Thursday, July 28, 2011
Does a tax increase necessarily harm the economy?
The op-ed is fundamentally correct. I'm no fan of higher taxes, but if the government is going to spend, the least destructive way to pay for it is through taxes. And the tax system should be designed to be as painless, low cost, and predictable as possible -- that's been established at least as far back as Adam Smith. Yes, taxes have deadweight losses, and in that sense reduce income and wealth. On the other hand, so do borrowing and inflation. And so do failures to provide public goods that could be provided. Ideological positions that fail to recognize these facts are simply blinders that prevent their proponents from seeing reality.
This problem is exemplified by the title of the op-ed, "Tax Increases Don't Harm Economies." Presumably the editors came up with it, for it's not what the author himself argues. Any statement that begins "tax increases have such and such effect" is almost assuredly wrong. Tax increase can reduce growth, Tax increases *can* increase govt revenues. Tax increases can decrease govt revenues. Presumably tax increases can increase growth. It depends on the kind of tax, the magnitude, and what the status quo is. Republicans latch onto the Laffer curve (a perfectly sound concept) and then falsely argue that all tax increases/decreases behave as if we are on the bad side of the curve. This is simply nonsense. Even worse, some of them have gone so far off their rockers as to claim that an effort to abolish subsidies to ethanol production is a tax increase, simply because of the way the subsidy legislation was written. If the firms receiving the tax breaks for ethanol production instead were to be taxed, but then received subsidy payments in the amount of the taxes, presumably Norquist would oppose the program, instead of favoring it, simply because they were called subsidies instead of tax cuts. Go figure.
OTOH, Democrats argue as if there are never deadweight losses. This is a lunatic's position. If you tax something, you get less of it, as a general rule. Taxes can indeed deter entrepreneurship, reduce investment, and block capital formation -- yes, they can harm the economy. Don't believe it? Impose a tax rate of 100% on all income and see what happens. The Laffer curve is reality.
Today's mainstream political views on taxes are nonsense, and so there's almost no intelligent discussion of tax policy. But Republicans sound particularly crazy these days since they argue that you can cut taxes without cutting spending while running a deficit. You cannot. You only transfer the tax burden to someone else, who will pay it later in interest and principle payments on the debt, or perhaps indirectly via inflation or default.
And now they insist that hastening this "later," by provoking an unnecessary financial crisis over raising the debt ceiling, is good policy. Well, they're wrong... it will only increase costs.
You cannot cut taxes without cutting spending while running a deficit. A "cut" will only transfer the tax burden to someone else, who will pay it later in interest and principle payments on the debt, or perhaps indirectly via inflation or default.
Sorry for repeating myself, but no one else seems to be saying this, and it needs saying.