The document discusses various tax gimmicks used by governments to hide the true costs and impacts of taxation. It summarizes three main gimmicks: 1) Withholding taxes cause people pain upon paying but not receiving a refund, 2) Temporary taxes often become permanent as people adjust to the new rates, and 3) Statutory tax burdens differ from economic burdens as taxes impact prices. It also notes that raising taxes yields little revenue but reduces growth, and the tax burden has shifted over time to focus more on the middle class.

1. Taxes, Deficits, Debt, and
Gimmicks
Antony Davies
Duquesne University
www.antonydavies.org

2. Tax
Gimmicks:
How
government
hides
what
it
does

3. Gimmick
#1:
Withheld
Taxes
Endowment
effect:
People
value
things
more
once
their
property
rights
to
those
things
have
been
established.
à
The
pain
of
paying
$10
is
worse
than
is
the
pain
of
not
receiving
$10.

4. Gimmick
#1:
Withheld
Taxes
2011:
$850
billion
in
withholdings
=
40%
of
federal
revenues
How
much
do
you
spend
a
month
on
gasoline?

5. Gimmick
#2:
Temporary
Taxes
How
they
arrive
Voters
tolerate
new
taxes
that
go
toward
addressing
the
emergency.
Why
taxes
aren’t
temporary
People
get
used
to
paying
the
tax.
Government
gets
used
to
receiving
the
revenue.

6. Gimmick
#2:
Temporary
Tax
Cuts
Why
tax
cuts
are
temporary
PoliMcal
triple-­‐dipping:
• Get
credit
for
cuOng
taxes,
• “Temporariness”
miMgates
complaints
about
ballooning
deficits,
• Cuts
expire
when
other
party
is
in
power.
Why
they
don’t
perform
as
promised
People
make
long-­‐term
decisions
based
on
anMcipated
long-­‐term
income
and
expenses.
à Temporary
tax
cuts
don’t
affect
long-­‐term
income
and
expenses.

7. Gimmick
#2:
Temporary
Tax
Cuts
Households:
Pay
down
debt
now
to
offset
anMcipated
future
tax
increase.
Businesses:
Hiring
that
isn’t
profitable
before
the
tax
cut
won’t
be
aWer
the
tax
cut.

8. Payroll
tax
cut
takes
effect
Average
=
9.6%
Average
=
9.0%
0.6
percentage
point
decline
in
unemployment
following
the
payroll
tax
cut.
Source:
Bureau
of
Labor
Sta/s/cs
Produced
by:
Antony
Davies,
Duquesne
University

9. Payroll
tax
cut
takes
effect
No
increase
in
employment
following
the
payroll
tax
cut.
Average
=
57.5%
Average
=
57.5%
Source:
Bureau
of
Labor
Sta/s/cs
Produced
by:
Antony
Davies,
Duquesne
University

10. Gimmick
#3:
Statutory
vs.
Economic
Tax
Incidence
The government can only set the statutory burden of a tax. It has no
control over the economic burden.
• Employer-paid taxes
• Corporate taxes
• Luxury taxes

11. Gimmick
#3:
Statutory
vs.
Economic
Tax
Incidence
A buyer and seller are haggling over the price of a used car.
$6,500
$7,500

12. Gimmick
#3:
Statutory
vs.
Economic
Tax
Incidence
A buyer and seller are haggling over the price of a used car.
Buyer pays $7,000
$7,000
Seller earns $7,000

13. Gimmick
#3:
Statutory
vs.
Economic
Tax
Incidence
Government imposes a $1,000 tax on car sales (to be paid by the seller).
$7,000
$7,000
–
$1,000
$6,000
$6,500
$7,500

14. Gimmick
#3:
Statutory
vs.
Economic
Tax
Incidence
Buyer pays $7,500
$7,500
Seller earns $6,500
(after tax)

15. Gimmick
#3:
Statutory
vs.
Economic
Tax
Incidence
No Tax $1,000 Tax on Seller
Buyer pays $7,000 Buyer pays $7,500
Seller earns $7,000 Seller earns $6,500
(after tax)
Each pays $500 of the tax.

16. Gimmick
#3:
Statutory
vs.
Economic
Tax
Incidence
Government imposes a $1,000 tax on car purchases (to be paid by the
buyer).
$7,000
$7,000
+
$1,000
$8,000
$6,500
$7,500

17. Gimmick
#3:
Statutory
vs.
Economic
Tax
Incidence
Buyer pays $7,500
(including tax)
$6,500
Seller earns $6,500

18. Gimmick
#3:
Statutory
vs.
Economic
Tax
Incidence
No Tax $1,000 Tax on Buyer
Buyer pays $7,000 Buyer pays $7,500
(including tax)
Seller earns $7,000 Seller earns $6,500
Each pays $500 of the tax.

19. Gimmick
#3:
Statutory
vs.
Economic
Tax
Incidence
Government cannot control who pays the tax.

20. Tax
Revenues:
What
does
raising
taxes
get
us?

21. Source:
Tax
Policy
Center
(Urban
Ins/tute
and
Brookings
Ins/tute),
Bureau
of
Economic
Analysis
Produced
by:
Antony
Davies,
Duquesne
University

22. Source:
Tax
Policy
Center
(Urban
Ins/tute
and
Brookings
Ins/tute),
Bureau
of
Economic
Analysis
Produced
by:
Antony
Davies,
Duquesne
University

23. Source:
Tax
Policy
Center
(Urban
Ins/tute
and
Brookings
Ins/tute),
Bureau
of
Economic
Analysis
Produced
by:
Antony
Davies,
Duquesne
University

24. Source:
Tax
Policy
Center
(Urban
Ins/tute
and
Brookings
Ins/tute),
Bureau
of
Economic
Analysis,
Barro
and
Redlick
(2009)
Produced
by:
Antony
Davies,
Duquesne
University

25. Source:
Tax
Policy
Center
(Urban
Ins/tute
and
Brookings
Ins/tute),
Bureau
of
Economic
Analysis
Produced
by:
Antony
Davies,
Duquesne
University

26. Fair
Shares:
Who
is
paying
taxes?

27. How
much
government
spending
do
people
fund
with
their
tax
dollars?
Top
1%
56
days
2%
to
5%
44
days
5%
to
10%
31
days
10%
to
20%
41
days
20%
to
40%
47
days
40%
to
60%
24
days
60%
to
80%
10
days
Deficit
Day
80%
to
100%
18
hours
Children
112
days

28. The
larger
economic
problem
involves
the
“not
yet”
rich.

29. How
did
we
get
here?

30. Source:
Bureau
of
Labor
Sta/s/cs
Produced
by:
Antony
Davies,
Duquesne
University

31. Source:
Bureau
of
Labor
Sta/s/cs
Produced
by:
Antony
Davies,
Duquesne
University

32. Source:
Bureau
of
Labor
Sta/s/cs
Produced
by:
Antony
Davies,
Duquesne
University

33. Does
debt
maTer?

34. Dangers
of
so
much
debt
• Too
easy
to
lose
track
of
what’s
important.
$300
million
cut
in
Community
Development
Block
Grants.
$300
million
=
45
minutes.
=
2
days

35. Dangers
of
so
much
debt
• Too
easy
to
lose
track
of
what’s
important.
• Pressure
on
Federal
Reserve
to
keep
interest
rates
low.
+1%
=

36. Since
1962,
interest
rate
on
the
debt
has
averaged
6%
+/-­‐
2%.
The
interest
rate
on
the
debt
was
5%
just
ten
years
ago.
Source:
Bureau
of
Economic
Analysis,
US
Department
of
the
Treasury

37. Dangers
of
so
much
debt
• Too
easy
to
lose
track
of
what’s
important.
• Pressure
on
Federal
Reserve
to
keep
interest
rates
low.
• Quickly
approaching
a
point
of
no
return.

38. Interest
on
the
debt
remains
at
2.6%
indefinitely.
Interest
consumes
40%
of
tax
revenue
in
2050.
Interest
consumes
19%
of
tax
revenue
in
2012.
Assumes
growths
from
1970
to
present
conMnue
Source:
Bureau
of
Economic
Analysis,
US
Department
of
the
Treasury
Annual
tax
revenue
growth
is
5.9%
Annual
non-­‐interest
spending
growth
is
6.7%

39. Suppose
interest
on
the
debt
rises
to
5%
over
the
next
ten
years.
Interest
consumes
100%
of
tax
revenue
in
2046.
Interest
consumes
19%
of
tax
revenue
in
2012.
Assumes
growths
from
1970
to
present
conMnue
Source:
Bureau
of
Economic
Analysis,
US
Department
of
the
Treasury
Annual
tax
revenue
growth
is
5.9%
Annual
non-­‐interest
spending
growth
is
6.7%

40. Taxes, Deficits, Debt, and
Gimmicks
Antony Davies
Duquesne University
www.antonydavies.org

41. Where
are
we
going?

42. CBO
Forecasts
CBO (154 forecasts, 1997 – 2011)
• Overestimated revenues by 10% four years out.
• Overestimated revenues by 15% ten years out.
• Underestimated outlays by 12% four years out.
• Underestimated outlays by 30% ten years out.

43. OveresMmate
UnderesMmate
Source:
Congressional
Budget
Office
Produced
by:
Antony
Davies,
Duquesne
University

44. Take
CBO’s
6-­‐year
out
projecMon
and
mulMply
by
0.87
to
get
an
unbiased
forecast.
Actual
tax
revenues
are
less
than
CBO
projecMons.
Source:
Congressional
Budget
Office
Produced
by:
Antony
Davies,
Duquesne
University

45. OveresMmate
UnderesMmate
Actual
federal
spending
is
greater
than
CBO
projecMons.
Source:
Congressional
Budget
Office
Produced
by:
Antony
Davies,
Duquesne
University

46. Actual
debt
is
significantly
higher
than
CBO
projecMons.
OveresMmate
UnderesMmate
Source:
Congressional
Budget
Office
Produced
by:
Antony
Davies,
Duquesne
University

47. Actual
debt
is
significantly
higher
than
CBO
projecMons.
OveresMmate
UnderesMmate
Source:
Congressional
Budget
Office
Produced
by:
Antony
Davies,
Duquesne
University

48. What
does
this
mean?
Forecast
error
correcMon
CBO’s
current
forecast
for
2016:
Federal
Revenue
$3.8
trillion
x
0.90
=
$3.3
trillion
Federal
Outlays
$4.3
trillion
x
1.12
=
$5.0
trillion
Deficit
$0.5
trillion
$1.7
trillion
Public
Debt
$13.2
trillion
x
1.43
=
$18.9
trillion
Gross
Debt
$18.4
trillion
x
1.17
=
$21.5
trillion
Public
debt
will
be
102%
of
GDP.
Total
debt
outstanding
will
be
116%
of
GDP.

49. How
about
some
sWmulus!

50. Federal
Reserve
=
$1,500
b.
TARP
=
$356
b.
Financial
IniMaMves
=
Total
(net)
sMmulus
=
$3
trillion
$366
b.
Housing
IniMaMves
=
$130
b.
SMmulus
=
$578
b.
Data
Source:
money.cnn.com/news/storysupplement/economy/bailouPracker/

51. Total
(net)
stimulus
=
$3
trillion
10%
8%
Unemployment Rate: 7%
6%
9%

52. Historically, how has the economy reacted to stimulus
spending?

53. SMmulus
Spending
and
Economic
Growth
4%
3%
More
economic
acMvity
2%
RGDP
per
Capita
Growth
1%
0%
-­‐6% -­‐4% -­‐2% 0% 2% 4% 6%
-­‐1%
-­‐2%
-­‐3%
More
government
spending
-­‐4%
Change
in
Federal
Outlays
as
%
of
GDP

54. SMmulus
Spending
and
Economic
Growth
4%
3%
More
economic
acMvity
2%
RGDP
per
Capita
Growth
If stimulus spending
1% worked, we should see
a relationship like this.
0%
-­‐6% -­‐4% -­‐2% 0% 2% 4% 6%
-­‐1%
-­‐2%
-­‐3%
More
government
spending
-­‐4%
Change
in
Federal
Outlays
as
%
of
GDP

55. SMmulus
Spending
and
Economic
Growth
(1954.1
to
2011.1)
4%
3%
2%
RGDP
per
Capita
Growth
1%
0%
-­‐6% -­‐4% -­‐2% 0% 2% 4% 6%
-­‐1%
-­‐2%
-­‐3%
Increased
government
spending
does
not
appear
to
increase
economic
acMvity.
-­‐4%
Change
in
Federal
Outlays
as
%
of
GDP
Data
Source:
Bureau
of
Economic
Analysis,
Na/onal
Income
and
Product
Accounts

56. Maybe stimulus spending doesn’t have an immediate effect.
What is the effect over time?

57. SMmulus
Spending
and
Economic
Growth
(1954.1
to
2011.1)
4%
3%
RGDP
per
Capita
Growth
1
Year
Later
2%
1%
0%
-­‐6% -­‐4% -­‐2% 0% 2% 4% 6%
-­‐1%
-­‐2%
Increased
government
spending
does
-­‐3%
not
appear
to
increase
economic
acMvity
one
year
in
the
future.
-­‐4%
Change
in
Federal
Outlays
as
%
of
GDP
Data
Source:
Bureau
of
Economic
Analysis,
Na/onal
Income
and
Product
Accounts

58. SMmulus
Spending
and
Economic
Growth
(1954.1
to
2011.1)
4%
3%
RGDP
per
Capita
Growth
1
Year
Later
2%
1%
0%
-­‐6% -­‐4% -­‐2% 0% 2% 4% 6%
-­‐1%
-­‐2%
Increased
government
spending
does
-­‐3% not
appear
to
increase
economic
acMvity
one
year
in
the
future.
-­‐4%
Change
in
Federal
Outlays
as
%
of
GDP
Data
Source:
Bureau
of
Economic
Analysis,
Na/onal
Income
and
Product
Accounts

59. Maybe stimulus spending’s effects are cumulative.
What is the cumulative effect?

60. SMmulus
Spending
and
Economic
Growth
(1954.1
to
2011.1)
3%
Increased
government
spending
2% appears
to
have
a
negaMve
cumulaMve
effect
over
4
quarters.
RGDP
per
Capita
Growth
(4QMA)
2%
1%
1%
0%
-­‐1.0% -­‐0.5% 0.0% 0.5% 1.0% 1.5% 2.0%
-­‐1%
-­‐1%
-­‐2%
Change
in
Federal
Outlays
as
%
of
GDP
(4Q
Moving
Average)
Data
Source:
Bureau
of
Economic
Analysis,
Na/onal
Income
and
Product
Accounts

61. SMmulus
Spending
and
Economic
Growth
(1954.1
to
2011.1)
3%
Increased
government
spending
2% appears
to
have
a
negaMve
cumulaMve
effect
over
4
quarters.
RGDP
per
Capita
Growth
(4QMA)
2%
1%
1%
0%
-­‐1.0% -­‐0.5% 0.0% 0.5% 1.0% 1.5% 2.0%
-­‐1%
-­‐1%
-­‐2%
Change
in
Federal
Outlays
as
%
of
GDP
(4Q
Moving
Average)
Data
Source:
Bureau
of
Economic
Analysis,
Na/onal
Income
and
Product
Accounts