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Friday, November 16, 2012

Stephen Moore: Spending Cuts are the Same as Tax Cuts

     No they're not, and it's rather bracing to hear someone who's allegedly economically literate at least in the minds of saying something that is such a basic fallacy. This is economics 101. Spending cuts and tax cuts are not the same thing.

      True, conservative Republicans like both things which in their mind makes them synonymous. But a tax cut puts more spending into the economy, a spending cut removes spending from the economy.

      "A cut in spending is the economic equivalent of a cut in taxes now, or later. This point is effectively conceded by Mr. Obama demanding that his spending and borrowing binge of the past four years must be paid for by a giant increase in taxes over the next decade."

       http://online.wsj.com/article/SB10000872396390443684104578066611560765402.html?mod=googlenews_wsj

       There's a few things wrong with paragraph. There really wasn't any "binge" over the last 4 years. In fact we've seen a depression in government jobs, particularly at the state level. If government jobs had grown at the same pace as even under the Bush Administration we would be much closer to where we want to be.

        Moore is simply wrong about basic accounting in the economy. If you think of the private sector as a checking account, a tax cut is synonymous with a spending increase-as both increase our private sector account.

         On the other hand, a tax increase is synonymous with a spending cut.

         During a recession you want an increased budget deficit while you would be more interested cutting the deficit during boom times. Indeed, there's been way too much focus on the deficit out of conservatives during the downturn. There's no need to worry about deficit cutting right now. The talk about budget vigilantes about to swoop down at any moment is absurd.

         As to the rating agencies, what credibility do they have left?

         In fact the stronger argument is that the economy is in recession right now and doesn't need any taxes to go up. Still, the budget deficit has been to high since Bush's budget busting tax cuts and the two unfunded wars.

         What ending the Bush tax cuts will do is fix our longer term structural deficit. At some point deficits are of concern. Taxes of some sort have to be raised if we can have the kind of public spending our economy needs. Bush gave the tax cuts to the wealthy at the expense of the rest of Americans who depend on public services. .

        As taxes are a necessity-in the long run to avoid deficits that are too high and too much inflation-it's fair,, and I believe efficient-for the wealthy to pay a larger share of this.

        P.S. Moore's large point in the article that lower tax rates for the rich are good for everyone is dubious. It's the usual claims that cutting taxes will actually increase the amount of taxes the rich pay-via higher growth.

        The examples he uses are typical of this argument. He claims 1920s were fueled by Coolidge's tax cuts, the 30s Depression by higher tax rates. While he admits the bottom didn't fall out the economy post WWII with a 91% tax rate on the wealthy, he claims that there was still a brake on growth that was unleashed by JFK's tax cuts.

         He then of course talks of a huge 80s boom thanks to Reagan's tax cuts. He does mention the 90s and admit that we saw very high growth despite Clinton's tax hike on the rich. However, he claims this was due to spending cuts so we're again at the fallacy of spending cuts as being stimulative.

          What his history lesson actually shows, though he tries not to notice it, is that in the 60s a 70% top rate was consistent with high growth,, in the 80s a 50% rate for the rich was consistent with growth, and in the 90s a 39% tax rate was.

            Yet he claims that: "If Mr. Obama has his way and raises tax rates on upper-income groups, it will slow the economy, and everyone will lose."

              As Bill Kristol says,, a slightly higher tax rate for the rich won't kill us.

        

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