Treasury Dynamic Analysis of Tax Reform Options

Office of Tax Analysis, U. S. Department of the Treasury ^ | May 25, 2006 | R. Carroll, J. Diamond, C. Johnson, J. Mackie III

[n-tres-ted]

The Office of Tax Analysis of the U. S. Department of the Treasury has performed an analysis of the recommendations of the president's commission on fundamental tax reform. The report details findings of OTA regarding each of the two reform proposals by the commission, plus analysis of a third option: a personal consumption tax (PCT). Which plan produces the highest growth in capital and in income? The PCT, of course. This study uses dynamic scoring, which is good. But the study would have been even better if it had analysed the Fair Tax, which has substantial support in Congress, particularly in the House. The report is pdf format, so cannot be copied.

[n-tres-ted]

Thank you. I'll try to be more careful.

[Mind-numbed Robot]

". . . The idea that capital produces its own interest, whether true or false, seems at least to be clear and simple. It might be expected, therefore, that the theories built on this fundamental idea would be marked by a peculiar definiteness and transparency in their arguments. In this expectation, however, we should be completely disappointed. . . ."

It is really simpler than it seems. Money is a commodity that is bought and sold. Interest is the price.

[lewislynn]

It is really simpler than it seems. Money is a commodity that is bought and sold. Interest is the price.

That's why the Fairtax taxes it.

[StJacques]

"It is really simpler than it seems. Money is a commodity that is bought and sold. Interest is the price."

True, but to an economist "Capital" is more than just money, it is "any asset that is available for use in the production of other assets." According to Böhm-Bawerk all of these assets; land, equipment, intellectual property, labor, capital goods, and more, "earn interest" or "pay dividends" when handled by an entrepreneur -- defined as one who takes the factors of production and turns them into capital Böhm-Bawerk was especially interested in showing how entrepreneurship was beneficial because an entrepreneur is able to expand the scope of what constitutes "capital" through his own creative enterprise. In other words, there was something inherently "subjective" in the nature of capital itself because capital was a thing of value, and for everyone in the "Austrian School of Economics" -- Böhm-Bawerk may have been their greatest exponent -- value was subjective in nature, an idea still drives many present-day economists mad.

I'll stop the lecture right here. Sorry if sounded pedantic. I became a big fan of Austrian Economics after discovering the so-called "Socialist Calculation Debate" in which several Austrian economists; Ludwig von Mises and Friedrich Hayek among them, put forth very convincing arguments, beginning in 1920, that a Socialist system simply could not survive because destroying private property meant destroying the means of exchange which made pricing systems so inefficient as to be unworkable. One of the greatest insights I ever read was Hayek's "prices are not merely 'rates of exchange between goods', but rather 'a mechanism for communicating information'." He showed quite convincingly in my opinion, that price systems evolve spontaneously with economic actors never being able to understand the consequences of their actions, whether these actors are economic agents or economic planners. Socialism wouldn't work because it could not possibly work.

I thought it was a thing of beauty when I first learned it and I still do so today. Hayek put his theory together between 1935-1945 and history proved him right. He died a little over a year after the Soviet Union collapsed, thus knowing that he had won one of the biggest theoretical debates in economic history.

[Bigun]

Excellent points all!I agree with everything you say and would add that we need to recognize the fact that we have been at war with anti capitalistic forces, both within and without our government, for quite some time now. Perhaps we have begun to turn the corner in that war.

[pigdog]

Indeed, anti-capitalist forces "... within and without our government ..." - and also on these threads!!

How right you are!!

[pigdog]

You'd then no doubt be aware of (and interested in) Dr. Kurt Richenbacher who has such informative newsletters. His material is very informative.

[StJacques]

". . . I . . . would add that we need to recognize the fact that we have been at war with anti capitalistic forces, both within and without our government, for quite some time now . . ."

Take a bow Bigun.

I have been amazed to see that, after the complete and utter failure of socialism we witnessed in the collapse of the Soviet Union, that the basic lesson of the failure of economic and social planning has not sunk in. How can they not get it? IT DOES NOT WORK! And I want to share one of my recurring observations about how the most basic aspects of economic theory are completely ignored by Democrats and others on the Left when presenting their arguments to the public.

Have you ever noticed how Democrats will start talking about how we "need to pay more attention to our economy" and then immediately go on to discuss anything but economic policy? Bill Clinton was the true master of this deception and I have raged against those who attempted to counter his arguments for their failure to call him down on it. Clinton would start off by saying "it's the American economy that matters here" and then go on to talk about health care, affordable housing, Social Security, jobs for African-Americans and the like. None of those were aspects of economic policy. Those items fall under the heading of social policy. And no matter how much Democrats and the Left try to pass them off as economic policy, they still remain parts of their agenda on social issues.

Of everything I can point to in the public pronouncements of Democrats and the Left that identifies them as anti-capitalistic (your well-placed comment Bigun), this is what leaps out at me most. Democrats and the Left simply will not discuss economic policy because they know that they do not have a chance of making their arguments stick. They will discuss social policy, and falsely call it "economics."

Forgive me for my rant, but this is one of my recurring observations of deception in national policy and I needed to get on my soapbox for just a moment to vent it out.

[StJacques]

"You'd then no doubt be aware of (and interested in) Dr. Kurt Richenbacher who has such informative newsletters. His material is very informative."

Yes I am. And I have read a few of his newsletters. Is it the Wall Street Journal that circulates them? I know they publish pieces by him on a regular basis. The von Mises Institute has discussed his work at some length. Richenbacher is the true "Cassandra of Debt" among modern economists, especially in his persistence at pointing out the relationship between how each dollar of GDP growth requires x dollars of debt to sustain it and further, that the x figure has been rising for some time now.

I don't think too many policy makers want to listen to Richenbacher these days. If he's right, it means we should cut both government spending and consumer credit interest rates dramatically. That does not go down well in Washington.

[Bigun]

Forgive me for my rant, but this is one of my recurring observations of deception in national policy and I needed to get on my soapbox for just a moment to vent it out.

No forgiveness required! In fact, I am very happy to make the acquaintance of another who "gets it"!

[pigdog]

I took out a subscription after reading several of his positions/papers and did so from a private organization.

If you'd like, I'll dig out the name of the firm and FReepmail you the particulars. Not advertising; just offering to help with information.

[StJacques]

". . . I am very happy to make the acquaintance of another who "gets it"!"

My pleasure as well Bigun!

[StJacques]

No need, I just googled his name and signed myself up for the "Daily Reckoning" e-mail, which includes Richenbacher's regular newsletter info. But thanks.

[Bigun]

As you have undoubtedly already observed, there are a good number of folks on this board claiming to have been schooled in the "dismal science" and that may well be but, given what they say here, I have to wonder if WHERE they obtained that training might not have been the Patrice Lamumba School of Economics at Moscow University!

[StJacques]

". . . I have to wonder if WHERE they obtained that training might not have been the Patrice Lamumba School of Economics at Moscow University!"

LOL!!!

It's amazing how many university professors there are, including many of those outside of Economics departments who discuss the subject as though they are "authorities" on it -- esp. History professors -- who still try to explain economics to their students in terms of "producer relationships," which is what Marx taught after all. Somehow they all have missed the revolution in economic thought that began as far back as the 1870's with Jevons, Walras, and Menger; all of whom finally decided to reject the labor theory of value and began to move the study of Economics away from one which placed the producer at the center of economic life and along the road to a social science that sees the consumer as primary, which is where any respectable economist will tell you the focus is today. Economies are driven by the forces of demand. It's as simple as that! And no matter how much social engineers seek to encourage policies that are meant to control the "relationships of production" -- even those of us who know better still cannot get away from the infection of Marxist terminology -- it's simply not going to work.

My favorite test of one's knowledge of Economics by the way, is to ask someone who considers himself or herself an authority to explain "why recessions happen." And if they can tell me that recessions are necessary for an economy to readjust the flow of investment capital to those enterprises that are most efficient in satisfying actual demand, then I'm prepared to discuss Economics with them. Otherwise I sit back and prepare to hear, sooner or later, some kind of exposition that's going to tell me why this or that group of people don't have good jobs and how some specific policy or set of policies will fix the problem. And my inevitable response that "you're going to have to do less to get more" is almost always greeted with incredulity. They sit back and accuse me of being stuck on Adam Smith when I'm really fixated on a train of economic thought that only begins a hundred years after him and did not really take off until the post-World War II era.

[pigdog]

Actually very funny ... but oh, too true!!

[pigdog]

Ah yes, Menger is my favorite "old master".

[StJacques]

"Ah yes, Menger is my favorite 'old master'."

I have him 2nd, right after Böhm-Bawerk.

[Bigun]

Economies are driven by the forces of demand. It's as simple as that!

Bears repeating! So I did!

The basic law of free market economies are as old as mankind.

If I you have something of value that I desire it is far easier and less costly for me to attempt to barter it away from you with something of value that I have and you want than to obtain it by any other means. It has always been thus and always WILL be thus in truly free markets.

The problem, of course, is that there are darned few, if any, of those to be found.

[StJacques]

". . . It has always been thus and always WILL be thus in truly free markets.

The problem, of course, is that there are darned few, if any, of those to be found."

I couldn't agree more. Even though I expect the 2nd Amendment fanatics to contest me on this, the real loss of freedom we have experienced over the past century has been our freedom of economic choice.