TAX NEWS - 2010

Taxes and Growth

Warren Meyer has a couple of posts showing how government involvement in the auto market and housing market only served to push forward planned purchases of these assets, with no change at all in the trajectory of consumption.

The point I'd like to make is that supporters of stimulus and look at this and say, "yes, this is in fact what we intended." I do not dispute that. But if you accept that Cash for Clunkers and the home buyer tax credit stimulated economic activity, then how can you at the same time argue that lowering taxes across the board would not do something similarly? And note the interesting thing about the Clunkers program above – when the tax rebate ended, the consumption plunged. Would it take too much imagination to think that if tax rebates persisted, that consumption would increase along with it?

The reason I bring it up is that from an accounting standpoint, you can run counter-cyclical Keynesian budget deficits with either spending increases or tax cuts – there is no difference. So when you see the Progressives calling for more spending while at the same time continuing their soak the rich and non-rich tax policies, remember that all of their hand waving about the necessity of spending increases is nothing more than a cover for continuing the upward march of government in this country.

There is one more important differences between tax decreases and spending increases. When we increase government spending, that spending gets politically directed to politically favored projects and interests, and expands the power of those in Congress, the Executive office and the bureaucracies. Oh yeah, plus we impose at least another 30% cost on taxpayers in the form of lost economic activity from the distorted incentives required to collect the taxes (now or later) to pay for this spending.

When we use tax decreases as stimulus, we empower the decentralized many, we reduce the power of those in Congress and the Executive office and we eliminate the dead weight losses that the taxes imposed in the first place. In fact, even if all other effects of taxes and spending were identical, eliminating the distortionary impacts of taxation seriously works in favor of tax reduction.