The Corner

The Purposes of Tax Cuts is What Now?

From a reader:

Jonah,

I agree with you that a consumption tax, economist Greg Mankiw would call is a Pigovian tax (see his blog), has some merit.  Not least of which being its transparancy (Imagine the public outrage if we had to physically cut a check for our payroll taxes each paycheck!)

However, when you say, “First: we know the spending is coming no matter what.”, that sounds extremely defeatist to me.  If we cannot stand up for lower spending and smaller government, what will we stand up for?  The point of reducing taxes is to FORCE the government to reduce spending.  The old corporate raiders in the 80’s knew this.  For years, corporate managements were wasting resources, expanding into all sorts of businesses non-related to their core comptencies and generally engaging in other empire building activities.  They insulated themselves with friendly boards and were thought to be untouchable until Michael Milken figured out how to get to them with the invention of high yield, ie., “junk”, bonds.  This allowed the raiders to come in, take over the businesses, and make them more efficient.  The massive amounts of debt that they used to take over their targets was useful b/c the management was forced to get rid of its non-essential functions in order to be able to meet the payments on the bonds. 

Me: I think there are a lot of problems with this.  The first is, this strategy hasn’t exactly worked so far and I never signed up for bankrupting the country as a matter of principle. Second, I always favored reducing taxes because I thought — and think — taxes are too high and lower taxation will create more prosperity.

As for the defeatist bit, which I’m hearing from a lot of readers, I’m underwhelmed. The GOP just lost the presidency to a guy promising the moon. The GOP lost the Congress in ‘06 and lost more seats in ‘08. We are in the middle of a huge recession and the government has already committed trillions to bailouts of all kinds and the political climate has never been more conducive to a huge infrastructure/stimulus bill. I’m all for a “we can win this thing” attitude, but the idea that the Republicans can stop the inevitable spending spree during a recession when they’re completely out of power when they couldn’t stop over-spending when they were in power and the economy was growing strikes me as less than compelling. Look, I don’t love gas taxes. My point from the outset was simply that if you prefer gas taxes to other forms of taxation, this would be the time to lay down the marker for it.

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