In isolation there is no point at which taxes are not too high. All taxes are hurting the economy. There is however a point where lowering taxes will impact the ability to finance other aspects of society which will hurt the economy even more. Education, health, infrastructure, a well-functioning bureaucracy and police & legal system, etc.
Well, as you hint at, if you took tax money and threw it in the trash you would hurt the economy. However in the real world the money taxes take from people would be invested or lead to consumption at some rate say X. The money the government spends, not being thrown into the trash, gets invested or spent on consumption at some rate Y. If Y > X then taxes help the economy.
If you tax a 1%ers hookers and blow money and put it into road infrastructure improvements that cut travel times for thousands of people, you are improving the economy tons. You are hurting the hooker segment of the economy, of course.
It’s really not fair to cite continental Europe as examples of austerity. Most advocates of austerity(if you are to give them a fair hearing) would not advocate the European economic model as something they would wish to emulate.
As far as the US example goes its probably best to judge it over the entire economic cycle. As a UK subject we had New Labour in charge during the last economic boom. Only when the downturn hit did all our previously sound economic and fiscal figures show themselves to have been a sham. It turns out that running a Gov’t budget deficit of 3% of GDP is probably not the best idea at the height on an economic boom.
Europe vs the US is one of the better austerity vs non-austerity experiments. I agree that following the Keynsian strategy of running a surplus during good times is beyond most governments, including right wing ones. Certainly true in the US where tax increases which would have reduced the deficit Bush ran, and paid for some of the war, were not done for ideological and political reasons. Yet Spain had a very small deficit and was hit the hardest, thanks to the real estate bubble funded by foreign money.
One of my VPs once said that if you are facing a deficit you can cut expenses, but getting more income generally works much better. A growing economy does just that, and if austerity slows economic growth it makes a bad situation worth. Krugman talked about the confidence fairy - the idea that austerity would lead to growth by making business more confident and willing to invest. The confidence fairies seem to be in short supply. New or returning customers, however, seem to do the trick.
Even in isolation this is not necessarily true; taxes can be used, obviously, to address externalities and market failures, and their absence would hurt the economy.
The example of Spain is interesting. You are correct Spain did have a very small deficit as the financial crisis hit. However, this reinforces my belief that economic and fiscal numbers are/were a sham. The economy of Spain was enlarged to a huge degree by an artificial property boom. This property boom resulted in inflated Spanish GDP figures and record tax receipts for the Spanish Government. Sure, Spain will have suffered from having to bail out its banks, but it also suffered from the massive fall in it’s GDP and tax intake. In the case of Spain a small deicit at the height of the boom was nowhere near prudent fiscal policy.
I would be more willing to accept the Keynesian argument of deficits spending if it came with structural reforms and something like a balanced budget/surplus during the good times. However, this is never to be. Eight years past the last crash and a balanced budget(or something close to it) is still nowhere on the horizon. The US can perhaps get away with such policies for now, certainly I don’t believe most European countries can.
Sure it does. It increases aggregate demand. Particularly if it is lowered for low- and middle-income people, who are likely to spend it quickly.
Their housing bubble was the result of money coming in from other parts of the Eurozone. Banks seemed to be behind most of our problems. Politicians being politicians, a small deficit by European standards is about all you can hope for. We can only hope that they’ll have learned for the next time, like California has.
I agree in principle, but it is hardly a good idea to not do what is economically necessary after a crash because the guys who came before you spent too much. The US deficit during the recession would have been lower if we had started from a better place, but we’re much better off than we would be of we decided we couldn’t afford stimulus.
When Bush wrote checks in the early part of his term the money didn’t stimulate demand as much as expected. IIRC, much of it either went to pay off debt or into savings, neither very stimulative.
I would recommend Mark Blyth’s Austerity: The History of a Dangerous Idea for those interested in reading about European experiments in austerity politics in the wake of the 2008 crash. Summary: it doesn’t work. Or, in Blyth’s words: “the deployment of austerity as economic policy has been as effective in us bringing peace, prosperity, and crucially, a sustained reduction of debt, as the Mongol Golden Horde was in furthering the development of Olympic dressage” (p.229). Compared to some of the arguments here, the book has the virtue of bringing actual numbers to bear!
Cite?
How would that work? It’s still no way to balance a budget. Ross Perot’s idea was to lower spending while raising taxes.
N.B.: The Laffer curve is bullshit. As I’m sure even the economic libertarians here must agree by now.
It’s not the Laffer curve itself that’s bullshit, just the arguments made with it. At its most basic, the Laffer curve is simply a refutation of the idea that raising the tax rate will, unconditionally under all circumstances, increase government revenue.
Osborne’s austerity has produced higher - no, record - debt from a program of cutting taxes and government spending.
Check out the chart.
http://blogs.spectator.co.uk/coffeehouse/2013/11/the-tories-have-piled-on-more-debt-than-labour/
"The national debt figures are out – £1.2 trillion and rising – and although I hate to say it, the Labour Party has a valid point to make. If you don’t adjust for inflation, Osborne has borrowed more in under four years than the Labour Party borrowed over 13 years. "
More in 4 years than in 13… AAAAAARGH!!!
Thing is, the more market oriented your economy, the more bureacracy you need to administer all the competing consumer options. Hence higher taxes.
If the shops have just one state produced aspirin on the shelves, you have one safety test to do.
If you open the market and have 10 different types or brands of painkiller, you have 10 times the bureaucratic work.
Rinse and repeat for every field of innovation, privatisation, market structure etc.
Indeed. Here in the United States, Obama’s had a program of higher taxes and increased spending. Tell us how the debt piled up during the Obama administration compares to previous administrations.
Of course, and that explains why market-oriented countries such as Switzerland, New Zealand, and Australia have much higher taxes than less market-oriented countries such as France, Italy, and Greece.
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No, wait. Switzerland, New Zealand, and Australia have much lower taxes than France, Italy, and Greece. Which is why your claim that more market-oriented countries have higher taxes is utterly ludicrous.
Let me explain something. We don’t need bureaucracy. We have it, but we could get rid of the enormous majority of it without hurting anybody other than the bureaucrats, who would have to find useful jobs. The United States economy functioned quite well from its founding until the early 20th century with only a tiny fraction of the bureaucracy that it has today. There are plenty of industries that still do so. Software, for example. Software still has a free market for the most part. There’s no federal or state Department of Software that has to approve pieces of software. As a result, the USA has thousands of software companies producing innovative, useful products. Compare that to a heavily regulated industry such as freight trains or pharmaceuticals. Bureaucracy leads to fewer companies, less competition, and less innovation.
France Italy and Greece are less market oriented ? No way. I’ve been in Italian supermarkets and there is peeerrrrlenty of choice.
The software bureacracy is Microsoft’s, not the elected government’s. Seen how many linux games there are ?
I’m not sure what the argument is. Debt"under the Obama administration" has risen by about $6.3 trillion (I think these are trillions) since 2009; it rose by $6.1 trillion from 2001 to 2009; by $2.5 trillion from 1990 to 2000; as a percentage of GDP, that’s 21% points, 28% points, and about 1% point each.
Now what? This has very little to do with a discussion of how successful austerity is as an economic policy was, does it?
Is there actual, hard evidence for this? Or more like your opinion? Because, for what it’s worth, by your logic, we could easily do without cars, trucks, telephones, antibiotics, a stock exchange, fiat money, liberalized financial markets, and so on–all of which everybody’s economies worked plenty well “until the early 20th century” (and in some cases, long after!)…
Ever taken a counterfeit medicine? Has a glass of milk contaminated with melamine? I have.
I’ll keep my bureaucracy, thank you.