. Greece ran up debt relative to GDP at a fairly good clip even during good times, while the United States — despite the Bush administration’s best efforts — did not. So America does not have a comparable record of sustained fiscal irresponsibility; we’ve only developed large deficits in response to the crisis, which happens to be exactly when we should be running large deficits.
And that’s not even to get into the issue of us having our own currency."

The fact that the US has it's own currency was almost an afterthought, and he avoided the crucially important fact that the external debt is in domestic currency.  The point of having your own currency is that you cannot default on debt denominated in it by definition.  This is not about fiscal responsibility or about how large debts and deficits are, but in what currency they are denominated.  The problem is not the ability to print bonds, bills, or dollar bills, which foreigners and the domestic private sector continue to hold without a problem, but the political blackmail by Republicans, and apparently accepted by Obama, to obtain gains for the rich at the expense of the rest.  Franklin Serrano aptly referred to this situation as dysfunctional finance!

The debt-ceiling limit: a guide for the bewildered

It is very difficult to explain American politics to those that are not Americans and/or have not lived here long enough. Add to that the confusion over basic economic principles, and it becomes almost impossible to explain the debt-ceiling debate to rational people.

As noted by James Galbraith, this is not a fiscal crisis, which should be obvious, since it was a Wall Street driven bubble.  Also, contrary to what you think the Republicans are the big government party. The graph below shows total federal government spending as a share of GDP (in black), and some spending categories as a share of government spending (in colors). As it can be seen total spending goes up in 1981, 1989, 2001, when Republicans assumed the administration, and down in 1993, when Clinton did.  Also, note that even if spending went up in 2009, as a result of the crisis, it did come down in 2010 (which is not a good thing, by the way) with Obama.

Read the rest here.