by Chidem Kurdas
Alan Greenspan exemplifies an inconsistency that appears to be widespread. He reportedly said that the stimulus has fallen far short of expectations and the government should get out of the way and allow businesses to power the recovery. At the same time, he’s so worried about budget deficits that he supports higher taxes.
Threatening more taxes is not exactly the way to encourage economic activity. This is not a new point, but judging by the chorus advocating higher taxes – Mr. Greenspan is far from alone – the argument needs to be repeated. Raising tax rates will create a vicious cycle of slowing growth, fewer jobs, lower income and less tax revenue, leading to more deficits.
Robert Barro estimates that if all the 2003 Bush tax cuts are allowed to expire for 2011, the growth of gross domestic product for 2011-12 would be reduced by 1.1 percentage points. Mr. Greenspan favors letting the Bush tax cuts expire, but not just that. Out-of-control government spending implies even higher taxes.
So the end of the Bush cuts may be just the first step of a comprehensive new plan to rob America. This mugging looks to knock down the economy by creating incentives against investment and work.
Yes, the taxes we’re discussing are in the future and right now there may be other uncertainties that delay recovery. But people think of long-term prospects when deciding to hire more staff or start a new business. Those prospects are increasingly impaired. There are the higher future taxes. Then there are healthcare costs due to the mammoth new medical entitlement. Add to all that, there are regulations that pullulate like bed bugs.
A vicious cycle is already discernable. Consider the demand for more “stimulus” to accelerate the recovery. This is like knocking somebody down and then offering them stimulant drugs to help with their wooziness. The Obama administration handicaps businesses every which way and then uses the slow economy as an excuse to add more pork—while the prospect of taxes to pay for the yawning deficits further worsens the outlook, hindering recovery.
Mr. Greenspan does not favor additional stimulus, but the tax increases he and others advocate in the name of fiscal responsibility are potentially a blight upon jobs and incomes.
To be sure, market economies can generate jobs and incomes in the face of adverse conditions. The American economy is recovering despite the shadow cast by government bloat. But it will have to drag along a limitless burden of taxes and bureaucratic edicts. That’s a substantial encumbrance for even a very dynamic economy.
It makes no sense to advocate higher tax rates to cure deficits—the resulting sluggish growth will pull down total tax revenue in the long run. So why this insistence on taxes? You can argue, following conventional neoclassical economics, that government borrowing will eventually push up the cost of capital, crowding out investment. By this textbook reasoning, tax hikes are needed to avoid higher interest rates in the future. But that argument ignores the direct impact of tax hikes on output and income.
Anyway, there is a better solution. The way to tackle the deficit is to cut government spending. If you really want to improve prospects and encourage the economy, make a commitment to reduce spending over time. To make the commitment credible, cut taxes now.