Politicians, Taxes, And The Fantasy Of Government

I had wanted to eschew political discussion on the blog for a while, and only write on policy issues from an economic perspective. But election day is looming, and all the economics blogs and newspapers are discussing the relative merits/demerits of the so-called "Romney Tax Plan." The always-excellent David Henderson has a typically excellent summary of the relevant economic discussions being had out there. (Let's forget about the direct partisan messaging for now, since it doesn't actually address the relevant issues.)

First, let me use Henderson's most recent piece as a means by which to bring my readers up to speed, if you have not been following economic debate out there. He writes:
I've discussed this here and here and Garett Jones highlighted Josh Barro's piece on it yesterday. Critics, including Barro, have concluded that the only way Romney can get his 20% across-the-board cut in tax rates, even with limits on deductions and exemptions, is to substantially raise taxes on the middle class. I highlighted Harvey Rosen's contribution to the debate here. The bottom line is that increasing taxes on the middle class is not the only way to achieve Romney's tax cuts.
Quoting a recent John Cochrane blog post, Henderson continues:
What possible sense does it make, then, to evaluate such a plan by assuming off the bat that it has no effect at all on output, employment, investment and so forth? Yet that is precisely what the standard "static" scoring does! We build a rocket ship to go to the moon, and we evaluate its cost effectiveness by assuming that it never leaves the launch pad?
Of course, if you can show that the rocket ship can never leave the launch pad, that's a legitimate criticism of the rocket ship. But you can't just assume it. By the way, check out the comments, including Cochrane's responses to the commenters. Cochrane has some very good content there.
Finally, Henderson excerpts some additional points made by Alan Reynolds. I encourage readers to check that out, but for my purposes here, it's not necessary.

What I want to say about it is this...

Quibbling over the details of the Romney tax plan is a lot of nonsense. The issue here is that the government simply spends too much money. No tax reform would be necessary if spending were reduced. Economists who argue for "tax reform" are really throwing in the towel here. The relevant issue is not tax reform, but rather fiscal solvency.

Every economist on Earth (at least every economist I have ever met or read) seems to agree with the proposition that high tax rates in general - and high marginal tax rates in particular - are an impediment to economic growth.

We don't need to argue over anyone's "tax plan" to move the only relevant discussion down the road a few steps. Given that everyone agrees on the fact that there is only so much tax reform can do to establish fiscal solvency, the only issue worth talking about is the matter of reducing the total amount of government monetary expenditures. But that can't happen because US politicians (and probably every other politician out there) has this mental disease where they think they can just get away with creating "policy incentives" to "grow our way out of debt." This is becoming more and more of a fantasy with each passing day.

And by "fantasy," I mean to say that these folks are drunk on the opium of government and don't realize how short their cognitive time-horizon has become. The time for tax reform is gone. The window of opportunity for small, incentive-inducing changes at the margin passed in the late 90s.

My belief here is that the so-called "Great Moderation" was not a period of normalcy, but rather a period of over-employment. In the Austrian sense, I believe we as an economy were consuming capital at an increasing rate without investing it in wealth improving technologies. American companies captured productivity gains from outsourcing low-skill jobs, but we have now reached a point where everything is outsourced except upper management positions. We've captured about all the gains from outsourcing that we possibly can, short of selling off everything for a huge golden parachute and retiring.

Now, obviously, that is precisely what the Baby Boomers intend to do with the American economy. When they retire, then the Hydra will no longer have any heads. Reinvestment will be impossible because all the competitive technology and economic infrastructure will be in the BRICM countries. People my age and younger will either have to build an empire from the ground up, or move to BRICM. I readily admit that the latter option is extremely enticing, and anyone who chooses to do this is acting in their own rational self-interest. By all means, do it while you still can!

But for those who choose to stay in America, the relevant issue is government spending; namely, shrinking it. Forget tax reform. We need to end the wars, shrink the bureaucracy, and scale-back social welfare spending.

The choice is simply this: Either we reduce government spending, or we move to BRICM. The politicians can whine about social "fairness" all they want, but they cannot change basic arithmetic. The current trajectory cannot continue. So, take your pick: Move to China, or learn how to stop asking government to solve your every problem.


  1. This is totally wrong. Are you seriously contending that if the US commited to a flat tax tomorrow (revenue-neutral), it would not have any impact on growth?


    1. Sorry, no, that's not what I've written above. Please give it a closer read.