January 30, 2008

Every Argument Will Be Made to Raise Taxes

Justin Katz

Beware unsigned opinion pieces phrased in the first person. The instance in mind is this post from A Blog Called Hope, which appears to be a somewhat official production of the Rhode Island Democrats:

I know everyone hates taxes, but a longer and more destructive recession would be much worse.

Actually, it simply isn't the case that "everyone hates taxes." Some folks' livelihoods depend on taxes. Some folks currently see the situation in Rhode Island as taxes versus their own largess. And some folks believe it to be a simple matter of justice for the right people to be taxed. Whether "I" is among these groups is impossible to tell. What's not impossible to tell is whether the argument that he or she puts forward reasonably applies to Rhode Island:

I invite Governor Carcieri to read a report written during the last recession by Peter Orszag and Joseph Stiglitz. The report essentially reads that given the two options of cutting spending or raising taxes, the latter option is the least harmful for the economy during recessions.

The reasoning is pretty straight-forward, although anathema to Republican thought. Basically, everything is dependent on an individual’s propensity to consume. And as Americans, we all love to spend our money on stuff! A reduction in government spending on goods and services will reduce consumption by exactly the same amount. For every dollar that the government does not spend, the economy does not generate that economic activity. Conversely, if taxes are increased by $1, there may be a drop in consumption by 90 cents while savings is reduced by 10 cents. This scenario is less harmful to the economy that the former.

Having skimmed the mentioned report, I'll go further than Orszag and Stiglitz: At the state level, unless the tax targeted for cutting is the sales tax or is realized in the form of a rebate, tax cuts probably have almost no tangible benefit toward ending a recession. (For simplicity, I'm ignoring intangible effects such as increased optimism based on the tenor of legislative debate.) By the time the government realizes that a recession is in effect and takes action, the downturn is likely to have run most of its course. In the case of tax reductions, actual cash yields from tax cuts are delayed even longer.

But recession (whether existing, pending, or threatening) is not the problem in Rhode Island; it's merely an exacerbation. Rather, the problem is the structural deficit and the economy-draining policies that make up the structure. Raising taxes to ensure that those to whom the state dollars go can continue to consume would not only not solve the long-term problem, because those taxes would have to be raised again as costs go up, it would make the problem worse, because the cost/benefit analysis of living in Rhode Island would cross a line for even more residents. And they'll take that taxable dollar — and the cumulative millions like it — out of play altogether.


Incidentally, I'm not ceding the Democrats' argument that government spending is good for the state during a recession. The type of spending that they usually mean — handouts and other social programs, which go straight to the consumer category — has less economic value. The $1 bill is spent, but it dissipates into the economy. Subtract taxes, subtract the cost of goods brought in from elsewhere, subtract the cut of the dollar that goes back to the corporations (including, liberals might shudder to hear, executives), and so on.

On the other hand, a dollar left in the hands of local entrepreneurs, business owners, and other active citizens — all in the producer category — grows more money. They invest in local real estate, order more goods from local suppliers, hire more local employees, and so on. Even when they consume, I'd wager that it's more likely to be for productive purchases. (Picture me buying a new nail gun, which helps me to work more quickly, to complete jobs in a more timely fashion, and to negotiate a higher salary based on the utility of my work van.)

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The comment box was locked on that post. I guess "I" doesn't want to know what "We" think about raising taxes.

Not very democratic if you ask me.

Posted by: Red at January 30, 2008 2:10 PM
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