Taxes, Growth, Deficits and Balanced or Balanced Budgets vs Balanced Reporting.
Advocates of tax cuts regularly claim that it is well known and obvious anyway that lower taxes cause higher economic growth. They have generally learned not to claim that this increase in growth will imply a large enough increase in revenues that lower tax rates imply higher tax receipts (remember the Laffer curve) since this claim has been solidly refuted by the evidence. Of course it was inconsistent with available evidence when first made, but the pattern of big tax cuts followed by big deficits followed by big tax increases followed by surpluses followed by huge tax cuts followed by huge deficits is too dramatic to deny.
Thus the advocates of tax cuts don't deny (or openly admit) that they are advocating increased budget deficits. I don't know if this is a strategic choice, but if it is, it is briliant, because it makes it possible for journalists and moderate commentators to write "on the one hand ... on the other hand ..." which seems to be what they like best.
In particular the following balanced assessment of tax policy is so common that I won't bother looking up examples.
Strawjournalist: "Republicans argue that this tax cut for the rich will cause increased economic growth. Democrats reply that it will cause the deficit to increase."
Strawpundit: "It is hard to know whether the further cut in my taxes is good policy. On the one hand it is agreed that it will cause increased growth on the other hand it is agreed that it will cause increased deficits. I care about growth more than deficits so go ahead cut my taxes."
The argument and counter argument seem to lead to the view that one should balance two aims -- high growth and balanced budgets. This position makes no sense at all. In particular, it is obvious that an argument based on the claim that too much emphasis has been placed on growth and too little on budget balance is doomed, because it should be doomed. It is nonsense. A budget deficit is not a bad thing in itself. It can be a bad thing because it has bad effects. Let's pass the mike to straweconomist
straweconomist: This tax cut is a bad idea because it will cause reduced growth. It will indeed reduce small deadweight losses due to the following incomprehensible Harberger triangles blah blah blah and will increase incentives to save. However in a closed economy it would reduce investment because the increase in public dis-saving will vastly outweigh the increase in private savings due to the incentive effects which are so tiny that, although I am required by my guild oath to swear I am sure they exist, I have never seen any convincing evidence that they are not zero. Thus, in a closed economy the tax cut would cause reduced investment and growth. In an open economy we can put off the day of reckoning so long as idiot foreigners buy dollar denominated debt, but they are gonna wise up sooner or later and that will cause extreme economic disruption which will imply that my neoclassical growth model will be about as useful as it was in 1937 and that geek down the hall who studies Argentina will be the only guy who can figure out what is happening with the USA which means huge negative growth and he will smirk at me in the elevator so you better not cut taxes again, because that would be totally unjust because once he came to a thesis defence without having read the document.
OK straweconomist has trouble with the English language but he is saying deficits are bad because they are bad for growth so to evaluate the effect of tax cuts on growth you can't pretend that they are magically balanced by spending cuts but have to consider the effect of the deficit on things that really matter.
At least he is more in touch with the real world than Hay economist
Hayeconomist grins and shakes his remarkably large head and acts puzzled as to why anyone thinks that there could be such a thing as a violation of an intertemporal budget constraint or a tax cut not balanced by a tax increase or decreased spending. Well you know the government does have an intertemporal budget constraint so you know (and everyone knows according to the rational expectations hypothesis) that for given government spending there can be no tax cuts or increases but only tax shifts. So, since the incentive effects of taxes are the effects of the public sector and the main reason that the government should be drowned in a bath tub, the only thing to do is to figure out how to stabilise tax rates since clearly optimal tax rates are a martingale because that's what the finance guys down the hall in a very cold boring city in upstate New York were always going on about. That kinda means that running huge deficits when there is no extraordinary need for spending (like more than the cost of the war) is like maxing out your credit card that is dumb.
Well Straweconomist and Hay economist clearly don't speak the same language and neither seems familiar with English, but they do agree on one thing. Strawpundit doesn't know what the hell he is talking about. posted by Robert
permalink and comments1:40 AM