It’s estimated that Germany has now accepted about one million refugees in 2015 alone. Germany’s total population is about 80 million so that means that the population of the country has increased by 1.5% in a single year.
Something that isn’t mentioned frequently enough is the cost the Germans are assuming. It costs Germany about 10,000 euro to support each refugee. 1,000,000 X 10,000 = 10 billion euro. Germany’s total budget is around 250 billion euro. That means that just maintaining the refugees they’ve accepted will add about 4% to the German budget.
Considering what sticklers the Germans have been in fiscal matters that means either they’ve got to cut something else or tax the German people more. I expect the latter.
Germany’s GDP growth rate for 2015 will have been around .4% for 2015. Expect it to slip into negative territory in 2016.
“Germany’s GDP growth rate for 2015 will have been around .4% for 2015. Expect it to slip into negative territory in 2016.”
Why?
Because they’ll raise taxes to pay for the refugees, removing money from the private economy. .4% is already flat.
This runs counter to your usual admonition, at least as I understand it, that calls for tax cuts make one a one trick pony, and an advocate for an ineffective policy.
Separately, one has to wonder what a step jump of 1.5% in population will do to aggregate demand.
It’ll be a bigger jump than that. First, the flow isn’t going to stop immediately. Second, perhaps a majority of the refugees have been young men. They’re going to demand family reunification.
Merkel is going to be hated in future German history books.
I’m not advocating it just pointing out what the Germans have done from a historical standpoint.
So, if raising taxes removes money from the private economy, what does lowering them do? Do people simply stuff the extra money into their socks? Or, do they reinvest it? And, would they be more likely, or less likely, to reinvest it if the bureaucracy, created by central government controls, were less odious, time-consuming and discouraging to take risks?
It depends on income level. Those in lower income quintiles purchase goods, many of them manufactured somewhere other than here or assembled from components made somewhere other than here. Those in the highest income levels take their money and invest it somewhere other than here.
Either way it contributes to income inequality and doesn’t do much to create jobs in the United States.
And, yes, stuffing money into your socks is getting increasingly appealing.
“Those in the highest income levels take their money and invest it somewhere other than here.”
What about the idea of making it fiscally advantageous to reinvest (or even bring back money from abroad) here in the U.S.? Incentives do effect behavior in most other areas of life, why not try it in the financial sector more often? It’s that whole Kennedy logic of “a rising sea raises all ships” kind of optimism, instead of lets just level the playing field and crush everyone.
@jan
Is there a lower bound to lowering taxes, and if so, what is it?
Good luck. The Democrats want to increase taxes on the wealthiest Americans and are morally opposed to reducing taxes on businesses. The Republicans have focused their fire on the individual income tax.
There should be a reverse capital gains tax. This would reward anybody who makes good investment choices. It would simply lower taxes (below zero.)
Since they make the worst choices, the poor should be taxed at the highest rate. This would give them incentive to get out of poverty. (Debtors prisons might not be a bad idea either.)
I’ve never understood why the idea that the Laffer Curve might actually be curvey is so hard to grasp. Past a certain rate going up, tax hikes are counterproductive; past a certain rate going down, tax cuts are, at best, ineffective at generating additional economic activity. (I could phrase it more precisely but I’m on my phone and think the point is clear.)
If there isn’t, there ought to be something similar to the Laffer Curve but wrt complexity of a tax code. Harder to quantify, but probably possible.
Turns out my socks pay the same interest rate as Wells Fargo.
Cuts in income or capital gains taxes are going to disproportionately impact some areas of the country. There would be a significant change in Manhattan, for example, but a tax cut for an investment banker in New York will have little beneficial impact on a worker in Mississippi.
If she does spend more as a result it will typically be for high-priced consumer and luxury goods, potentially generating inflationary pressures in the sectors of the economy catering to her wishes, while deflation remains in sectors serving the lower-middle class and poor.
On the other hand, ending or reducing FICA/self-employment taxes will produce broadly distributed benefits.
While I favor at the very least restructuring FICA, the benefits that would be realized by doing aren’t as great as they would have been 30 years ago and will tend to concentrate wealth in a way they wouldn’t have 30 years ago.
I have a simplistic way of conceptualizing the limitations of the GOP and Democratic economic policies (the one trick pony ideas of tax cuts for the GOP and Keynesian deficit spending for the Democrats.) I think my explanation cuts to the heart of the problems, but I’ve never seen it put this way. The shortcoming in each case is due to ignoring the dimension of time.
For the GOP, at the lower end of the Laffer curve, even when an initial tax cut produces an effect on aggregate demand, it is a temporary effect which won’t be sustained. And when you add in the high level of consumer debt, the desired effect is further depressed because: 1) there is less pent up demand since consumers have been purchasing on credit and 2) consumers have a debt load to service and will pay down the credit card balance instead of making new purchases if they realize some gains from tax cuts.
With regard to the Democrats’ love of deficit spending to juice the economy there are multiple reasons that this can fail but one part also depends on the idea that debt shiftis demand over time. If there is little to no pent up aggregate demand, then putting more money into the private sector through public spending will not conjure up demand. And for public spending to be beneficial, it has to meet legitimate needs that will be productive (ie, the positive multiplier effect) rather than spending for its own sake or for enriching political donors.
So each side should recognize that their pet policies have limitations. If we had any moderate politicians left, and people who cared about good policy, they would be debating where the sweet spot is for tax rates and government spending, and trying to better understand how the details matter (which type of tax cuts or increases have various effects, and how the policies interact with each other.)
But this is where we find ourselves because we’ve allowed the two parties to manipulate voters to think in black and white terms about these policies, and when they fail they further entrench their partisan advantage by claiming that they failed because of the opposition instead of allowing for the possibility that their policies were part of the problem.
And I say this as a person who is conservative, and not a moderate. I just recognize that the center has not held and the system is breaking down.
I have several reactions to your observations, CStanley. It’s not a bad formulation but there are several other factors. First, we’re not “at the lower end of the Laffer curve”. How can I tell? Just look at the results of the last tax cut. As Ben points out, if we cut payroll taxes we get more effect but the Republicans have no interest in that. They’re obsessively focused on the personal income tax.
Second, financialization. In theory if the federal government puts another $1 trillion into the economy it will produce $1 trillion times the Keynesian multiplier in economic growth up to potential product. Above potential product (as you correctly point out) there is no effect. That theory should be true whether you divvy the $1 trillion up among all Americans or give the whole lump sum to Warren Buffett.
But Warren Buffett doesn’t buy houses, cars, or anything else. He just buys financial products or, worse, takes the money and invests it in Brazil. That reduces the multiplier practically to nothing. Maybe even less than nothing (because of the way the federal government does its fund accounting).
The present structure of the U. S. economy means that the perennial Democratic favorite, “infrastructure spending”, is more like giving the money to Warren Buffett than it is like divvying it up among 310 million Americans.
Finally, balance of trade. For the people in the lower income quintiles just about everything they buy was made somewhere else or assembled from components that were made somewhere else. And retail has consolidated. When a hypothetical Average Joe takes the $3,000 from our hypothetical $1 trillion to Walmart quite a bit of it ends up in the hands of Walmart’s Chinese suppliers, some goes to the large brand name conglomerates, a little of it is used to pay Walmart’s employees, and the rest goes to the Walton family and other Walmart stockholders. Again, not much Keynesian multiplier. And income inequality!
Thanks for your comments. As I stated, my formulation is simplistic and I think of it as a good starting point for explaining to partisans where the flaws lie in their party’s policies. Like most Americans, I have very little training in economics but it’s pretty clear that what we’ve been doing hasn’t been working and when I listen to policy suggestions these flaws seem pretty obvious to me.
Regarding the Laffer curve, you are right to point out that it also matters where we are on the curve. My comments were that in addition to the need to know what part of the curve we are operating on, there are these other factors that the curve doesn’t account for.
And on the trade deficit, I have to say this is something you have made me much more aware of.
I come to you with an investment proposal. Give me $100MM and at the end of the investment period I will give you a) $150MM, b) $128MM or c) $116MM. Each scenario is for the same investment with, identical an identical risk profile.
To hear some of you, you would be indifferent to the three options. And yet, this is the simple future value calculation for a 10%/yr gross return in five years at zero, 15% and 23% capital gains tax treatment. The latter two illustrate the increase in rate and the ObamaCare surtax implemented by the Obama Admin and. Dem congress.
Said another way, you want me to believe that you visit three investment houses all pitching the exact same investment to you, but quoting you annual returns of 10%, 5.5% and 3.2%, respectively. Further, to pour gas on the fire, in your opinion the risk of the investment warrants an 8-10% return………and you then tell me you don’t care who you place the investment with, or if you would even make it???
It’s absurd.
FV = CV [ 1+ (i x n) ]]. Play with it with any assumptions you like.
Democrats, at least not their economists, don’t believe that deficit spending works in all situations. In fact, they understand there is a price to pay for it in slowing the economy later, though hopefully this hits after the economy is doing well. So deficit spending is just a temporary fix to help demand.
What you should note is that based upon what they actually vote for, deficit spending is now a permanent policy of both parties. Under Clinton we had a brief respite, but ever since Reagan became president the norm has been that we increase debt faster than we grow the economy. AFAICT this only bothers Republicans when a Democrat holds office.
Steve
Steve on your last point I agree that both parties have created deficits, but that is part of the dissatisfaction that is boiling over in the GOP.
@Guarneri- surely you get that most of us don’t isolate the capitol gains tax as the main part of economic platform because we aren’t in the position to accept your investment proposal? So for most of us, it isn’t about the return on that investment but how those investments affect the rest of the economy and tax policy.
Drew- Then when the capital gains rate was higher in the past, we must have had zero economic growth. Let me go look at that FRED site and see if that was true. Hmmm, nope. Growth doesn’t look to be related to cap gains rates, or if it is it is a very weak relationship that will take a lot of math to prove. So it looks like the real purpose of the lower rate is to make sure the person with $100 million dollars is making a lot more money.
Steve
@Drew
You can take your money and invest it in Venezuela, Nigeria, China, or France, but of course, you won’t, will you? No. Your US taxes pay for a lot more than just social welfare programs. There is an upper bound, and the Laffer Curve captures the concept. (Somehow, Dr. Laffer seems to have missed the entire lower bound concept.)
If you decide to use your money to purchase goods or services, somebody else will invest it, or if you put it in the bank, it will be invested for you. The only recourse you have is to stuff it into your mattress, or in a credit based money system, you could destroy money by repaying debt.
From your last link, it appears you like David Stockman. I guess you have come over to the Dark Side. As such, here is another link from him, and it is not much better: The Keynesian Recovery Meme Is About To Get Mugged, Part 2