Wednesday, August 18, 2010

The Religion of Tax Cuts

Readers Comment: I don't care if every street light stays off, I don't care if public employee rolls get cut in half, I don't care if unemployment goes to 15 percent. Not a penny more in higher taxes. (from: NY Times article America Goes dark)

America is one of the richest countries in the world. It is a country that can put a man on the moon, it spends billions on the most upto date military spending in the world. Yet, the US is currently cutting back essential welfare services. Why can the richest country in the world have disintegrating road and public transport services?

The above comment may sound extreme, but, it is merely the honest statement of the current conservative philosophy of tax cuts and state involvement.

It is simply a choice. If you insist on tax cuts for the rich, you won't be able to afford public spending. If you choose tax cuts at all costs, it means you have a society with crumbling roads, lack of investment and increasing social division. You may not care about a divided society, you may not care about a crumbling infrastructure network. But, if you follow the religion of tax cuts at all costs this is what you are choosing.

Unfortunately, in America, the philosophy of tax cuts is seen as a win win situation.
  • Cut taxes and you get more revenue (because people work harder)
  • Cut taxes and you will get higher economic growth.
Like a mantra the conservative commentators repeat government bad, tax cuts good. It is lazy economics, of course government spending can be inefficient. But, government spending can also overcome market failure, it can help create social cohesion. It is not a clear black and white issue. It is not a question of government good or bad. It depends on how it is spent and on what projects. The issue is to maximise the efficiency of spending and make sure it is directed to those areas of the economy (health, education, public transport) where the free market invariable fails to create a socially optimal level.

It doesn't seem to matter than the US economies greatest decades were in periods of relative high tax (70%) in the 40s and 50s. Nor do the tax cuts to the richest 2% of the population during the Bush years seem to have promoted job growth in a way that occured during the Clinton year's of higher tax.

Just to make things worse, in recent years, the biggest tax cuts in America were directed at the richest people in society. But, when you cut taxes for the rich, it is more likely the tax cut is saved. If you cut taxes for the poorest, a higher % would spending the money and it would have a bigger impact on economy.

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3 comments:

Anonymous said...

Salaries for public employees in the U.S. are now DOUBLE what salaries are for comparable workers in the private sector. Additionally, Americans are seeing the growth of our government as a giant money-sucking behemoth. The RAPID recent growth of the public sector and its overpaid employees is at the direct expense of private sector workers. While there is a lot of talk in the media about the income-disparity between the richest Americans and the poorest, there is another, rapidly-growing disparity between the incomes of private sector employees and those of public sector employees. The impoverisment of private sector workers to finance the bloated incomes of public sector workers is the new class struggle in the United States which is feuling a lot of the anger Americans feel about increasing taxes. Why increase taxes when we could simply shrink our bloated government? Pampered, overpaid government employees will trot out the excuse that, oh, if you do that the lights go out across America, schools close, police departments and other essential services shut down, but this is just smoke and mirrors. The real threat to America is not the lights going out; it's the serfdom of the private sector workers under the feudal lordship of the public sector employees who do NO PRODUCTIVE WORK and simply live as leeches on the economic productivity of the private-sector-poor. See the Manhattan Institute for Policy Research's Issue Brief No. 1 from February 2010 concerning the "Two Americas."

Pierre Ratcliffe said...

and with all this, during the past two decades, the US has led the world into the greatest slump since 1929... You have to read Joseph E Stiglitz's most recent book "Freefall"... It is all about this failure of the US to keep up with their mission to improve the fate of humanity.

micah fleitman said...

I am an econ BS undergrad, and have not yet formed an opinion on this matter. Seeing as America is shockingly rich by global and historical standards, claims that state intervention is ruining our economy are obviously over blown. But that does not mean that our prosperity is due to these interventions, and it may be in spite of wasteful/costly interventions, like tariffs or immigration restrictions.

You site the historical correlation between growth and tax rates, but do you have any evidence of causality?

If the state ceases providing these services, why would the market fail to provide them? Roads for example, thanks to technology, are no longer public goods. With an easy pass, non-payers can be excluded.

Why wouldn't the rich invest their tax savings where it can receive the highest return (not leaving dollar bills on the sidewalk)just as you claim the non-rich would?

And most importantly,while optimal state intervention may in theory prove more efficacious than the market mechanism, how often are these interventions theoretically optimal? More over,given the possibility of poor policies, do these interventions have a net social benefit or cost?