On James Maule’s tax law blog Mauled Again, he wrestles with Tax Rebates, Tax Cuts, Deficits, War, Politics and the Economy and reaches some provocative conclusions.

He starts by giving us a rundown of deficit spending, tax policy, and how each is manipulated in the cause of economic stimulus:

  • The U.S. government is running a budget deficit.
  • Those responsible for the budget aren’t about to jeopardise their reelection chances by “raising taxes to the levels to which they need to be raised to eliminate the deficit even if coupled with reduced spending.”
  • When you have a broad-based tax cut or rebate, people with less money tend to spend more of the cut or rebate than people with more money do, because they are more likely to have unmet needs that can be met by spending that are more motivating than are opportunities to save or invest.
  • “Recessions reflect, to some extent, insufficient consumption, generated by reduced income (which in turn causes businesses to spend less, causing even less income).”
  • (While this is a good argument for targeting tax cuts and rebates at poorer people when you’re trying to use them as a recession-busting measure, there are also arguments that say regardless of their recession-busting promise, measures like this are unwise for other reasons.)
  • The “trickle-down” theory that tax cuts and rebates aimed at the wealthy eventually have the same sort of stimulating effect on the economy via investments suffers from the fact that while poor people tend to spend their money at home, rich people often invest overseas and so their economic stimulus is especially diluted and indirect.
  • (I would add to this line of thought the argument that recent tax cuts, because they were accompanied by cuts in government programs for people with low incomes, may not have had the expected effect. In other words, instead of the government paying for part of Kelly’s child care, now Kelly pays for all of it. Maybe Kelly now has more money to do so because of the tax cuts, but her new spending doesn’t result in any more jobs.)

Maule continues:

When there is a surplus, because the economy is humming along and tax and other revenues increase faster than does government spending, the question of whether the surplus should be returned proportionately or directed totally or disproportionately to low income households poses an interesting question. Would the tax cuts be better used by the low income households? Recall that these households would spend the money. In this economic environment, with the economy humming along, throwing more money into the consumption bucket would increase the spiral, cause shortages of goods and services, and trigger inflation.

On the other hand, if there is a deficit, a tax cut means that the deficit is larger (no matter who gets the cuts). Then the question is whether the deficit would be reduced more quickly if the tax cuts were directed to the low income households or to the high income households. If the high income households are going to funnel their tax cuts to enterprises abroad, the tax revenue would be less than if the money were spent (by any sort of taxpayer) on domestic consumption. After all, the folks being paid to clean gutters and build home improvements, etc., now have higher income and thus will pay more taxes.

Maule says that the current tax-cut-happy, deficit-spending government’s policies are “like giving candy to a diabetic child. What the nation needs is fiscal discipline. If the nation is going to provide all that it has promised, the nation needs to pay for it. One can argue the merits of what should be spent on prescription drugs, social security benefits, homeland security, national defense, and the tens of thousands of other expenditures in the federal budget or waiting to be added (no matter who is elected). Tax revenue must equal expenditures. Raise one or cut the other. One can debate how the tax burden should be allocated, and I am not going to reinvent that wheel. Suffice it to say that the worst thing that can be done is to increase spending (something both candidates propose to do, because votes come more easily that way) without raising taxes (something one candidate promises not to do and something the other candidate seems to support though with campaign trail words very different from the realities of the plan).”

We’ve heard that sort of common sense budget-balancing argument before, of course, but here’s where it gets interesting: If nobody is willing to pay for all of this spending now, and as sure as “what goes up must come down” somebody’s gonna be left with the tab… who is that somebody going to be, and which piper are they going to be paying?

Is there a huge Federal credit card? No, there is something better. The government borrows money. From whom? From two sources. Remember the question about the high income taxpayers and what they’re doing with their tax cuts? They’re investing in U.S. Treasury bonds (and other obligations). And foreign governments (especially China), awash in U.S. dollars because of the trade deficit, are also buying U.S. Treasury obligations.

So, instead of the Congress directing tax cuts to people who would spend the money because they have no choice, the Congress directed most of the tax cuts to the high income taxpayers who then loaned the money back to the government so that it could spend it. When the smoke clears, the government (us) is indebted to the high income taxpayers (and to China, if that makes anyone feel any better).

My next-to-last question: so how is this all that different from a feudal economy, in which the low income serfs were beholden to the high income nobles and royalty (and, tossing in some theology and annoying a few folks, the very high income church)?

Someday, we will wake up and the creditors will be at the door. My last question: Who is going to pay?

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