In their zeal to oppose the lunacy of the so-called “stimulus” plan, many radio talk show hosts and other pundits have fallen into the Keynesian trap. Rather than the politicians spending nearly a trillion dollars, they argue, it would provide much more stimulus if the government gave massive tax cuts. Although the instincts behind such arguments are sound, they often betray an underlying Keynesian mindset.FULL ARTICLE
Source link: http://blog.mises.org/9444/cut-taxes-for-the-right-reasons/
Cut Taxes for the Right Reasons
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without discrediting the concept of gdp as a proxy for wealth-creation, we’re fighting a losing battle.
the chorus line “consumption is two thirds of gdp” will drown us out every time.
I have two brief comments. First, your article contains a contradiction. You point out correctly that in this downturn, many businesses made incorrect forecasts. But you then say that these businesses are at fault for not anticipating the desires of their customers and you also say that the mistaken forecasts are partly a result of decisions made by others. But if the latter is true, which it is, then the businesses are not at fault; some of them did the best they could, but because of what others did, their forecasts were in error. But it is wrong to impute a fault to them as if they did not do the best that they could. The second point has to do with your passing suggestion that taxes are a form of stealing, a common point on this forum. Not necessarily so. If X kills Y, it is not necessarily murder if the killing is morally justified as in self-defense. Similarly, if someone takes another person’s property, it is not theft if the taking is morally justified. So the question is whether and under what circumstances taxes are ever justified. Until one answers this question by constructing a true theory of property rights, one should refrain from asserting that taxes are cases of stealing.
Important comments on the gdp, newson!
Tax cuts make sense only when the state as a budget surplus. With a huge deficit, tax cuts force the state to either borrow more and crowd out private investment, or to avoid crowding out and higher interest rates the fed will expand credit. Either way, tax cuts with a deficit do more harm than good.
Some will argue that tax cuts will increase revenue to the federal government down the road. That’s not always true, otherwise cutting taxes to zero would increase tax revenue to infinity. An optimum exists and we are beyond that optimum. Any further reductions in taxes will increase the deficit.
“Hoarders” of cash WANT the value of their cash to increase, but that is NOT typically why they “hoard” it (as the article seems to imply), at least not in today’s economy.
Money is saved because of anticipated (or feared) personal deficits – the need or desire to spend in the future in excess of future income. If, for example, someone comes to be in fear of losing their job that seemed secure last week, they might defer or scale down consumption expenditures today in order to be able to continue to consume even after income from the (a) job is interrupted.
That is what’s happening today, and NOT a speculation in the future purchasing power of money.
My take on this issue:
http://cavalier973.blogtownhall.com/2008/11/07/life_in_obamamerica.thtml
To Charles Landesman:
There is no need to construct “true theory of property rights” just to deduce the fact that taxation is mere theft. Quite contrary, burden of proof lies on you, you would need to manufacture some kind of theory to justify taxation. Similarly people are asked to justify themselves if they happen to kill someone. Without any such justification they are sentenced.
Moreover self-defense is an answer to a crime while tax collectors do not respond to your actions. You cannot just kill anybody, you can kill only someone who does not respect you property rights. It is completely different with tax collectors. They just raid your business, sack your property, they give you nor justification whatsoever and you are punished even for any “evasive manoeuvre”, for not surrendering immediately and unconditionally.
It needs really hard brainwashing NOT to put equation taxation = theft. Either you are statist (why not, I used to be one of them) or you have just provoked me to absolutely superfluous post just for fun
Exactly. Burden of proof is always on the would-be aggressor. Or must you prove to me dear Charles why I can’t rob you blind first? If so, can I have your address?
Fundamentalist,
Usually you and I are in agreement but this time a number of our assumptions do not hold.
Tax cuts make sense only when the state as a budget surplus.
If tax rates are at 99% but the government has reduced spending to the point that it is in surplus, how can you say that a tax cut does not make sense? Actually keeping taxes at 99% does not make sense.
Some will argue that tax cuts will increase revenue to the federal government down the road. That’s not always true, otherwise cutting taxes to zero would increase tax revenue to infinity. An optimum exists and we are beyond that optimum. Any further reductions in taxes will increase the deficit.
Think the Law of Diminishing Returns applied to tax policy (Laffer Curve). A tax rate of zero will bring in zero tax revenue, as will a tax rate of 100%.
fundamentalist is right in this way: when there is a deficit, tax cuts and stimulus are one and the same, the taxpayer must pay. with a tax cut, he gets to decide what to do with his own money that he must pay back! [although i don't believe there is any real plan to repay the debt]. with stimulus the government decides.
this in no way justifies taxes,etc, it just is an economic reality, tax cuts will increse the deficit dollar for dollar which increases the debt.
sound economics work both ways, you can’t say stimulus spending robs the taxpayer on the one hand and tax cuts don’t, when a deficit is simply a future bill to the same taxpayer.
fundamentalist made the points that I came here to make:
Tax cuts make sense only when the state has a budget surplus. With a huge deficit, tax cuts force the state to either borrow more and crowd out private investment, or to avoid crowding out and higher interest rates the fed will expand credit. Either way, tax cuts with a deficit do more harm than good. (made one minor grammar correction)
It is the amount of resources deployed by government that matters. People who believe that government is better suited (morally and/or economically) to command the resources will want government to increase its scope regardless of how it is funded. The current focus on “stimulus” by way of a combination of spending increases and tax cuts implies the following:
1) The spending increases will multiply the resources under the control of government,
and 2) the burden of funding the activities will fall more heavily on the capital markets or currency devaluation.
Promoting tax cuts without reducing spending may be superior (in the eyes of most mises readers, anyway) to current plans since 1) would not be true. The amount of resources under government control would be relatively unchanged. But 2) would still be true. What unintended consequences could arise?
Assuming that the tax income was replaced by debt, we can observe that tax payers would be wealthier. However, there would be a reduction to the capital available to invest. Supposing that the tax cut would be provided primarily to people on the lower income scales (politically likely, I am certain), the increase to tax payer wealth would likely result in more short term consumption. Sure, some people would save or pay down debt, but many (most?) others would continue their irresponsible ways and spend, spend, spend! We would simply be diverting resources from capital investment to consumption. If one of our problems is capital consumption (as I have seen reasonably contended on this site), then this is exactly the wrong outcome.
On the other hand, if the tax income was replaced by inflation, then we would be giving tax payers more wealth with one hand and taking it back with the other. What’s more, price structures would certainly be further blurred. Chances are, we would simply lay the groundwork for the next bubble. That is, of course, unless hyperinflation were to occur.
I think that our task is to convince people that the government is NOT suitable to command so much of society’s resources. Promoting tax cuts without this broader focus, while well-intentioned, misses the main target and could lead toward unintended consequences.
‘any amount of money can get the job done’
This amounts to claiming that any amount of money is optimal, does it not?
Although exchange can take place with a greater or smaller stock of money, the stock of money, and its division between forms (e.g. coin, bank notes, cheque account money etc.) does a better or worse job of than some other stock and division.
The role of the financial sector is to issue the quantity, quality and form of bearer and book entry money as consumers demand to hold and financial institutions find a business case to issue.
The metallic money stock also depends on demand to forgo contractual interest by holding it instead of interest bearing financial instruments.
Cut Taxes by all means but equally important is to cut government spending at the same time and the more the better. This point seems to have been missed in this article.
There is a tremendous amount of government spending that is wasteful and now we are going to get more of it, as a result there will be more and more economic pain ahead for the average taxpayer, of course those closest to the first government handouts will be winners in the short run, in the long run all will be losers via inflation, the majority though who have no political pull will end up being losers immediately as is and has been the case in the past.
Government intervention in the economy is always bad and the more intervention the worse. Lets not get sidetracked on economic minutiae.
Sometimes a tax reduction is not a tax reduction. In the face of a budget deficit, any tax cut without a similar reduction in government spending merely changes the time profile of taxation and possibly who pays for the government spending.
If annual government spending is $15, while present taxation is $13 and the government reduces taxes to $10, the tax reduction of $3 can be financed through the Fed (an inflation tax of $3). In this instance, the incidence of the $3 tax would likely be somewhat different than the incidence of the explicit $3 tax reduction. In this case, there is no time shift in taxation involved.
If the $3 current tax reduction is financed through increased public bond holdings, either domestic or foreign, today’s taxpayers have been relieved of $3 of taxes but tomorrow’s taxpayers will see their taxes increase in a PV amount exactly equal to $3, whether those future tax increases are explicit or in the form of inflation.
Is there anyone here who thinks that a great deal of the U.S. government explicit and implicit liabilities won’t be “paid off” by future inflation?
Dick: “If tax rates are at 99%…”
I agree with you there. If tax rates are that high, then cutting them will benefit through reducing the deficit by generating more tax revenue. In our case I think we have reached the other side of the optimum and any further reduction in taxes will not result in greater revenue but instead large deficits. W. Bush’s tax cuts demonstrated that.
If tax cuts were combined with spending cuts, I would be all for them.
Excellent, excellent article. Is it not possible that under the illusions that credit expansion creates, people buy things which they do not want AT ALL? I am thinking of pet rocks, troll dolls, vitamin pills, spiral-french-fry makers, certain “music”… Then, is it not possible that during the ensuing credit contraction, they realize they did not want those things AT ALL, and that, besides that, they now do not want to buy different thngs instead? Yet, the article seems to preclude of this possibility, stating that the resources used up in frivolous, unwanted articles during a boom are always urgently needed elsewhere.
In other words, an individual might find out from experiencing an economic cycle that he is happier working half as much and spending half as much. Why could not such a discovery be very general?
Another comment: I feel that the USA is trying to use as money something that is unfit to be money. Americans are analogous to tribal people trying to use fresh fish (something very perishable) as money. Saving is largely impossible and seldom attempted. But when disaster strikes everyone, this “money” suddenly becomes very much valued–as life-support. Nobody knows whether to consume any fish he has, or to try to hoard it, or what. In an emergency, most people try to hoard for as long as they think possible. Thus, the “money” can and does fluctuate wildly in value. I think I see the “invisible hand of the market” gesturing to everyone–statist and libertarian alike–to abandon this form of “money” and find a better one–one that enables savings. I don’t think the “credit crisis” is going away unless and until people feel they can save in some way other than in perishable, volatile items the US Treasury and Fed and other politicians try unsuccessfully to control at will.
While I agree with the author, whom I generally like and respect for his style and philosophy, on the futility and stupidity of the whole notion of the stimulus package, and agree with him that the tax cuts are better than just the meaningless over-spending, I disagree on many other aspects of his article:
1. “Of course that’s not what happened. Instead, what happened is that American consumers decided they weren’t prepared to spend as much on these nonessential items.
The author is being vague here (even though he later somewhat touches the real issue; see point 3 below): the true reason of sharp decline in US consumer spending which has lead to this crisis is the critical point in globalization of the US economy that we have reached, with all the ensuing logical consequences – the almost complete destruction of manufacturing base, massive outsourcing, massive accumulation of wealth in the hands of the few – the Multi-National Corporations. This is what happens when only a few oligopolies are around – the Free Market becomes just an empty taunting word… (Now I know I will be chastised as being a protectionist or mercantilist by some, but what the heck, I will bite this bullet as well…);
2. “[...] And now we finally see the problem: the businesses right now that are struggling made bad forecasts.[...]“
Not true – the businesses had no means of knowing that the money supply will be suddenly “frozen” on them by the corporate banks. They had all the reasons to believe in the ensuing inflation, not deflation, and that is why they were factoring-in higher prices in their business forecasts. They had no way of knowing that the Multi-Nationals will decide to ditch the American worker as being “useless and expensive”… It was not in the plans, at least not so soon and not so fast…
To prove my point, take 2007. The things were going just fine – the houses were flying off the shelves, the cars off the dealership lots. Everybody was having a party with the cheap supply of foreign-made goods and excessive capital, courtesy of humble Fed, super-leveraged banks, et al… Everybody had a job… What happened?! It was one of those wild parties that was not supposed to end – ever… What has changed between 2007 and 2008, after all?
My theory is that the corporate banks have decided to turn-off the lights and ruin the party just for kicks (just kidding).
What really happened was that the corporations become even greedier than they were – they want more, more, more, more profits… They don’t want to pay “useless Americans” 50K, 60K a year, Why?! If there is this Asian guy who would be happy to toil days and nights and be thankful for the generous opportunity presented to him for mere pennies?! You see the dilemma here?
3. “[...] It is because of these real imbalances in the global structure of production that American consumers have cut back on their discretionary purchases, and it is why American producers need to adapt to the new realities as well. The government is simply trying to freeze the US economy in the unsustainable configuration of the boom years.[...]“
Are you telling us to work and live like Chinese – for a bowl of rice, Mr. Murphy? If you want us to be responsible savers bring our jobs back then, sir. Bring back the manufacturing !!!!!. Stop the illegals!!!!!. Stop outsourcing!!!!!!!!!! Like all the Austrians, you too are advocating for unregulated globalized market. This is the direct consequence of it – you get what you sow!
In all honesty, sir, I don’t think the government is trying to “freeze” anything! What is happening is the Multinationals have figured they can’t make more profit anymore by re-investing their enormous surplus capital in the US, since the public does not earn as much anymore, but they also don’t want pay much to the American workers. They became the victims of their own greed. Now they want the government to start paying them directly (circumventing the now useless and duped consumer), since the Americans have no high-paying jobs anymore, and they can’t buy their cheap foreign crap as they were doing it for the past decade or so…
fundmentalist
Dick: “If tax rates are at 99%…”
I agree with you there. If tax rates are that high, then cutting them will benefit through reducing the deficit by generating more tax revenue. In our case I think we have reached the other side of the optimum and any further reduction in taxes will not result in greater revenue but instead large deficits. W. Bush’s tax cuts demonstrated that.
If tax cuts were combined with spending cuts, I would be all for them.
Don’t miss it. Bush had more than one “tax cut.” The only tax cut (more a Bill Thomas plan than a Bush plan) that was supply side was the one in 2003 and the result was an almost immediate increase in prosperity and tax revenue to the Treasury. But other than this cut, Bush’s spending and welfare programs (and in this I include his non-supply side tax cuts) completely negated the impact.
Deficit spending is not in itself a problem. Everyone of us operates at some level in deficit spending. But spending must be for the right things. A greater problem than deficit spending is spending on programs or policies that actually harm the economy rather than help. Fannie and Freddie are great examples. Even if we had balanced the budget they would have worked their destruction, but a little deficit would never cause the problems they did.
Bravo. This is a great article. Professor Murphy drives home an important point: “By justifying tax cuts on the grounds that the taxpayers will go out and spend the money, these critics actually concede the entire case.”
I would like to point out a common Keynesian argument against lowering tax rates. Lovers of liberty should be aware of this Keynesian argument so they can effectively combat it.
Keynesians will argue that lower tax rates will make booms and busts more violent. Here’s their argument.
The Keynesians begin by adjusting the simple investment multiplier (M = 1/(1-mpc)) to include taxation. Thus, M = 1/(1-mpc(1-t)). In non-mathematical terms, a higher tax rate will lead to a smaller multiplier. This allows the Keynesians to argue that a sudden fall in Investment Spending will have a smaller negative impact on Income when the tax rate is higher (ΔY = ΔI x M). In short, busts will be less violent when tax rates are high.
Further inspection of the multiplier reveals that this argument is absurd. Jeffrey Herbener has shown that the MPC is not bound by the Keynesian constraint that the MPC must be greater than 0 but less than 1. This leads to all sorts of contradictions within the Keynesian system. See chapter 4 of “Dissent on Keynes”
http://mises.org/books/dissent.pdf
Fundamentalist: “If tax cuts were combined with spending cuts, I would be all for them.”
The only way to reduce taxes is through a reduction in government spending, since every $1 of government spending must be financed by $1 taxes of one kind or another.
The U.S. is still the world’s largest manufacturer; we make about a fifth of everything made in the world. The manufacturing jobs that we are losing are due more to gains in productivity than to international trade.
http://www.uschamber.com/international/primer/manufacturing.htm
http://www.heritage.org/Research/Economy/wm1709.cfm
http://www.conference-board.org/utilities/pressDetail.cfm?press_ID=2432
TO: cavalier973
Tell that to autoworkers, steel mill workers, and about everybody else…
Productivity gains you say?!! You’ve gotta be kidding me… Does it make sense to send jobs from more productive, thus more cost-efficient place to the less?!
Am I loosing it or what?! Have you seen anything that says “Made in USA” lately?
I have returned from a trip to Spain and Italy last December – same thing there; everything proudly states “Made in China”…
They turned this poor country into ecological disaster, with half of its workforce being exploited through their Communist Party intermediaries… Tell me how’s that a Free Market?!!
Or is China the role model we all have to admire?! The harbinger of what to become of all of us?!
Well, not all manufacturing job losses are due to productivity gains, I guess: some of the job losses are do to technological progress as well.
Think of all the jobs lost in the typewriter industry….
Funny think about the steel industry workers…President Bush raised the steel tariff for a while there. The Steel workers flourished; of course, but a lot of other industries’ workers were hurt. It’s even possible that more people lost their jobs due to the higher steel prices than were employed by the steel industry.
In trying to help one specific group of people, President Bush ended up hurting a whole lot of other people because he only looked at the immediate consequences of his actions on the specific group, instead of considering also other groups that would be affected, and at the long-term consequences of his actions.
http://www.ncpa.org/edo/bb/2002/bb042202.html
http://articles.latimes.com/2003/sep/28/nation/na-steel28
http://www.citac.info/remedy/2002_Job_Study.pdf
http://news.bbc.co.uk/2/hi/business/3212311.stm
pbergn,
caviler is suggesting that work done in the US remains in the US with fewer workers. A worker today with better tools may be able to do work requiring 2 people 10 years ago. This helps keep the remaining jobs domestic.
The US is a leader in producing a lot of things ranging from aircraft to tools. Many imported Chineese goods are of poor quality and while not rare, I don’t feel the need to buy very many of them.
I would like to point something out as well. The entire article, whether poignant or factual starts out on an incorrect premise to begin with. A couple actually.
I tend to get my information from multiple sources, including some who have been making statements such as he alleges in his editorial. However, the one’s I have heard have been very specific to point out that they don’t buy into many of the notions defined in Keynesian economic theory in the first place. Meanwhile the article here seems to use Keynes as the basis for contradicting them.
The second part I think falls down to another point I have heard expressed that he seems to have missed – the right to tax in the first place! I don’t know about you, but more than 35% of my ‘income’ goes straight to federal, state or local taxes. That is not including sales taxes, use taxes, hidden taxes such as are on gas, tariffs on goods, etc. And I’m so-called ‘lower income’ at the moment.
Although the piece seems to focus on the notion of what will ‘fix’ an economy, another thing I have heard expressed and tend to agree with is that government really can’t ‘fix’ a recession in the first place and what little they can do is generally done by either adjusting interest rates or adjusting the money supply. Interest rates are already bottomed out and increasing money supply (via things like huge bailouts or spending/incentive plans) generally leads to inflation and devaluation of the dollar – two things that definitely do NOT fix recessions.
You mention that stimulus may fail because people may opt to save the windfall, but then you make the same mistake with businesses.
It’s not a tax cut that is needed, it’s a sharp tax hike.
Tax cuts will not force a company to reinvest. In fact, with low tax rates, profits may be taken.
A tax hike, on the otherhand, could induce a company to invest.
k ackermann says:
“A tax hike, on the otherhand, could induce a company to invest”
this is gibberish.
I argued that to show that taxation is in itself a form of theft, one needs a true or at least plausible theory of property rights. Two respondents claimed that the burden of proof is on me to show that taxation is not theft. Not so. The very idea of a burden of proof belongs to court trials, not in a conversation where various parties are arguing their cases. When one makes an assertion such as “Taxation is theft” it is reasonable to ask for a reason for believing this. If none is forthcoming, the discussion is over. When I say that taxation is not in itself theft, I am willing to give a reason. The reason is that rights in general and property rights in particular are not absolute; when rights conflict, then one must choose in favor of those rights that are most urgent; thus there are situations in which the state is justified in taking property when other rights outweigh those of property.
Charles Landesman:
When I say that taxation is not in itself theft, I am willing to give a reason. The reason is that rights in general and property rights in particular are not absolute; when rights conflict, then one must choose in favor of those rights that are most urgent; thus there are situations in which the state is justified in taking property when other rights outweigh those of property.
I’ll grant that rights are not absolute. I have never been a proponent of natural rights or any other kind of theory that posits rights in an absolute sense. But your reasoning is extremely weak. By employing your argument, any level of theft may be sanctioned. One need only claim a right and make the case that your need is urgent. Do you really stand by this argument?
If you wish to make an argument in supporting of proposed rights, I would like to suggest the following standards:
1) Rights must be self-consistent. That is, no two rights may contradict each other.
2) Rights must be of a nature that they may apply at times and in all circumstances.
3) Rights must apply equally and consistently to all people.
Being a self-interested person, I favor promoting observance of rights that follow these standards in the interest that they will render society more peaceful and productive. You are free to promote rights that violate these standards, of course. If you do, my response is simple. I reject them. As a matter of self-interest, I will oppose them and endeavor to convince others to oppose them as well. This is the only absolute that I offer.
Mr. Landesman:
“The second point has to do with your passing suggestion that taxes are a form of stealing, a common point on this forum. Not necessarily so. If X kills Y, it is not necessarily murder if the killing is morally justified as in self-defense. Similarly, if someone takes another person’s property, it is not theft if the taking is morally justified. So the question is whether and under what circumstances taxes are ever justified.”
You are confusing moralilty with legality. There is not a single moral argument that can be made for the destruction or theft of any other person’s property. Just because you murder someone in self-defense does not make it moral, it just makes it legal.
By suggesting that it is immoral to do something under condition X but moral under condition Y, you are demonstrating that you have no concept of morality and a complete lack of principles.
Your concept of property rights is at odds with liberty and you are foolish not to see that your line of thinking has been used by tyrants since the dawn of civilization to take over and destroy societies.
pbergn writes: “Not true – the businesses had no means of knowing that the money supply will be suddenly “frozen” on them by the corporate banks., this as an response to original author’s claim that the businesses right now that are struggling made bad forecasts.
Why, sure, the businesses had no means of knowing. But they still did their forecasts, and these forecasts have been proven by now to be really bad. That’s the fact, and it’s as true as facts can be.
If we ask something else, like, if it was unfair – for them being prevented from having any chance to do correct forecasts (and this was due to the government and FED manipulating the money) then yes, that’s unfair. But then again this is one of the original author’s points.
The primary benefit achieved by a reduction in taxes is simply reducing the government’s ability to attempt ‘fixes’. I fully believe that nothing else can have the same degree of positive impact to assisting a recovery. It would be better if the majority of our tax payments were simply converted to cash and burned. That would at least have a neutral impact outside of the original taxation. As processes stand, our own confiscated funds are used to inflict yet further harm against us. Truly insult piled atop injury.
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