Tuesday, 02 September 2014

Commentary

Tax and Spend

Posted by Tom Duncan
August 6, 2010

On Wednesday, August 4, Secretary of Treasury Timothy Geithner debated the Bush tax cuts with Douglas Hotz-Eakin, president of the American Action Forum. It was not much of a debate. With Geithner and Holtz-Eakin joined by the third panelist, John Podesta, president and CEO of Center for American Progress, and a time constraint of 45 minutes for the entire event, there was little room for an in depth exploration of either side’s arguments. Geithner did, however, present the audience with a copy of his opening remarks.

Geithner and the Obama administration, of course, hold the position that the Bush’s “tax cuts for the top 2 percent of Americans” should be repealed. He makes the case by arguing that “permanently extending the tax cuts for the top 2 percent would require us to borrow over $700 billion dollars more over the next decade…” and that “extending the tax cuts for the top 2 percent even for one year would require the United States to borrow an additional $30 billion. The top 2 percent would save most of that increase in after-tax income.”

The basic argument presented (and I will try to be accurate in paraphrasing), is that extending a tax cut to the wealthiest Americans will not have enough of a stimulating effect to merit the increased deficit from the federal government not receiving that revenue.

The growing deficit is a concern. On the Sound Money site, I have posted several articles by respected scholars on why it is such a concern. The question now is how we solve the problem while causing the least harm. The usual ways for a government to finance a deficit are to borrow money, raise taxes or inflate. Geithner and the current administration have opted for repealing the tax cuts to the wealthy. This option has merit for those currently in power because the language of taxing the rich holds large political sway. Especially if the argument is phrased in such a way that the choice appears to be between giving those rich a tax break or maintaining their level of taxation.

The problem with this argument, however, is that the tax cuts are already in place. So the status quo is the smaller tax. And as even one of the President’s top economic advisor Christina Romer knows, tax increases tend to be contractionary for the economy, an economy that is already struggling to pull itself out of a deep recession. The question is no longer whether tax cuts have positive benefits, but whether tax increases have negative ones. Of course, when the tax cuts first appeared, there were some concerns that this situation was exactly what was hoped for. Even if this were true, the point still stands.

So perhaps a tax increase is not the way to fix the current deficit problem. What about the other two usual practices: inflation and borrowing? Well the entire Sound Money website is built around the perils of inflation. And borrowing now just leads to this same choice in the future, though perhaps the economy would be on better footing for a contractionary tax hike (though I’d still argue against it).

Perhaps it is time that, instead of looking for a way to pay for our deficit, we looked for a way to not create the deficit in the first place. The administration has paid lip service to this idea with its claim to do away with outdated and “unnecessary” programs, but at the same time it continues to push forward expensive healthcare programs, add councils and committees for financial regulation, and otherwise throw money into the void. It could be that what we need is not to keep looking for a way to support the government’s spending habits. It could be that what we need is to break those habits.

Tom Duncan
Sound Money Fellow
Atlas Economic Research Foundation

Image by graur razvan ionut / FreeDigitalPhotos.net.