Friday, October 05, 2007

The Trouble With Rudy: Part the Third

I don't know how I missed this when it came out, but in case you were thinking "Yeah, Rudy, kind of a nut on the foreign-policy side of things, but I bet his fiscal policies are pretty good" - well, not so much:

Republican presidential candidate Rudy Giuliani said Friday that the
alternative minimum tax — which is expected to generate as much as $1 trillion
over the next 10 years — could be eliminated over the long term by balancing it
out with even more tax cuts.


The alternative minimum tax, or AMT, was enacted in 1969 to ensure that
a handful of wealthy taxpayers could not exploit a series of loopholes to avoid
paying any income taxes. But the tax was never indexed for inflation. It
now applies to more than 4 million taxpayers and has been the target of tax
reformers who say it will soon unfairly target middle-class taxpayers, if it
hasn't already.

But eliminating the AMT would be extremely expensive, costing $100 billion
in 2010 alone. Giuliani told the 700-member audience of the Northern Virginia
Technology Council that he wants to cap the tax, and perhaps eventually
eliminate it altogether.

"Over time we can figure out how to eliminate it. ... If we were going to
eliminate it, though, we'd have to balance it with additional tax
," Giuliani said, leaving confused expressions on his audience.
"That might be by making the Bush tax cuts permanent."

Emphasis added.

This is an extreme version of what's become a seemingly universal belief among conservatives that cutting taxes usually, or always, results in greater tax revenues. Exactly how this became the pet economic theory of Republican Presidential candidates is the subject of a recently-published book, but the basic theory is something like this:

Tax revenues don't automatically increase as tax rates increase, because at some point the tax rates become so high that people either leave the country or find more ways to hide their income from the tax man. At some point, it becomes counterproductive to raise taxes, and in theory, at very high rates, a tax cut could actually increase tax revenues. That's not crazy. The principle behind the Laffer curve isn't completely nuts.

What is crazy is the way a surprising number of people use it. The biggest problem with the Laffer curve is that nobody really knows where that point is, and the second biggest problem is that they frequently assume that, no matter how much taxes are cut, we're still on the wrong side of it. Income tax rates for the highest income brackets have declined steadily from a high of (IIRC) 91% under that pinko Eisenhower. Today they're roughly 35%, less for lower tax brackets. For the U.S. to be on the wrong side of the Laffer curve (so much so that tax cuts would increase tax revenues significantly), we would have to think that the optimal tax rate is well south of that.

Giuliani's big idea - which he later confirmed was not a misstatement - is that (1) we should cut taxes on the wealthiest Americans and (2) if that reduces government revenue, we can pay for that by cutting other taxes even more. It does not seem to occur to him that if the government loses revenue by (1), it is past the point on the Laffer curve where (2) even kind-of makes sense. Not to mention that, if we're on the side of the curve where raising taxes raises tax revenue, doing either one is objectively nuts without also significantly cutting government spending. Since his foreign-policy positions envision a robust use of the U.S. military, explicitly contemplating a war with Iran, we are left to conclude that he will be cutting domestic spending sharply even as most of the country favors some form of universal health care.