fyi, a post I made in reply to a tax/deficit question on the Concord Lis

Ian (below) received a reply (below) from Don Luskin
regarding a discussion about Paul Krugman.

I answer Ian's question, but if anyone cares to add
or subtract from my answer, please do (and kindly
copy me)

Regards,

Curtiss Priest

   Date: Wed, 26 Mar 2003 12:48:19 -0500
   From: "W. Curtiss Priest" <bmslib@mit.edu>
Subject: re: deficits vs. higher taxes [was Re: fyi, source of the
Thoreau quotation -- "the cost of a thing"]

Dear Ian,

Regarding this statement?  A very good question.

"As to the tax cuts – I have only one question for
you. Fine, let’s count the deleterious effects of
deficits on future growth. Why not also count the
deleterious effects of higher taxes? In the end, they
are the same thing – it’s just a question of how you
want to take your poison. And the “how” can be very,
very important!"

These are quite different in how much money is actually
spent by the federal government.

But, they are not different -- if -- you believe that
all deficits must and will be paid (with an exception 
for the interest the government (i.e. we taxpayers) pay on
the deficit.)

Returning to my first comment about how they differ --
politicians are mostly "short-run" folk.  They will always
try to put off something negative -- whether it is putting
off a recession, or a depression, the federal deficit, or
a trade imbalance.

If you read "The Great Reckoning" by Davidson and Rees-Mogg,
this is a message about political behavior that they raise
again and again.

So, we try things like "lock boxes" and "budget ceilings" --
but, one way or another those get undone, when push comes
to shove.

And, there are folk who really believe that the federal
debt might never have to be reckoned with, because, they
view it as something that can always be pushed off, into
the future.  This is perhaps the most dangerous thinking,
because countries that really think that way, suddenly
find themselves facing hyperinflation, a crumbling currency,
and many other ill-effects of spending what you don't have.

Now I have to add to this, the "magic" that a tax cut is supposed
to do.  A tax cut is touted as a way of freeing up capital
and encouraging free enterprise, such that in the long-run,
we receive more tax receipts from the increased economic
activity.

Now, at certain times and places, this actually has some
degree of merit.  But, let's take this argument "to the limit"
which is one way analysts understand effects.

And, to take "tax cuts" to the limit, we would have a tax rate of
zero.

Now, you and I know that, now, no matter how much economic
activity is spurred by this extreme -- that zero percent
of anything, no matter how large, is still zero.

Thus, we see that there is a fallacy in a "simple argument"
to always cut taxes to spur growth to create higher revenues.

Then, there is the matter that if you reduce taxes, and 
don't get added revenues, you will "have to reduce the
size of government."  Of any of this, this is the most
mysterious part of the "equation."  What evidence do we
have that this kind of "pressure" on the system has in
actually contracting the size of government?  Well, given
the continued rise in the federal debt, we can see that it
certainly does not "shut off the spigot."  Now, does it have
"some effect" in reducing government spending.  The answer
to that is, "yes," -- but "how much" and is this sufficient
to make up for other harms reduced taxes create -- such as
"interest charges" on the federal debt, and "passing the
federal debt to our children."

So, in real life there are at least 5 actual differences:

        1.  Amount of interest paid on the federal debt

        2.  A greater or less federal debt passed to
                "our children" -- and the consequences
                to them

        3.  Possible spill-over effects such as hyperinflation
                and crumbling of a currency (with respect to
                world markets)

        4.  How much money government actually spends in
                a given year

        5.  How much, if any, greater revenues accrue to
                the difference between higher taxes vs.
                lower taxes

Regards,

Dr. Priest
-- 


           W. Curtiss Priest, Director, CITS
        Research Affiliate, Culture & Media, MIT
      Center for Information, Technology & Society
         466 Pleasant St., Melrose, MA  02176
   781-662-4044  BMSLIB@MIT.EDU http://Cybertrails.org