The Corner

Recovery, Keynesians, and Tax Increases

According to ABC News, and other news outlets, the president is urging House GOP members to “do the right thing” on taxes. That means let the Bush tax cuts (shouldn’t they be called the Obama tax cuts now, since he extended them in December 2010?) expire for households making over $250,000. This is not new, obviously, and yet it continues to surprise me since it goes against the underlying economic theory that this White House has been operating under from the beginning: Keynesian economics.

The standard Keynesian theory recommends against raising taxes during economic downturn since it will hurt economic growth and, as such, makes it even harder to get debt burdens under control. We can debate how much of a downturn the U.S. economy is going through, but it certainly isn’t looking good. 

Case in point: this morning’s very slow and lower-than-expected GDP-growth numbers. Here is the Wall Street Journal on the news:

The nation’s gross domestic product–the value of all goods and services produced–grew at an annual rate of 1.5% between April and June, the Commerce Department said Friday. The reading is down from the upwardly revised 2.0% growth rate during the prior three months and a 4.1% rate in the fourth quarter of 2011.

Economists surveyed by Dow Jones Newswires had expected 1.3% annualized growth during the second quarter.

That number, 1.5 percent, is the one of lowest growth rates so far and the second consecutive reduction in growth rate since the last quarter of 2011.

So I wonder, given the weak economy, where are the outraged Keynesians complaining about the unsoundness of raising taxes in this situation?#more#I know there are plenty of them asking for more spending. If you remember, I asked that same question during the European austerity debate, when many pundits and out there were complaining about European governments’ mostly-pretend spending cuts while never mentioning the large increase in taxes that took place in these countries. As I explained in this space in May,

Tax increases (private-sector austerity), especially in times of economic contractions, are never a good idea or a good way to promote growth. That’s true even in a Keynesian model. Yet, we aren’t hearing anti-austerity advocates complain loudly that Europeans are raising taxes. Where are the headlines saying, “Europe needs to stop raising taxes”? Instead, we read that spending, and the lack of it, is to blame for austerity. Maybe that’s because acknowledging that austerity through spending cuts and tax increases has produced terrible results in Europe makes it hard to continue calling for tax increases–even if only on the rich–in the the US’s weak economy.

Whether one thinks that tax rates should higher or lower in the long run, right now isn’t the time to increase them. On that note, here is a reminder of some of the upcoming tax increases for the uninsured.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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