What the editors of the Wall Street Journal miss in their lament about the tax increases looming on the horizon:
Democrats are elated with the popularity of their $1.9 trillion spending bill, which they passed under the political cover of the Covid emergency. Handing out money is always popular, especially when there appear to be no costs.
Enjoy the moment because the costs will soon arrive in the form of tax increases. Treasury Secretary Janet Yellen put that looming prospect on the table on Sunday on ABC’s “This Week.â€
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So Ms. Yellen won’t even rule out Ms. Warren’s wealth tax that would hit all assets above $50 million each year and that Mr. Biden didn’t campaign on. The Treasury Secretary is also floating a global minimum tax on corporations, which would reduce the tax competition among countries that is a rare discipline on political tax appetites.
Expect more such taxing surprises, as Democrats debate which taxpayers to gore, but one sure bet is that this won’t be as popular as passing out money. Paying the bill never is.
which is that a tax increase at this point is bad policy. To understand why you’ve got to understand more about the economic and politics of tax increases.
Taxes are by definition taking money out of the private sector. The effect of removing money from the private sector is to slow economic growth. But what if you plan to spend more money in the private sector (I hear someone ask)? It results in less economic growth than would otherwise be the case. The difference is deadweight loss.
There’s a big different between the policy of just issuing credit (described in the previous post) and taxing and spending. The former is risky but it might increase economic growth. Not as much as just dropping money from a helicopter but it might increase economic growth. The latter just reduces potential economic growth.
Do we really need less economic growth?
But what about income and wealth inequality (I hear someone else ask)? Although changing marginal rates is within the power of the government, realizing additional revenue by doing it is an if-come. However you may try you may not be taking money from the rich and giving it to the poor. You probably won’t be doing much about income inequality.
There’s a big different between the policy of just issuing credit (described in the previous post) and taxing and spending. The former is risky but it might increase economic growth.
If the economy was growing, the increased economic growth would be minimal. It is more likely to provide momentum to an already growing economy.
But what about income and wealth inequality (I hear someone else ask)?
It will increase. It must increase. Issuing credit creates money, and the beneficiaries of the newly created money are those with access to that new money. Since the poor do not have access to the new money, they will not benefit, and then, there is asset inflation which does not benefit the poor, either..
Taxing the new money has the same effect as reducing the interest rate paid. If the tax rate exceeds the interest rate, the effective interest rate is negative.
It is like a Chinese finger trap, but worse. Increasing credit will increase the wealth inequality. Increasing taxes increases the amount paid for the increased credit which increases income inequality. Furthermore, the income and wealth inequality increases are not linear.
It is a financialized leveraging scheme, and it is simply borrowing money to buyback stock. Credit creation always benefits the wealthy, and this is true even if it is the government creating the credit.
Lord, another round of the same old idiotic tax rhetoric out of Washington…..
It is interesting question.
To add a perspective from the “other side of the fence”, Michael Pettis did a podcast on Bloomberg Odd Lots series recently.
The topic was ostensibly about the imbalances in China’s economy and why it is so hard to correct them; but he made an interesting aside on US fiscal policy.
To paraphrase; unlike China who throws money into all kinds of white elephant infrastructure; the US has bad infrastructure. If the government invests in infrastructure; the return on investment sustains the debt and the improved infrastructure will drive demand.
He follows on if the Government throws money at lower income households, that will drive demand and businesses will invest to meet the demand which pays for the fiscal transfers, increased debt, or monetization.*
* Pettis’s caveat is some of the demand will be diverted to other countries.
My thought was; the grass is always greener on the other side. Is the US really underinvested in infrastructure; and governments here have a track record of efficiently investing in infrastructure? Or the Government can easily transfer income to lower income households vs transferring income to providers of services to lower income households?
I don’t think there are easy solutions — or at least ones that can keep politicians in office.
“Handing out money is always popular, especially when there appear to be no costs.”
Cutting taxes is always popular, especially when there appear to be no costs. Think that we are in a game of chicken here. One side cuts taxes without cutting spending and the other side is now going to increase spending without increasing revenue. Debt just keeps increasing.
“Is the US really underinvested in infrastructure”
Yes, in some areas. Our grid is pretty awful. Contrary to what Dave believes some of our roads and bridges are in pretty bad shape. Lots of our water and sewer systems are pretty old.
Steve
Job security for tax advisors, accountants and attorneys.
Efforts to tax and spend, tax and redistribute are like eating spaghetti with a spoon.
Fiscal responsibility must begin at home, and at the state level. The Feds need to stick to defense and ceremony.
Who knows where it ends, especially now that fiat money has competitors.
There’s a distinction between “roads and bridges in bad shape” on the one hand and “road and bridge repair that satisfies cost-benefit analysis” on the other. In downstate Illinois and I presume most other states there are thousands of roads and bridges which should be decommissioned rather than being repaired—they just aren’t worth repairing because they’re practically never used any more.
Our present system encourages the building of new roads and bridges while requiring road and bridge repair to meet cost-benefit analysis. From that I draw different conclusions than you apparently do.
Comparing U. S. infrastructure with Chinese infrastructure is comparing apples and oranges. Among China’s “white elephants”, there’s a lot of green field infrastructure building. In the U. S. on the other hand our system of national highways is more than a century old and our interstate system more than 50 years old. Our need isn’t green field construction but maintenance. Additionally, we have an entire industry devoted to BANANA, an impediment the Chinese government doesn’t face.
It’s no accident that Barack Obama complained in 2011 that “Shovel-ready wasn’t as shovel-ready as we expected”.
@Drew
Lord, another round of the same old idiotic tax rhetoric out of Washington…..
This is possible because of Republicans. Democrats know you will never force them to pay any more taxes. When forced to actually pay more taxes, they squeal like rich pigs.
President Trump was nice enough to accommodate them, and they have yet to thank him. The sales tax exemption is a tax shelter, and as such, any income tax increases never affect them. As scams go, it is pretty sweet. Basically, the more shit you buy, the less taxes you pay.
Propose a stock tax, and watch Zuckerberg and Buffet squeal about it being unfair.
Anyone want to bet that the WSJ has written more articles worrying about debt in the first 2 months of Biden’s term than they did during the entire Trump term?
Steve