After years of tax hikes under Dinkins, Giuliani proposed making up the city’s still-huge budget deficit entirely through spending cuts and savings. Even more audaciously, he proposed a modest tax cut to signal the business community that New York was open for business, promising more tax cuts later. “I felt it was really important the first year I was mayor to cut a tax,” Giuliani later explained. “Nobody ever cut a tax before in New York City, and that was one of the reasons I wanted to set a new precedent.”

...Although Giuliani was no tax or economic expert when he took office, he became a tax-cut true believer when he saw how the city’s economy and targeted industries perked up at his first reductions. One of his initial budgetary moves was to cut the city’s hotel tax, which during the Dinkins administration had been the highest of any major world city. When tourism rebounded, Giuliani pointed out that the city was collecting more in taxes from a lower rate. “No one ever considered tax reductions a reasonable option,” Giuliani explained. But, he added in a speech at the Ronald Reagan Library, “targeted tax reductions spur growth. That’s why we have made obtaining targeted tax reductions a priority of every budget.” In his eight years in office, Giuliani reduced or eliminated 23 taxes, including the sales tax on some clothing purchases, the tax on commercial rents everywhere outside of Manhattan’s major business districts, and various taxes on small businesses and self-employed New Yorkers.

Paul Krugman:

The tax code, [Bush] said, “unwisely encourages workers to choose overly expensive, gold-plated plans. The result is that insurance premiums rise, and many Americans cannot afford the coverage they need.”

Again, wow. No economic analysis I’m aware of says that when Peter chooses a good health plan, he raises Paul’s premiums.

Rebuttal:

Update [1/26/2007]... Economist John Seater writes,

Today's post on the Krugman's self-rebuttal is probably the best post I ever have seen on your blog. That judgment may merely reflect my particular interests, but in any case that's the way I see it. Some people seriously mentioned Krugman for a Nobel this last time around - a guy who can't bring himself to recall the basics (demand curves slope down, supply curves slope up, ...) when applying economics to the world around him. What an inspiring Nobel laureate he would be.

The debate about the capital gains tax cut is over. When Congress passed the 15 percent reduction on capital gains all we heard from the naysayers is this will produce massive deficits. When Congress extended the 15 percent rate in 2006 we heard the same tired rhetoric - only louder. Now the new leadership want to repeal this tax cut to generate revenue to the federal government. Based on the new data they may want to reconsider whether repealing this tax cut will generate any revenue to the federal government.

Today's CBO report puts the debate to bed. We were told by the Joint Committee on Taxation (JCT) the capital gains tax cut would "cost" the Federal Treasury $5.4 billion in fiscal years 2003-2006. Thus, the initial CBO forecast (January 2004) forecasted capital gains revenue to be $42 billion in 2003, $46 billion in 2004, $52 billion in 2005, and $57 billion in 2006.

Well in what could now be considered the worst forecast in modern times we find out today capital gains tax collections were actually $51 billion in 2003, $72 billion in 2004, $97 billion in 2005, and $110 billion in 2006. For 2005 and 2006 collections nearly doubled the initial forecast.

...this report becomes the numbers used all year by the press and politicians. So American Shareholders Association did an analysis of their accuracy in one year forecasting and since the 2003 tax cut. The January CBO forecast underestimated total tax collections in a fiscal year by an average of $85 billion per year in the past three years (largely the result of non wage income and corporate tax collections). Further, we found the baseline is now $200 billion higher since initially forecasted four months after the 2003 tax cut. Simply put the numbers tomorrow will be an underestimation of what the revenue picture will look like at the end of this fiscal year...

Also of note the report will document updated capital gains tax collection numbers. Last year showed CBO wildly underestimated cap gains collections and the numbers showed the capital gains tax cut paid for itself 16 times over. Based on non-wage income tax collections we are expecting

Senator Max Baucus of Montana, the chairman of the Finance Committee, a critical venue for any Social Security plan, said he too believed the president must give up his private accounts before serious talks could occur. If so, he added, “I’m more than open, if the president is truly willing to look at all options.”

You are also from California if...

1. You roll your bike out of the garage and are riding down the coast within 10 minutes

2. You wake up every day of your life in a place tourists will pay thousands to visit for a week.

3. Bundling up for the winter means closed-toed shoes and a sweatshirt.

4. That house you could barely afford is worth twice that much 5 years later, and will put your kids through college.

5. You can snowboard a world-class mountain, surf world-class breaks, and mountain bike world-class trails....all this weekend.

I'll take California.

1. You may be riding down the coast in your bike in 10 minutes if you live in Laguna Beach or Malibu, but 99% of Californians roll their cars out of their garages and are creeping down the road rage freeways for hours on the way to work.

2. Tourists will pay thousands of dollars to visit New Orleans for a week. Wanna live there?

3. Bundling up for the winter means closed toed shoes and a sweatshirt in Yutzville, Mississippi, too, but who wants to live there?

4. Sure, you can send your kids to college if your house doubles in value, as long as you sell it to pay the tuition and move into a 1 bedroom apartment in Compton.

5. Can't argue with this one.

A manager at J.C. Penney who attended graduate school at night, Reynolds was plucked from obscurity by William F. Buckley in the 1960s after writing a few pieces for The National Review. (He's still "a couple of classes" short of his masters degree in economics.) He later went to the conservative Hudson Institute and from there made his way to the Cato Institute, where he is now a senior fellow.

Thanks to Jameson Campaigne for the link.

Posted by Donald L. Luskin at 8:47 AM | link    

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