Much of my work on fiscal policy is focused on educating audiences about the long-run benefits of small government and modest taxation.
But what about the short-run issue of how to deal with a fiscal crisis? I have periodically weighed in on this topic, citing research from places like the European Central Bank and International Monetary Fund to show that spending restraint is the right approach.
And I've also highlighted the success of the Baltic nations, all of which responded to the recent crisis with genuine spending cuts (and I very much enjoyed exposing Paul Krugman's erroneous attack on Estonia).
Today, let's look at Cyprus. That Mediterranean nation got in trouble because of an unsustainable long-run increase in the burden of government spending. Combined with the fallout caused by an insolvent banking system, Cyprus suffered a deep crisis earlier this decade.
Unlike many other European nations, however, Cyprus decided to deal with its over-spending problem by tightening belts in the public sector rather than the private sector.
This approach has been very successful according to a report from the Associated Press.
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...emerging from a three-year, multi-billion euro rescue program, Cyprus boasts one of the highest economic growth rates among the 19 Eurozone countries — an annual rate of 2.7 percent in the first quarter. Finance Minister Harris Georgiades says Cyprus turned its economy around by aggressively slashing costs but also by avoiding piling on new taxes that would weigh ordinary folks down and put a serious damper on growth. "We didn't raise taxes that would burden an already strained economy," he told The Associated Press in an interview. "We found spending cuts that weren't detrimental to economic activity."
We can learn a lot of economic lessons from Europe.
- Never adopt a VAT unless you want much bigger government.
- Bigger government means lower living standards.
- Don't believe Bernie Sanders about the Nordic nations.
Today, we're going to focus on another lesson, which is that higher taxes lead to more red ink. And let's hope Hillary Clinton is paying attention.
I've already made the argument, using European fiscal data to show that big increases in the tax burden over the past several decades
have resulted in much higher levels of government debt.
But let's now augment that argument by considering what's happened in recent years.
There's been a big fiscal crisis in Europe, which has forced governments to engage in austerity.
But the type of austerity matters. A lot.
Here's some of what I wrote back in 2014.
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...austerity is a catch-all phrase that includes bad policy (higher taxes) and good policy (spending restraint). But with a few notable exceptions, European nations have been choosing the wrong kind of austerity (even though Paul Krugman doesn’t seem to know the difference).
We have good news and bad news.
The good news is that President Obama has unveiled his final budget.
The bad news is that it's a roadmap for an ever-growing burden of government spending. Here are the relevant details.
- The President wants the federal budget to climb by nearly $1.2 trillion over the next five years.
- Annual spending would jump by an average of about $235 billion per year.
- The burden of government spending would rise more than twice as fast as inflation.
- By 2021, federal government outlays will consume 22.4% of GDP, up from 20.4% of economic output in 2014.
I guess the President doesn't have any interest in complying with Mitchell's Golden Rule, huh?
While all this spending is disturbing (should we really step on the accelerator as we approach the Greek fiscal cliff?), the part of this budget that's really galling is the enormous tax increase on oil.
As acknowledged in a report by USA Today, this means a big tax hike on ordinary Americans (for what it's worth, remember that Obama promised never to raise their taxes).
Consumers will likely pay the price for President Obama's proposed $10 tax per-barrel of oil, an administration official and a prominent analyst said Thursday. Energy companies will simply pass along the cost to consumers, Patrick DeHaan, senior petroleum analyst for GasBuddy.com, which tracks gas prices nationwide, said in an interview with USA TODAY. ....a 15-gallon fill-up would cost at least $2.76 more per day. It would also affect people who use heating oil to warm their homes and diesel to fill their trucks.
Isn't that wonderful. We'll pay more to fill our tanks and heat our homes, and we'll also pay more for everything that has oil as an input.
The Organization for Economic Cooperation and Development is a Paris-based international bureaucracy. It used to engage in relatively benign activities such as data collection, but now focuses on promoting policies to expand the size and scope of government.
That's troubling, particularly since the biggest share of the OECD's budget comes from American taxpayers. So we're subsidizing a bureaucracy that uses our money to advocate policies that will result in even more of our money being redistributed by governments.
Adding insult to injury, the OECD's shift to left-wing advocacy has been accompanied by a lowering of intellectual standards. Here are some recent examples of the bureaucracy's sloppy and/or dishonest output.
Falsely asserting that there is more poverty in the United States than in poor nations such as Greece, Portugal, Turkey, and Hungary.
Given this list of embarrassing errors, you probably won't be surprised by the OECD's latest foray into ideology-over-accuracy analysis.
I'm a big fan of the flat tax because a low tax rate and no double taxation will result in faster growth and more upward mobility.
I also like the flat tax because it gets rid of all deductions, credits, exemptions, preferences, exclusions, and other distortions.
And a loophole-free tax code would be a great way of reducing Washington corruption and promoting simplicity.
Moreover, keep in mind that eliminating all favors from the internal revenue code also would be good for growth because people then will make decisions on the basis of what makes economic sense rather than because of peculiar quirks of the tax system.
Sounds great, right?
Well, it's not quite as simple as it sounds because there's a debate about how to measure loopholes. Sensible people want a tax code that's neutral, which means the government doesn't tilt the playing field. And one of the main implications of this benchmark is that the tax code shouldn't create a bias against income that is saved and invested. In the world of public finance, this means they favor a neutral "consumption-base" tax system, but that's simply another way of saying they want income taxed only one time.
Folks on the left, however, are advocates of a "Haig-Simons" tax system, which means they believe that there should be double taxation of all income that is saved and invested. You see this approach from the Joint Committee on Taxation. You see it from the Government Accountability Office. You see it from the Congressional Budget Office. Heck, you even sometimes see Republicans mistakenly use this benchmark.
I have a very straightforward rule when assessing politicians. Simply stated, if they are open to tax hikes, then it's quite likely that they have no desire to control the size, cost, and power of the federal government.
Based on that rule, I'm skeptical about Donald Trump.
To understand my doubts, here are some passages from a story on the topic in the New York Times.
For years, Republicans have run for office on promises of cutting taxes... But this election cycle, the Republican presidential candidate who currently leads in most polls is taking a different approach... Mr. Trump has...suggested he would increase taxes on the compensation of hedge fund managers. And he has vowed to change laws that allow American companies to benefit from cheaper tax rates by using mergers to base their operations outside the United States.
These policy positions are raising a lot of eyebrows.
“All of those are anti-growth policies,” said David McIntosh, the president of the Club for Growth... “Those aren’t the types of things a typical Republican candidate would say,” said Michael R. Strain, a scholar at the conservative American Enterprise Institute, referring to the candidate’s comments on hedge funds, support for entitlement spending and the imposing of trade tariffs.
Mr. Trump and former Gov. Jeb Bush of Florida are the only leading Republican candidates who have not signed a pledge to not raise taxes. ...In an interview with Fox News last week, Mr. Trump said a flat tax would be a viable improvement to America’s tax system. Moments later, he suggested that a flat tax would be unfair because the rich would be taxed at the same rate as the poor.
Byron York of the Washington Examiner writes about Trump's fiscal policy in the context of traditional Republican orthodoxy.
Trump is preparing a tax proposal that will again set him far apart from the party's powers-that-be. ...Trump has been sending signals that his tax proposal, which he says will be "comprehensive," will include higher rates for some of the richest Americans, a position generally at odds with Republican orthodoxy. "I want to see lower taxes," Trump said at an appearance in Norwood, Mass., on Friday night. "But on some people, they're not doing their fair share."
And if his campaign manager is accurately channeling Trump's views, the candidate even equates higher taxes with making America great.
Trump campaign manager Corey Lewandowski would say little about Trump's intentions, but noted that "Mr. Trump has said that he does not mind paying what is required to make our country great again." Raising taxes on anyone, even the super rich, has generally been anathema to Republicans for a generation.
Wow, what's next, a Biden-esque assertion that higher tax payments are patriotic?!?
Every so often, I get asked why I'm so rigidly opposed to tax hikes in general and so vociferously against the imposition of new taxes in particular.
In part, my hostility is an ideological reflex. When pressed, though, I'll confess that there are situations - in theory - where more taxes might be acceptable.
But there's a giant gap between theory and reality. In the real world, I can't think of a single instance in which higher taxes led to a fiscally responsible outcome.
That's true on the national level. And it's also true at the state level.
Speaking of which, the Wall Street Journal is - to put it mildly - not very happy at the tax-aholic behavior of Connecticut politicians. Here's some of what was in a recent editorial.
The Census Bureau says Connecticut was one of six states that lost population in fiscal 2013-2014, and a Gallup poll in the second half of 2013 found that about half of Nutmeg Staters would migrate if they could. Now the Democrats who run the state want to drive the other half out too. That’s the best way to explain the frenzy by Governor Dannel Malloy and the legislature to raise taxes again... Mr. Malloy promised last year during his re-election campaign that he wouldn’t raise taxes, but that’s what he also said in 2010. In 2011 he signed a $2.6 billion tax hike promising that it would eliminate a budget deficit. Having won re-election he’s now back seeking another $650 million in tax hikes. But that’s not enough for the legislature, which has floated $1.5 billion in tax increases. Add a state-wide municipal sales tax that some lawmakers want, and the total could hit $2.1 billion over two years.
In other words, higher taxes in recent years have been used to fund more spending.
And now the politicians are hoping to play the same trick another time.