03 August 2010

Taxes, Spending and Deficits

The "Bush Tax Cuts" are set to expire at the end of this year. If allowed, is this a bad thing?

Generally yes. Because congress handled the tax law ham-handedly, it was passed with a "sunset." So the wording gets tricky. Is allowing the law to expire a tax increase? Yes, it is.

Is raising taxes during a recession a bad idea? Yes, it is a certifiably terrible idea. It should go without saying that I think any tax increase ever is a bad idea, but there is positive economics out there that backs the original point, the latter being a matter of personal norms.

But if the tax rate is kept where it is, won't deficits increase*? Yes. Yes, they will. But Democrats seemingly don't mind deficits and, well, neither do Republicans. But Democrats seem to enjoy taxing the "wealthy," however defined, so at least rhetorically, they want to balance things a bit. Republicans talk a good game about cutting spending, but whenever given the opportunity to do so, don't. They don't want the political fallout of having to tell people "no, the government will not do that for you or give that to you." Democrats, to their disgrace, whenever Republicans do actually rattle their sabers and threaten some sop or giveaway, bring in the people who may be "harmed" and get them to testify that were it not for the generosity of the state taking something from one person to give it to them, well their life would be difficult.

But do deficits matter? This question, posed to any sensible person, will get you a puzzled look and an answer approximating "of course, you dolt." But thankfully for Democrats (& Republicans) we have people like Ezra Klein and James Galbraith (son of John Kenneth Galbraith) who say that there is "zero" danger with long-term deficit spending. I won't get into all the minutiae (Robert Murphy at the Ludwig von Mises Institute gets into some here), but spending beyond means is not good, and our sensible person is right and Ezra Kelin and Galbraith and Keynes and Krugman and Romer** are wrong.

So, should the tax increase go into effect? No. Because deficits don't matter. And "progressive" tax rates are un-egalitarian, unfair and immoral. It is morally repugnant that income over $x should be taxed at a higher amount. This punishes that which we should want to foster in society, namely success. The tax code is used as a "levelling down" device. It is used as a tool to affect "social change." It is used to punish. It should be used to care of that which the state has a legitimate interest in; paying for that which the government was granted the authority to do, not whatever a majority of elected officials want to do at any one time. That is why we have a constitution.

Further, progressive taxation increases incentives to hide compensation and hinders productivity.

The federal government shouldn't be funding schools, meals, churches, museums, parks, military bases in dozens of countries, housing, drug wars, hot wars (except in certain extreme instances and then only briefly), cold wars, dictators, democracies, policemen, firemen, hospitals, sugar growers, corn growers, wheat growers, communications commissions, agriculture commissions, election commissions, equal employment commissions, blue ribbon panels, retirement funds, disability funds or medical care. Get rid of this nonsense and then you won't need a commission on how to reduce the deficit.

*Currently $14,000,000,000,000 (that's $14 trillion or 14 x 10^12-another generation or so and we'll be approaching Avogadro's Number). Not including future liabilities. N.b-there are no future assets to offset those future liabilities, only future taxes.

**Romer's argument: "Extending the high-income tax cuts would provide very little job creation in 2011." This is fatuous. Look at this from a moral perspective: the more successful you are, the more you are to be penalized because you keeping more of what you earn won't create jobs for someone else next year. First, Romer was one of the twits behind the notion that if the "stimulus" package didn't pass, unemployment might go as high as 9%. Well, they passed and pissed away almost $1,000,000,000,000 and unemployment went even higher than that, so, as always, consider the source. The government is not an employment agency and people shouldn't pay taxes to affect job creation (which, we've seen, it doesn't).


Claudio said...

so do you think deficit spending is ok or not? I lost you there. As we both know, we disagree in regards to the "progressive" tax code, so let's not argue that point. I think that any harm in raising taxes (I think the total of the tax cut should be jettisoned) could be offset with a temporary extension in unemployment benefits (I hear the blood rushing to your head ... hee hee). That money would be pumped into the economy (much more effectively than other "stimulus" methods including tax cuts)and at the same time help people. Absolutely, the idiots in DC need to get their act together and make some of the tough choices to spend with in our collective means. What our "collective means" means, we disagree on. But as far as getting rid of the deficit and the government spending money, in other words how to get us out of the mess of deficit spending, I don't think just gutting everything the fed is doing is ever going to happen. there are too many people feel there is a role for the Federal government, like me. You can argue that there isn't or shouldn't, but it isn't going to change anytime soon. If, as I'm assuming you do, believe that the government needs to stop spending more than it takes in, I think we need to get rid of the irresponsible tax cuts AND stop spending too much. I'm not going to be happy with either of those processes either, but it seems like the only pragmatic road to getting back to a balanced budget.

Sean said...

No, deficit spending is not OK. My point that the tax increase should not go into effect because "deficits don't matter" was tongue in cheek (admittedly poorly done). Raising taxes, whether across the board, on the wealthy, progressively or however will not reduce the deficit because the government will spend whatever it takes in and then a little more. If by irresponsible tax cuts you mean those that weren't off-set with mandated spending reductions, I couldn't agree more. Both McCain and Greenspan said as much at the time. They were ignored by Democrats who didn't want to agree with Republicans and vilified by alleged conservatives for violating orthodoxy and questioning a tax cut.
I have no problem with unemployment compensation, but at 99 weeks, I think we may be hitting the point of diminishing returns. If firms and individuals can't match up after almost two years, we are then better off having the person doing some job and the firm hiring some person and letting nature take its course. Unemployment will go down when there is a definite cut-off for UC benefits. Further, the employee and employer will be paying taxes, giving more money to the feds and states to piss away inefficiently.
The most efficient way to stimulate the economy is to let the market clear. Constant government interference distorts markets and delays recovery. The best case for a "double-dip" recession is that interest rates are being kept too low further incentivizing capital investment, when such malinvestment is exactly what causes recessions to being with. Or course, people like Krugman will say it happened because the Bush/Obama stimuli just weren't big enough (it never is).
I agree that there are times when it isn't wise to worry about deficits, but we're way past that point. There will always be justification for government reaching over its bounds, whether to preserve jobs, spur innovation, or just generally "because we can."
Job creation and innovation do not need a government sugar-daddy.
There is a role for the federal government, and it is pretty clearly defined in Article I, Section 8 of the constitution (and any ambiguity should fall in favor of the individual and against the state). It doesn't include things like borrowing an extra $28 billion so teachers and policemen don't get fired--actions like these absolve states and municipalities from the responsibility of prioritizing the services they can provide for themselves and the citizens from paying for these services as directly as possible. This would also leave services to be performed by charitable organization or the private sector, either of which would be preferable to the state doing anything.
The one thing legislators have proven incapable of, regardless of party or ideology, is spending less than it takes it. And they diffuse outrage by "giving" that which they take from others under force of law to third-party special interest groups (grass roots, big business, historically downtrodden, what have you). Not only is it morally repugnant, it is inefficient.
I know nothing is going to change anytime soon. Perhaps nothing will change at all in my lifetime. But I'm going to keep tilting at wind mills.
Maybe one day I'll sway you and you'll join me.

Claudio said...

Weren't we in a surplus before the Bush Tax cuts? It seems to me the cuts were a way to put us into deficits in order to make social programs or the fed in general "die on the vine" by those that want to lesson the scope of the fed. We have sense proven that a)the majority of people don't want that much less gov't and b) the politicians are spineless C) those programs are not going away, neither are these wars (I agree one justified the other not) and our grand kids kids are going to have to pay for it. I guess we probably knew "b" before the cuts. I hear your windmills creaking in the wind, but I prefer the new fancy federally subsidized variety.

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