Democracy Gone Astray

Democracy, being a human construct, needs to be thought of as directionality rather than an object. As such, to understand it requires not so much a description of existing structures and/or other related phenomena but a declaration of intentionality.
This blog aims at creating labeled lists of published infringements of such intentionality, of points in time where democracy strays from its intended directionality. In addition to outright infringements, this blog also collects important contemporary information and/or discussions that impact our socio-political landscape.

All the posts here were published in the electronic media – main-stream as well as fringe, and maintain links to the original texts.

[NOTE: Due to changes I haven't caught on time in the blogging software, all of the 'Original Article' links were nullified between September 11, 2012 and December 11, 2012. My apologies.]

Sunday, June 26, 2011

Will Higher Taxes Tank the Economy?

The main sticking point in negotiations between Republicans and Democrats on deficit reduction measures to accompany a rise in the debt limit is whether higher revenues should make any contribution. A key Republican concern is that any tax increase would depress the economy.

Given the slow patch that the economy is going through, any realistic threat to growth is one that has to be taken seriously. But the Republican position that spending cuts are expansionary while tax increases are depressing is not logically consistent. Both spending cuts and tax increases affect the economy in roughly the same way in the short run – by reducing aggregate demand. Fiscal contraction, whether on the tax side or the spending side, will have a negative effect under current economic conditions.

Of course, it goes without saying that there will be different economic effects depending on how spending is cut or taxes are raised. But the first-order effect in either case will be to reduce national income and depress growth. In the longer run, some spending cuts could well be expansionary if they altered economic behavior in a positive direction. In general, subsidies are a bad idea because they distort economic decision making and reduce growth below what would occur in a free market environment.

But the same is true for tax subsidies. If someone pays lower taxes because they produce ethanol it is really no different than just getting a government check for doing the same thing. Yet many Republicans oppose abolishing tax-based subsidies because it would be an impermissible and economically depressing “tax increase,” while eliminating budget-based subsidies would be a beneficial “spending cut” that would be economically stimulating.

Economists have known for many years that many tax cuts are nothing more than spending by another name. They call such things “tax expenditures” and there are about $1 trillion worth in the tax code. Getting rid of many of them would have exactly the same economic benefits as reducing on-budget subsidies. Nevertheless, Republicans oppose eliminating tax expenditures unless other taxes are cut because any net tax increase would depress growth. The historical evidence, however, does not necessarily support this view.

Full Article
Source: The Fiscal Times 

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