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What about the budget?
Megan McArdle (what do you call her when Jane links to Megan? And can they have an infinite regress?) and Brad DeLong seem to agree that the Bush tax cuts should not be made permanent. My take is the following: Taxes already were raised when the government spending occurred. In that sense the "tax cuts" never were permanent. But when do we wish to admit this? We could raise (nominal) tax rates sooner rather than later, and hope that the subsequent "financial calming" effect will improve the chances for better policy in the future. Alternatively, we could play "chicken" with the marginal tax rates, and hope that holding them lower, for longer, will increase the chance of the appropriate entitlement reforms. I don't have any strong views as to which is the best way to proceed, at least assuming we cannot raise the gas tax instead.
But I do suspect that Megan favors a lower rate of government spending than does Brad. So does this mean she sees the first scenario, and he sees the second, and that they agree on the big question only because they disagree on the little one?
Posted by Tyler Cowen on February 7, 2006 at 02:42 PM in Economics | Permalink
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» A Note on Budget Deficits from Cafe Hayek
Assume that the U.S. government more or less reflects the informed will of the American people. (I believe this assumption to be unrealistic, but I’ll put aside my skepticism for the moment.) Being well-enough informed, American voters should know that [Read More]
Tracked on Feb 8, 2006 12:02:20 AM
» A Note on Budget Deficits from Cafe Hayek
Assume that the U.S. government more or less reflects the informed will of the American people. (I believe this assumption to be unrealistic, but I’ll put aside my skepticism for the moment.) Being well-enough informed, American voters should know that [Read More]
Tracked on Feb 8, 2006 6:53:40 AM
» A Note on Budget Deficits from Cafe Hayek
Assume that the U.S. government more or less reflects the informed will of the American people. (I believe this assumption to be unrealistic, but I’ll put aside my skepticism for the moment.) Being well-enough informed, American voters should know that [Read More]
Tracked on Feb 8, 2006 8:12:07 AM
» The Budget, Taxes and Free Money from The Stalwart
If you asked most people whether it would be a good idea for the government to print more currency, just to give people more cash, they'd probably intuitively understand that this wouldn't quite make sense. Yet if you tell them [Read More]
Tracked on Feb 8, 2006 9:03:14 AM
» Deficit Dogma from Asymmetrical Information
I confess to being shocked at the level of rancor and partisan sloganeering that the subject of budget deficits continue to attract. I'm reminded of this famous1 post by Sgt. Stryker on the subject of steel tariffs: Dude, let me clue you into something... [Read More]
Tracked on Feb 9, 2006 7:49:08 PM
» Deficit Dogma from Asymmetrical Information
I confess to being shocked at the level of rancor and partisan sloganeering that the subject of budget deficits continue to attract. I'm reminded of this famous1 post by Sgt. Stryker on the subject of steel tariffs: Dude, let me clue you into something... [Read More]
Tracked on Feb 9, 2006 7:50:51 PM
» Deficit Dogma from Asymmetrical Information
I confess to being shocked at the level of rancor and partisan sloganeering that the subject of budget deficits continue to attract. I'm reminded of this famous1 post by Sgt. Stryker on the subject of steel tariffs: Dude, let me clue you into something... [Read More]
Tracked on Feb 9, 2006 7:52:47 PM
» More Deficit Dogma? from Asymmetrical Information
I had to add a few comments to Jane's excellent post regarding the budget deficit. It mirrors a conversation we had in New York several weeks ago. Jane says:what I meant when I said that you should care about the budget deficit is that you should educa... [Read More]
Tracked on Feb 10, 2006 9:39:41 AM
» More Deficit Dogma? from Asymmetrical Information
I had to add a few comments to Jane's excellent post regarding the budget deficit. It mirrors a conversation we had in New York several weeks ago. Jane says:what I meant when I said that you should care about the budget deficit is that you should educa... [Read More]
Tracked on Feb 10, 2006 3:30:23 PM
» Deficit Dogma from Asymmetrical Information
I confess to being shocked at the level of rancor and partisan sloganeering that the subject of budget deficits continue to attract. I'm reminded of this famous1 post by Sgt. Stryker on the subject of steel tariffs: Dude, let me clue you into something... [Read More]
Tracked on Feb 10, 2006 3:31:28 PM
Comments
This always strikes me as a, 'so what?' question.
Congress can't make anything permanent, because the Constitution says one congress can't bind future congresses.
And, anyway, it doesn't make much difference what the tax rates are (unless they're near 0), the Federal government is going to take in between 17%-19% of GDP whether the top marginal rate is 90% or 28%. To pick two historical examples I'm familiar with.
In the last couple years of the 20th century it briefly hit above that range, and in the first couple years of the 21st dipped below it. Now it appears it's going to be back over 17%.
Unless the government can find a way to run deficits of 10% of GDP, entitlements will have to be cut somehow. Probably by gradually raising the age of retirement to 72.
Posted by: Patrick R. Sullivan at Feb 7, 2006 4:53:01 PM
What evidence exists which supports the notion that 'calming' the fiscal crisis with higher taxes now will lead to politicians reducing spending in the future? When haven't they spent all that they have and more? Isn't that a bit like giving a junkie one more hit, just to get through his current withdrawl, so that he can get off the juice next later?
Posted by: David Andersen at Feb 7, 2006 5:00:01 PM
HSAs and the Roth IRA should help calm things.
And the screaming begins, via Bros. Judd:
President Bush's proposal to expand tax-free health savings accounts would cost the U.S. Treasury $59 billion over five years, more than offsetting the savings he seeks from limiting the growth of Medicare. [...]
Posted by: Sandy P at Feb 7, 2006 5:11:53 PM
Yes, David, where can we possibly look in our nation's history to find evidence supporting the notion that a president can raise taxes, slow or cut spending, and improve the nation's ledger?
This person surely doesn't exist in our recent collective memory.
Posted by: Matt at Feb 7, 2006 5:14:13 PM
If this were a real problem, wouldn't we expect long term bonds to be trading well above their current levels? In the last few days, the 2 years were trading at higher yields than the 10s.
I am not adverse to raising Federal revenues. But, I think that raising income tax rates is the wrong way to do it. The use of the income tax as the dominant vehicle for federal funding is unwise. The tax is a long way from perfect. One of its defects is that it is excessively leveraged to the economy. I favor enacting a VAT at about 15%-20% (perhaps with half the revenue rebated to states that repeal their own sales taxes). I also believe that we should tax gasoline at $2.50/gal, if we are at all serious about overcoming our oil addiction.
Posted by: Robert Schwartz at Feb 7, 2006 5:51:36 PM
I can't tell if you're being sarcastic Matt, however, last time I checked, Congress is the entity that is responsible for the actual spending and taxing.
Posted by: David Andersen at Feb 7, 2006 6:19:15 PM
I'm going with sarcasm, in which case, you are not addressing my question which is asked in response to the posted idea that "We could raise (nominal) tax rates sooner rather than later, and hope that the subsequent "financial calming" effect will improve the chances for better policy in the future." In other words, if you are being sarcastic, your statement does not address this.
Posted by: David Andersen at Feb 7, 2006 6:35:11 PM
To answer your question, I support a much lower level of spending (which is why that article goes on to point out that entitlements are at least as big a problem as tax cuts). However, it seems to me that "starve the beast" has utterly failed as a method of enforcing spending discipline. I have thus concluded that we need to raise taxes for two reasons:
1) It's not fair to consume now and have a different group of people pay later
2) If we actually raise taxes to pay for the spending we're doing, it may put pressure on politicians to restrain spending.
Posted by: Jane Galt at Feb 7, 2006 10:12:54 PM
I suppose this is obvious, but one of the problems with raising taxes is that those people who would pay the lion's share of the increase are not necessarily the people who want what is being paid for, nor do they receive a proportional benefit. Even with the current tax structure that is the case. The fact that 50% of the population pays almost nothing in income taxes is a big part of the problem. What do they care if taxes are raised?
Thus, to Jane's point #1, it may not be fair to consume now and make someone else pay later, but is it any more fair to allow one group to consume now and have different group pay for it now? Is this lesser of two evils thinking? I also think her point is overly simplistic. There are completely rational cases for borrowing money to fund certain programs and projects.
I'd like to see any evidence that raising taxes will put pressure on politicians to restrain spending! Sounds like wishful thinking.
I don't think starve the beast has been given enough time. I think we really have to be hurting badly for it to have the desired effect. When the problems with Medicare and Social Security really hit the fan and there is no way out for the current politicians in office, then we will see what starve the beast does.
Posted by: David Andersen at Feb 7, 2006 11:59:54 PM
Congress is the entity that is responsible for the actual spending and taxing.
Which is why this post starts out talking about "the Bush tax cuts" -- oh right, that's a shorthand because his Presidency coincided with that remarkable period when the Republicans took over Congress from the Republicans.
Also, our hopes for cutting entitlement spending should improve greatly in the future, because demographics are significantly improving -- as the population ages, it will become easier and easier to reduce unpopular government programs like Social Security and Medicare.
Posted by: Barbar at Feb 8, 2006 12:27:55 AM
Barbar - are you denying any of the following: the current President, George W. Bush campaigned for President twice on the claim that he would lower taxes; he encouraged congressional leaders to pass particular bills cutting taxes in particular ways; very similar bills were in fact passed; President Bush signed these bills into law, agencies controlled by President Bush took credit for these tax cuts and purported to explain why the effects of these cuts would be/are beneficial?
If you don't deny any of these things, what is your complaint about calling these the Bush tax cuts?
Also, your assertion that Social Security is unpopular (disliked by more than half of the populace) is false.
Posted by: washerdreyer at Feb 8, 2006 1:09:05 AM
David Andersen writes:
"I don't think starve the beast has been given enough time. I think we really have to be hurting badly for it to have the desired effect."
What's missing here is a mechanism. If I hold my hand over a candle, eventually the heat from the candle will irritate pain receptors in my hand making me uncomfortable, and I'll pull my hand away to stop the discomfort. But how will more deficit spending make politicians cut spending?
I would guess that if you kept deficit spending at some point the dollar would collapse and there would be an economic disaster that would put pressure on politicians to do "something." However, it's not clear that under those circumstances, "something" wouldn't include a significant tax increase, which makes the whole exercise pointless. In any event, blowing up the economy because you want federal spending to be somewhat lower than it is seems like a textbook case of a cure worse than the disease.
Posted by: alkali at Feb 8, 2006 8:49:37 AM
washerdreyer,
Turn on your sarcasm detector, and re-read Barbar's post as responses to David Anderson's previous posts.
Posted by: Brock at Feb 8, 2006 8:52:21 AM
The most important thing is what is created. We want the most useful things created in the largest amount.
The federal reserve can create any amount of money. We can give it out and no one would have to work for a living. -grin-
Posted by: Huggy at Feb 8, 2006 9:15:49 AM
My mistake.
Posted by: washerdreyer at Feb 8, 2006 9:19:58 AM
Deficit spending is anti-constitutional. It is taxation without representation. We tax future generations of voters who have no say in how we spend the money. If we had to pay for the money we spend, rather than deferring to future generations, we would spend more responsibly.
Posted by: Quints at Feb 8, 2006 4:58:35 PM
Someone raised the concern on my blog that what is more of a problem is the structuring of the debt we have taken on to fund the deficits. For some reason we have been funding it with mostly short term 3 yr bills. That means that if we don't pay it off soon, the interest rate will climb significantly. Looks like we bought a variable rate mortgage when interest rates were at record lows.
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