Maddow’s Tax and Deficit Doubletalk
By James D. Agresti
May 20, 2014
In a recent segment of her Emmy-Award winning television show, Rachel Maddow, an MSNBC host with a doctorate in political science from Oxford University, claimed that:
- State government budget deficits in Kansas, North Carolina, and New Jersey are “huge,” because their Republican governors have cut tax rates.
- Cutting tax rates invariably leads to lower tax revenues.
- The federal deficit is “plummeting,” because President Obama raised taxes on the wealthiest Americans.
All of those assertions are false or misleading, and data from the federal government and the same sources cited by Maddow show that:
- The federal deficit she applauded is 4.8 to 6.7 times larger than the state shortfalls she derided.
- Tax revenues sometimes stay level and even increase when tax rates are cut.
- The federal deficit naturally declines after a recession, but it is still larger than Bush-era deficits that Obama condemned as “reckless.”
Below is the documentation of these facts, along with the details of how Maddow has distorted the truth.
The federal deficit far exceeds the “huge deficits” cited by Maddow
While criticizing Republican governors and tax cuts, Maddow flashed the following snippets of news stories about projected state budget shortfalls:
- Kansas: “a shortfall of about $900 million by fiscal year 2019”
- New Jersey: “$807-million-revenue shortfall”
- North Carolina: “Analysts expect $445M NC shortfall”
Maddow provided no sense of scale for these figures, which is vital to understanding their significance. Instead of providing some basic context, such as how large these shortfalls are compared to the size of the budgets, Maddow simply exclaimed that they are “huge.” She said this four times in less than three minutes while declaring that these budgets had “blown up” and were going “kablooey.”
However, compared to the size of their budgets, the projected budget shortfalls of these states are far smaller than that of the federal government. The projected 2014 fiscal year shortfall for Kanas is 3.0% of the budget—for Jersey, it is 3.0%—and for North Carolina, it is 2.2%. In comparison, the projected shortfall for the federal government is 14.5% of the budget.
In other words, the federal deficit that Maddow celebrated is 4.8 to 6.7 times larger than the state shortfalls she decried.
Higher taxes reduce the incentive to work
Throughout the segment, Maddow repeatedly used sarcasm to assert that reductions in tax rates inevitably produce lower tax revenues. In her words: “One thing that happens when you cut taxes is that taxes get cut!” That claim may seem intuitive, but it is not true in all cases.
As shown in the graph below, federal income tax revenues often do not correspond with top federal income tax rates (which lawmakers tend to raise and lower simultaneously with and more dramatically than the rates for lower brackets):
The reason that tax revenues don’t always mirror tax rates is because there are a host of other variables that affect revenues, one of which is that lower tax rates boost people’s incentives to work, thereby generating more taxable income.
As explained by the Congressional Budget Office (CBO), “a lower marginal tax rate on labor income increases the incentive to work, raising the number of hours people work and therefore the amount of output and income.”
The strength of this effect is debatable, and not every cut in tax rates leads to higher revenues. However, even prominent liberal economist Paul Krugman wrote in his 2009 textbook, Economics, that higher tax rates diminish the incentive to earn more income:
Any income tax system will tax away part of the gain an individual gets by moving up the income scale, reducing the incentive to earn more. But a progressive tax takes away a larger share of the gain than a proportional tax, creating a more adverse effect on incentives.
The decline in deficits since 2009 is nothing to brag about
Just two weeks before President Obama was inaugurated in January 2009, CBO projected the path of the U.S. economy and federal budget for the next 10 years based upon current law. These projections showed rapidly improving economic conditions coupled with rapidly declining budget deficits after 2009, as is typical after a recession.
In the words of Krugman, “rapid growth is normal when an economy is bouncing back from a deep slump.” Economic growth, in turn, boosts tax revenues and lessens spending on government assistance programs, all of which serves to shrink deficits.
Before going further, it is important to note that CBO’s current law projections for the federal deficit are not directly comparable to actual outcomes, because such projections often use unrealistic assumptions. However, they do show that just before Obama took office, the laws already in place coupled with the economic growth that regularly follows recessions were expected to progressively reduce the federal deficit, as shown in this graph:
Nevertheless, Obama and supporters like Maddow routinely crow about the declining deficit, using the refrain that it has fallen at the fastest pace since World War II. What they neglect to mention is that every deficit from 2009 to 2012 was larger than any deficit since the World War II era. Thus, there was enormous potential and natural impetus for the deficit to fall.
Yet, even in 2013, four years after the recession ended, the deficit was still 72% higher than the average deficits that occurred solely during the presidency of George W. Bush (without overlap with Clinton or Obama). Obama denounced these Bush-era deficits on the floor of the U.S. Senate in 2006 when he stated that “reckless fiscal policies” had driven federal deficits to “historically high levels.” Now, he and others are bragging about deficits that are significantly worse.
More importantly, the national debt provides a much clearer picture of the financial health of the federal government than the deficit in any given year or string of years. As such, during the same Senate speech, Obama warned that “America’s debt weakens us domestically and internationally,” “America has a debt problem and a failure of leadership,” and “Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren.”
On the day Obama gave that speech, the national debt was $8.3 trillion or 61% of the nation’s economy. The national debt now stands at $17.5 trillion or 102% of the economy. Hence, even after adjusting for economic growth (which accounts for population increases and inflation), our national debt is now 67% larger than the debt Obama railed against in 2006.
Finally, linking deficits to any particular president or governor fails to account for the actions of congresses, the impacts of preexisting laws, and many other variables that impact government spending and revenues. Hence, to attribute these deficits purely to presidents or governors, as Maddow and many others have done, oversimplifies and misrepresents the facts of these matters.
Higher tax rates on the wealthiest of Americans do not reduce our incentive to work. Nor due higher tax rates on income revenue from investments or higher taxes on capital gains. That is a ridiculous state and I can, as well as you apparently, make figures “dance”.
As the article documents, according to the Congressional Budget Office and even Paul Krugman, higher tax rates on the wealthiest of Americans do, in fact, reduce their incentive to work. More documentation is provided here, along with similar facts about taxes on investments and capital gains: http://www.justfacts.com/taxes.asp#economic
I realize that this is not on topic; I could find no other way to contact you.
Is there any way that you could add the death penalty to just facts?
We definitely plan to address this issue in the future, but I’m unsure when we’ll get to it. Currently, we have much work to do and need more resources to get it done.
In the meantime, we did publish a Fact App question on this issue: https://www.justfactsdaily.com/question?question=140066
As a hypothetical Robert, let’s say that the government decided to tax all income you earned over $40,000. 100%. Would you have any incentive at all to work longer or harder than necessary to reach $40,000? Of course not.
This holds generally true proportionally. At some point, there are diminishing returns. Incentive is destroyed.
You don’t think tax rates on investments are a consideration? Wow, man. There is an entire industry based on helping people navigate the incredibly complexity of the tax code when it comes to investing and minimizing tax exposure.
Robert, your comments about tax rates and incentives are obviously spoken from ignorance. You obviously have not invested money or have been a fool with your money.
I am not a rich man but I do invest money and I can tell you that I and my friends most definitely base part of our investment decisions based upon tax rates – you a fool to do otherwise.
Maybe the fools who watch MSNBC are bad money managers but there are a lot of people who are not so money stupid with their money.
For example, look at long term and short term capital gains. One is treated at the much higher income tax rate (short term) and if you have losses you want to take them as short term and for gains you want to hold for more than 1 year to turn them into long term gains which is taxed at 15% max. This allows you to keep more of your money and give less to the gov’t – this is good.
Also what about muni bonds which are free of federal taxes. Anybody can place money into these investments earning ~5% tax free for a nice income stream. Even a millionaire can do this and pay no federal investment taxes – yes this is a horrifying idea for liberals. But why are these investments not taxed? Is it a ploy by the “evil Koch brothers” to screw the gov’t?
Well no its an investment most beloved by gov’t because muni bonds are bonds by local gov’t used to fund the building/operation of schools, roads, infrastructure, etc. So a millionaire can invest large amount of money into muni bonds (which is good for society) and pay zero income taxes (good for him – a win-win). This is a choice the gov’t wants people to make since they want to raise money via the bond sale. So even local gov’t know if you tax this investment there will less incentive for investors to buy their bonds and they will have to raise interest rates to entice them back which means they have to raise peoples property taxes to pay for the increased interest payments (this is not good for the local community).
Moreover, even the poor understand what you do not about incentives. For example, look at the massive disincentive to work that the Obama welfare state is placing on middle class and lower income people. These people’s daily budgets may be slightly easier by all the free money via tax credits, food stamps, unemployment insurance but it also a large disincentives for them to better themselves. Why? because even these people know that getting a low paying job means a loss in free gov’t money for them. Even the poor understand this as a form of taxation on their benefits that apparently is beyond your comprehension.
This sick welfare disincentive is not good for them, their family or society but it does help the democratic party collect votes.
Keep going after those liberal “pundits” who propagate the myth machine, thereby repeating the lie often and loud enough so that most people believe it! I’d like to think that Maddow and her associates on MSNBC don’t have a terribly large audience, but these untruths should NOT go unchallenged. Keep up the good work!
This is not new knowledge or Rocket science folks I worked in law enforcement for years. We always knew that during a two week pay period you never worked more than 3 overtime shifts or it bumped up your tax burden to the point where you were making less than straight time. No one ever worked more than 3 shifts voluntarily ever! why give it to the government?