I don’t think that Haley Sweetland Edwards, writing at Time, really understands how the tax system works. She concentrates too much on the backend spending component:
Tax Day has a reputation for doom and gloom, but for most of us, there’s a silver lining: the promise of a little extra scratch.
Almost 77 percent of Americans will receive a tax refund this year, averaging about $2,798 per person, according to the most recent IRS statistics. Between April 2015 and April 2016, the IRS divvied out a grand total of $228.78 billion in money back.
So what’s that large cash infusion do for the overall economy? So far, the answer is unclear.
“I don’t think we really know,” said Roberton Williams, a tax expert at the Urban-Brookings Tax Policy Center at the Urban Institute. “When you have people waiting to make this big purchase and then saying, ‘Now that I have this money I’m going to go out and buy that big TV set or that washing machine,’ that’s certainly a direct stimulus.” Consumer spending represents about 70 percent of the U.S. GDP.
But when people save that money or pour it into repaying their debts? “That’s a much less direct stimulus on the economy,” he said.
The reason that this answer is inadequate is that the money was withdrawn from the private economy via the mechanism of automatic payroll deductions (or estimated tax installment payments) to begin with. Those taxes reduce economic activity before they encourage it. The question that she’s actually addressing appears to be whether higher taxes would be good or bad for the private economy. The issue that is, unfortunately, so rarely addressed is that of deadweight loss and when you take that into account the answer is much clearer.
But even once you’ve identified the question she’s actually addressing the issue is more complicated even than she’s suggesting. There is evidence that too large a debt overhang inhibits economic growth, too. So paying off that credit card balance or paying off more of the principle on that mortgage may or may not be a bad thing. There’s no way to tell a priori.
Just to recap my views on taxes, budgets, and economic growth, I think that
- The federal government’s spending more than it takes in is probably benign as long as the growth in aggregate product is greater than the deficit.
- With the deficit running at more than 3% of the economy while the growth rate lags at below 2%, that’s not the case.
- If you’re going to run a deficit, use it to make investments.
- Consumption is not the same as investment.
- Borrowing to pay operating expenses is a bad idea even if you’re the federal government. It’s even worse when you’re Chicago.
We can probably keep getting away with our profligate ways as long as the dollar is the world’s reserve currency. We can’t rely on that forever so it might be a good idea to start making better habits.
Even with all of that said, you can’t ignore deadweight loss. It wasn’t stupidity or a universal longing for freedom that killed the Soviet Union or that’s causing China trouble now. It was deadweight loss. Which is just another way of saying that bad decisions made over a long enough period of time have a way of coming back to bite you in the butt.