Wednesday, February 18, 2009

Cut Taxes Now

I wholeheartedly agree that it makes much more sense for the government to cut taxes, rather than spend money, in order to improve the economy. But what I have been arguing is that the reason for this superiority is not, "Let taxpayers spend money and create jobs rather than the politicians." But if job creation from spending is a bad argument, what are the valid reasons for supporting tax cuts?

First is the simple moral argument. That money was earned by the taxpayers, and so prima facie it is always a good idea to take (i.e., steal) less from them.

Second there is an incentive argument. Especially if the tax reduction comes in the form of lower marginal rates (rather than lump-sum rebates), then individuals have the incentive to produce more. Notice that this is the exact opposite of the standard Keynesian analysis. In other words, the pragmatic argument for tax cuts isn't to give consumers more money to go buy stuff, but rather it's to give producers the incentive to go make stuff.

In conclusion, the critics of the nearly trillion-dollar "stimulus" plan are certainly correct to call for tax cuts rather than more government spending. However, many of these critics couch their justifications in ways that actually prove the superiority of government spending. A correct analysis shows that it is better to let taxpayers keep more of their money, even if they use 100% of the savings to pay down debt. There is nothing magical about consumption spending, and in fact it was overconsumption that got us into the present mess.

read the entire essay

No comments: