Posts Tagged ‘skepticism’

The cost of tax cuts

2010.11.15

In the shadow of the elections victories of the Tea Party in the US election and the recent announcement of our own Campbell government here in BC to both cut income taxes while implementing a user fee for hospital stays, I thought it would be educational to take a sceptical look at taxes and in particular tax breaks.

Taxes have been a widely used tool by governments to punish ‘sin’ (in the form of alcohol and tobacco taxes) and to promote investment (in the form of tax holidays or credits like the capital gains tax). I am not going to get too partisan here. There are valid arguments on all sides about what are appropriate taxes and at what level those taxes should be – that is a discussion for a different day and perhaps a different show. What I would like to investigate here are two things: first that cutting taxes increases tax revenue (this was called Voodoo economics by G. Bush Sr., trickle-down economics by others but economist refer to this broadly as supply-side economics) and second that tax cuts are always good.

I shall address the former first. For those of us who had access to an US media source (or those who can remember any recent political campaign) every politician was promising to cut taxes; when asked how they would pay for these tax cuts, they would either respond by saying tax cuts cost nothing or they said they will reduce spending…when asked what spending, they would say something like “that fat in the system” or “improved efficiencies” – IE they would not cut anything. For example they often say they will cut “ear-marks’, but this only accounts for $3 billion out of a budget of $3.6+ trillion (with a deficit of $1.7 trillion)…or 0.08% of budget (0.17%  of deficit).

It seems popular among voters across the political spectrum. However, the recent dual announcements of our local government show the reality of the situation. Campbell announces a popular across the board tax cut of 15%. This applies to rich and poor alike (although not equally, but again that’s a different show*). This equates to a loss of over half a billion dollars a year. That is money the government will not have to provide services…like hospital beds. The government also recently announced a user fee on hospital rooms amounting to over $200 a week. Who is going to make up for the loss in tax revenues? The sick.

Environics Poll 2007

Now don’t get me wrong, maybe we are all happy with that, but most people when asked the question do they want to cut public spending (especially healthcare), they say no…in fact it is one of the few areas people show an innate socialist tendency.

Just to put the two into perspective, the median family will save about $350 a year in taxes.  The average hospital stay for an individual is 3-10 days (depending largely on age)…that’s a fee cost of $87 to $290 (and for those of you who say “well most people will not be in hospital that long” just remember that makes the fee even more onerous because it WILL effect most those who are suffering most and likely least like to afford it).

Okay, my math may be a little dodgy (mainly due to the lack of accurate numbers for ‘average hospital’ stay or the myriad of different income/fee/taxes an individual will pay) but the point should still be obvious. The hospital fee was not to pay for the tax cut but add in the added cost of medical insurance premiums[1], camping fees[2], transit fees[3], licence fees[4], tuition[5] and so on you will get there. (for those of us old enough, we remember when ‘user fee’ was a dirty word and the fees that did exist were token…not any more).

Cost of Bush's tax cuts

The point I am getting at, is if we want social services we have to pay for them as a society. That means when someone yells “tax cuts” remember they are also saying “cut services”. Maybe something you are comfortable with…maybe not but that is the reality of it. I was going to go on to talk about the wisdom of providing robust social services but that would be straying perhaps outside the bound of a sceptic podcast so we shall stop here and address the second point.

Many have claimed, largely Republicans and Monetarists, that cutting taxes increases tax revenue. On the surface this sounds paradoxical; however there is a shred of logic to be found. The idea, goes that if you cut taxes, those who have more money will invest in the economy, the economy grows, from this larger tax base you collect more absolute dollars even though the rate is lower. The idea works in reverse as well; increasing the tax rate will cause a contraction of the economy and a reduction in absolute dollars.

Often the example of the Reagan Revolution is used to prove this point…i.e. that it works in practice. However this is a flawed claim. As many modern economists have shown[6], including noble prize winner Paul Klugmen, the Reagan tax cuts did not improve the US economy and actually made government finances worse.

It is true the US economy grew fast from 1983-89 however this is in contrast to the miasma of the severe recession of 81-2. Capitalist markets are cyclical, and this was not an unusual recovery. Private savings, something supply-side economics assumes from the masses to provide the capital for investment, continues to decline throughout the decade (7.8->4.8%). Meaning, the money for the recovery, as it was, came from spending savings and increasing personal debt. Finally, this trend is echoed in the US budget; when Reagan came to office the US debt as a % of GDP was 32.5%, when Bush Sr. left it was 66.1%. Clinton, who raised taxes, brought the rate down to 56.4%. The same happened in Canada, when we increased taxes in the 90’s and went from the ‘basket-case’ nation to arguably the country with the most stable finances.

Lastly, the multiplier effect. Not all tax cuts are equal. Tax cuts cost money; those who claim that it is not should ‘not’ collect their next pay-check and see if it costs them money. So, the current desire of governments everywhere is stimulus. When the government (or anyone really) spends money it has what is called, a multiplier effect on the economy; that is for every “Y” dollars spent it generates Y*x (or Y’) in the economy. So, if I give you a dollar and you burn it, which generates no activity in the economy, in fact it removes the dollar from circulation so has a negative multiplier effect. Now most people will spend it or ‘invest’ it (be it real investments or just in your bank account) and they have a positive effect; that is they generate more than a dollars worth of economic activity. The best way to think about this is if you spend the dollar, the merchant sells more, can now hire a new employee, and we will in turn make more dollars and spend them; the new employee generates the new value. An economist could spin a better story, but I think you get the gist of it – the one dollar generates more than a dollar of economic activity.

Relative stimulus effect

Having given the background, how do tax cuts fair as stimulus[7]? In general, every dollar of tax cuts generates $1.30 of economic activity compared to a dollar spent on increasing UI benefits would generate $1.62 or increasing food stamps generates $1.74. There is also the issue of WHO to give the cut to. Lower income people spend (out of necessity) every penny they make so a cut in their taxes (thanks to HST we ALL pay taxes even the poorest) will generate the most activity but they latterly also have the least money (the bottom 50% of household control about 3% of Canadian wealth). As you move to the other extreme, the very wealthy often ‘invest’ most of their tax cuts (earning more than they need), so less activity generated but because they make more money a big bang (the top 10% own around 58.2% of the nation’s wealth[8] in the USA its 1% owning 35%). However, in a global world, it is most likely their investments will be ‘trans-national’ or outside ‘our’ economy and thus lost completely to the system – complete fizzle.

Society, of course, is not only extremes but a lopsided slope of ‘everything-in-between’ (note percentages of wealth ownership mentioned earlier) otherwise it would be easy to define tax policy; the trick is to determine both purpose (stimulate consumption, promote manufacturing, decrease inflation) and effectiveness. History has given us lessons to learn from and one a sceptical economist should be able to apply.

 


 

[8] http://www.wsws.org/articles/2007/jun2007/cana-j20.shtml

* By this i mean 15% of $100k = $18k while 15% of roughly the median income, $50k = $7.5k. So, the tax applies the same but the benefit is very unequal.

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I miss my Mummy…the Egypt kind

2010.10.31

I discovered a study about the relative rarity of cancer in ‘ancient’ societies. It was focused on physical evidence from Egypt (mummies and bones) and a review of ‘medical’ text from Egypt, Greece and Rome. I did a review of the article and was going to present it on our Oct 19th show. My take at the time was that it was a measured and well done study. It was forthright in its methodology, made reference to limitations in its assumptions, was limited in its claims and provided a plausible mechanism to explain their results.

As often happened the SGU (Skeptics Guide to the Universe) will a few days later duplicate some of our segments, as they did on this one. I was STUNNED at how wrong they got it. It sounded to me like they only read the media spin (which often spins in the wrong direction) and did not actual read the study. As a good skeptic, I did not want to assume something with checking out the ‘source’ material…as I did with the original study. So I checked out Steve Novella’s blog Neurologica.

Neurologica did not focus on the study (something I do have issues with) but on the extensive interview one of the researched gave on the University of Manchester website. I then checked out the interview and was stunned. It seemed one of the authors of the study did not read their own study. So, it turns out the SGU did get it wrong…kinda…and at least one of the authors of the study(Dr. David) got it very wrong – I still think the study is good. Why?

Straw Man – the SGU got it totally wrong when they stated in the podcast that the study stated that there was NO cancer in the ancient world. This, sadly, coloured the rest of their conversation and led them to disprove something not actually claimed by the study (although to add confusion something claimed by Dr. David). Actually the study pointed out a number of cases where there was physical evidence for cancer and more notably used ancient ‘medical’ text to show that cancer was known and treated (poorly) although rarely cured. The text stated that ‘medicine’ was ineffective and that the most common treatment was surgery or cauterizing the tumour.

The issue with longevity – First, Steve misread (shall I be generous?) and stated the study only involved mummies between 25-50yrs that is wrong. What the study said was the life expectancy was 40-50 for the wealthy and 25-30 for the poor. Actual age of the specimens was rarely mentioned. The SGU and the study noted that there was an issue comparing cancer rates of a population that had a life expectancy of 25-50yr to one that has an expectancy of 70-80yrs. The study addressed this by pointing out that a number of conditions have been diagnosed such atherosclerosis, Paget’s disease of bone and arthritis. Further, comparisons of ‘child’ or ‘early onset’ cancers could be reasonable compared. The SGU rightfully points out that the biggest childhood cancers, leukemia, leaves little to no ‘archaeological evidence’. However Osteosarcoma, one of the top ten childhood cancers is a bone cancer leaving notable evidence. Steve inaccurate states that “there does not appear to be any child mummies in their study”. However the study does make explicit reference to Chilean child mummies. The SGU also seems to imply that NO cancers occur between childhoods and ‘old age’, this is not true.

Causes of Cancer – as is stated earlier, The SGU is not totally off based with their attack. Professor Rosalie David, one of the study’s authors, in an interview on the University of Manchester website, shows a complete lack of understanding of her own study or (as i think the SGU suspects) plans to use the study to make tangential claims. She did state that “There is nothing in the natural environment that can cause cancer” something explicitly contradicted in her own study which stated that “Carcinogenic Environmental factors have been linked to up to 75% of human cancers” meaning that 25% are not linked and that’s assuming all carcinogenic environmental factors are ‘man-made’ which is not true either. For example, Bangladesh is plagues with high concentrations of arsenic in their water due to natural deposits. She weakens here own conclusions by stating that with regards to the ancient cancers “we are not sure what caused them”. The study also points out that “Various malignancies have been reported in non-human primates”; I am unsure how she connects these to ‘modern industrialization’.

One the SGU side, they seem to deny that ‘modern life’, with the dramatic increase in ‘man-induced’ environmental carcinogenic, could possible result in more cancers now than then. We know that chemical pollutions, nuclear bomb testing (in its day) and other factors have caused increase risk of cancer that just did not exist even 300 yrs. ago. Its equivalent to saying (and I am being perhaps too strong here) that electrocutions are about the same now as in ancient times. I think I understand why they are reacting so strongly to this, there are a number of people who claim everything in the ancient days was better or that this proved WiFi causes cancer – that’s nuts. However, I think they have overreacted (at least to the underlying article).

Lack of evidence – Steve says it is “an inherently weak form of evidence on which to base conclusions”. That is valid sometimes but not always. For example, if we had the hypothesis cancer was non-temporally correlated (ie cancer rates have changed little over history) then one would expect a similar number of cases on ancient times as now…that the fact there are dramatically fewer then than now is evidence for a change in prevalence. In fact I would have to ask Steve what evidence would he accept to show that something was worse now than then or visa-versa? I think, in this case, he got this completely wrong. I think, the worst criticism of the study I could find was the lack of numbers. There are a lot of mummies in the world, but it is not directly stated how many are represented in this meta-analysis nor is there any statistical correlation. Bone cancers, for example, are relatively common in children but that still only amounts to 5-10 per million per year. So, if 1000 mummies, we would expect < 1 case…their claim is weakest on the numbers. I would also like to have seen a graduation of evidence. Jumping from ancient Egypt to modern society seems large. If their hypothesis is true, one would expect a gradual increase in cancer rates over time with an explosion in modern times (statistically speaking).

So, I am left a little flat. I think the study was good. However, I think at least one of the authors comments made overstated some claims of the study, contradicted their own study and made comments that were demonstrably false. I think, if the SGU (and more to the point Steve’s entry on Neurologica) was based on the study then they also did a hash of it. However, if you ignore the study and focus on what the authors stated about it and the media spin, their criticisms are more accurate. Irrespective, I liked the study and hated the inaccurate spin that followed it both by the author, the media and the SGU. Better luck next time.

Original article:

http://www.nature.com/nrc/journal/v10/n10/full/nrc2914.html

Interview with Dr. David:

http://www.manchester.ac.uk/aboutus/news/display/?id=6243

Neurologica Blog:

http://theness.com/neurologicablog/?p=2402