Tag Archives: Taxes

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Harvard economist explains why spending cuts are better than tax increases

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From Investors Business Daily, an editorial by Dr. Alberto Alesina of Harvard University, that explains which approach to reducing debt and deficits works best. Is it cutting spending and reducing regulation? Or is it continuing to borrow and spend, and raising taxes?

Let’s see what Dr. Alesina says:

The evidence speaks loud and clear: When governments reduce deficits by raising taxes, they are indeed likely to witness deep, prolonged recessions. But when governments attack deficits by cutting spending, the results are very different.

In 2011, the International Monetary Fund identified episodes from 1980 to 2005 in which 17 developed countries had aggressively reduced deficits. The IMF classified each episode as either “expenditure-based” or “tax-based,” depending on whether the government had mainly cut spending or hiked taxes.

When Carlo Favero, Francesco Giavazzi and I studied the results, it turned out that the two kinds of deficit reduction had starkly different effects: cutting spending resulted in very small, short-lived — if any — recessions, and raising taxes resulted in prolonged recessions.

[…]The obvious economic challenge to our contention is: What keeps an economy from slumping when government spending, a major component of aggregate demand, goes down? That is, if the economy doesn’t enter recession, some other component of aggregate demand must necessarily be rising to make up for the reduced government spending — and what is it? The answer: private investment.

Our research found that private-sector capital accumulation rose after the spending-cut deficit reductions, with firms investing more in productive activities — for example, buying machinery and opening new plants. After the tax-hike deficit reductions, capital accumulation dropped.

The reason may involve business confidence, which, we found, plummeted during the tax-based adjustments and rose (or at least didn’t fall) during the expenditure-based ones. When governments cut spending, they may signal that tax rates won’t have to rise in the future, thus spurring investors (and possibly consumers) to be more active.

Our findings on business confidence are consistent with the broader argument that American firms, though profitable, aren’t investing or hiring as much as they might right now because they’re uncertain about future fiscal policy, taxation and regulation.

But there’s a second reason that private investment rises when governments cut spending: the cuts are often just part of a larger reform package that includes other pro-growth measures.

In another study, Silvia Ardagna and I showed that the deficit reductions that successfully lower debt-to-GDP ratios without sparking recessions are those that combine spending reductions with such measures as deregulation, the liberalization of labor markets (including, in some cases, explicit agreement with unions for more moderate wages) and tax reforms that increase labor participation.

Let’s be clear: This body of evidence doesn’t mean that cutting government spending always leads to economic booms. Rather, it shows that spending cuts are much less costly for the economy than tax hikes and that a carefully designed deficit-reduction plan, based on spending cuts and pro-growth policies, may completely eliminate the output loss that you’d expect from such cuts. Tax-based deficit reduction, by contrast, is always recessionary.

UPDATE: George Mason University economists agree: debt is wrecking the economy and the right way to stop it is with spending cuts, not tax increases. In order to grow the economy we need a balanced approach of spending cuts and tax cuts.

Excerpt:

The United States’ high levels of debt are already contributing to slower economic growth and decreased competitiveness. These impacts will worsen if the nation’s debt-to-GDP levels continue to rise, as is currently projected.

[…]High levels of government debt undermine U.S. competitiveness in several ways, including crowding out private investment, raising costs to private businesses, and contributing to both real and perceived macroeconomic instability.

[…]Carmen Reinhart and Kenneth Rogoff examine historical data from 40 countries over 200 years and find that when a nation’s gross national debt exceeds 90% of GDP, real growth was cut by one percent in mild cases and by half in the most extreme cases. This result was found in both developing and advanced economies.

Similarly, a Bank for International Settlements study finds that when government debt in OECD countries exceeds about 85% of GDP, economic growth slows.

[…]While fundamental tax reform is required to correct a host of structural inefficiencies, policymakers can quickly reduce the U.S. statutory rate of 35% to the OECD average rate of 26% or less.

That’s what research tells us. But that’s not what we are doing, because we voted for Barack Obama.

News

New FAA regulations will cause shortage of airline pilots

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From the Wall Street Journal.

Excerpt:

U.S. airlines are facing what threatens to be their most serious pilot shortage since the 1960s, with higher experience requirements for new hires about to take hold just as the industry braces for a wave of retirements.

Federal mandates taking effect next summer will require all newly hired pilots to have at least 1,500 hours of prior flight experience—six times the current minimum—raising the cost and time to train new fliers in an era when pay cuts and more-demanding schedules already have made the profession less attractive. Meanwhile, thousands of senior pilots at major airlines soon will start hitting the mandatory retirement age of 65.

[…]Another federal safety rule, to take effect in early 2014, also will squeeze the supply, by giving pilots more daily rest time. This change is expected to force passenger airlines to increase their pilot ranks by at least 5%. Adding to the problem is a small but steady stream of U.S. pilots moving to overseas carriers, many of which already face an acute shortage of aviators and pay handsomely to land well-trained U.S. captains.

[…]Estimates differ on the problem’s magnitude. Airlines for America, a trade group of the largest carriers that collectively employ 50,800 pilots now, cites a study by the University of North Dakota’s aviation department that indicates major airlines will need to hire 60,000 pilots by 2025 to replace departures and cover expansion.

Mr. Darby’s firm calculates that all U.S. airlines, including cargo, charter and regional carriers, together employ nearly 96,000 pilots, and will need to find more than 65,000 over the next eight years.

[…]Dave Barger, chief executive of JetBlue Airways Corp., said in an October speech that the industry is “facing an exodus of talent in the next few years” and could “wake up one day and find we have no one to operate or maintain those planes.”

The same thing is already happening with doctors because of Obamacare. And there is also a broad-based effort to put policies in place that cause private sector businesses to raise their prices, for example, by raising gas prices because of blocks on domestic energy development. Why would a socialist government pass taxes and regulations that cause consumers to become dissatisfied the private sector?

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Obama calls for $1.6 trillion of new taxes as economy faces a new recession

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Do you raise taxes in a recession? Obama once thought that raising taxes would hurt a recovery and hamper job creation.

Fox News reports on what Obama the President thinks now.

Excerpt:

President Obama, ahead of his first press conference since winning re-election and a meeting later this week with congressional leaders, staked out his starting point for fiscal cliff negotiations — $1.6 trillion in tax hikes. 

White House Press Secretary Jay Carney made clear that the president is sticking by his original budget plan, which includes $1.6 trillion in new revenue, by raising taxes on households making more than $250,000. 

[…]Republicans, though, are adamantly opposed to raising tax rates, despite a willingness to deal on closing loopholes and deductions.

[…]On Tuesday he met with labor leaders and liberal groups, telling them he would stand behind his campaign pledge to make top earners pay more in taxes.

“We’re prepared to stand up to make sure there is shared sacrifice here, so the rich actually start paying their fair share and the middle class don’t get soaked for that,” said AFL-CIO labor union federation President Richard Trumka.

At issue is an annual U.S. budget deficit that now is routinely above $1 trillion and a national debt that has risen to near $16.5 trillion.

Washington politicians have just over seven weeks, including breaks for the Thanksgiving holiday next week and the Christmas holiday season, to avert the year-end fiscal cliff.

$1.6 trillion of tax increases won’t hurt the middle class?

This article from Arthur C. Brooks addresses that point.

Excerpt:

On average, failed attempts to close budget gaps relied 53 percent on tax increases and 47 percent on spending cuts. Successful consolidations averaged 85 percent spending cuts and 15 percent tax increases. Some of the most successful financial comebacks–like Finland’s in the late 1990s–involved more than 100 percent spending cuts, so that taxes could be lowered. The spending cuts by the successful countries centered on entitlements and government personnel.

Now let’s look at the moral argument against raising taxes. Why does the president want to increase America’s tax burden? You may think it’s just a way to increase revenues and reduce the deficit. But even the president knows he can’t solve the fiscal crisis by helping himself to bigger and bigger chunks of the income of America’s most successful people. Even if individuals earning more than $200,000 were taxed at a 100 percent marginal rate–and we confiscated their passports so they could not flee–the take would come to $1.27 trillion, or just 77 percent of this year’s deficit.

For the administration, it’s not about the money–as we have heard again and again, it’s about “fairness.” The president believes that we will be a better nation if we redistribute more money from those who have more to those who have less. How much more do we need to redistribute until our system is fair?

As you ponder this question, remember the facts: The wealthiest 5 percent of Americans already account for 59 percent of federal income taxes. Nearly half of our citizens pay no federal income taxes at all–yet two-thirds of us believe that everybody should at least pay something, even if just to remind ourselves that government isn’t free. The Tax Foundation reports that the percentage of Americans who are net takers from the tax system is nearing 70 percent.

Note that even if you confiscated the passports of the wealthy, as communists tend to do, they would not agree to work for free voluntarily – they would stop working and do other things with their time instead. Perhaps Obama’s plan involves forcing the rich to continue to work while confiscating the fruits of their labor to distribute to his non-working constituencies. That would be slavery, which is not surprising if you know your history of slavery in the United States. Abraham Lincoln was a Republican, after all, and William Wilberforce was a Conservative.

The right way to solve this problem is with spending cuts and shutting down duplicate programs, waste and entire federal departments that are unconstitutional. But since we re-elected Obama, this is unlikely to happen. The Democrats are the party of big government and they will pass the costs of big government onto the middle class and their employers. When you tax the rich, you tax job-creating businesses and job-creating investors. You lose jobs. You make more people dependent on government. That’s what “making the wealthy pay their fair share” really means.