All governments have certain financial obligations. Which obligations they ought to have is a
matter for political philosophy. How they
most prudently meet their obligations is, at least in part, an economic question. It’s an important topic right now because if
things don’t change pretty significantly, the U.S. may not be able to meet all of its projected expenses.
There are essentially three views as to how we can satisfy
those obligations, and they segregate into two camps: the size of the American economic
pie is fixed, or the economic pie can grow.
The Occupy Wall Street crowd is the clearest example of
fixed-pie thinking. The very act of labeling citizens by their income percentile betrays a fixation on current wealth / income and ignores the implications of future economic growth. Can you imagine any self-respecting OWSer arguing that in order to wring more money out of the 1% we should figure out how to incentivize them to deploy their wealth more productively? Their rhetoric is entirely confiscatory.
Reality is not on their side—economies grow. The basic equation for macro-economic growth
is a rising population + increasing productivity. Both of those trends are intact globally and
show no signs of letting up in the next several decades.
Some fixed-pie folks may claim to have a right to a
larger piece of that growth, but that is a question for political philosophy--and hopefully, the rule of law--not economics.
The other group believes that the economic pie can
grow. They believe that taking money out
of the public sector allows it to be put to work more productively in the
private sector, which raises taxable incomes and which in turn leads to
higher tax receipts.
Growing pie proponents include
“supply-siders”. Supply-siders argue
that that there is no limit to the amount of economic benefit realized through
cutting taxes, and that because of this, the more taxes are cut, the more tax
money will be raised through taxes.
Ultimately it’s a view that reduces to the absurd: if we were to cut total federal tax receipts from $1 to $0, would we really somehow then take in more
money? Reality is on their side, but only to
a point.
The other growing-pie sub-group—we’ll call them the “optimal
tax” group—says to the fixed pie-ers and the supply-siders, “Wait a minute, there must be a tax
structure that engenders economic growth through private sector profit
retention, and maximizes tax receipts to meet government obligations.”
One challenge—especially difficult in an election year—is to distinguish whether popular arguments pertain to political philosophy,
or to economics. Another challenge is to
decide which economic arguments are reasonable.
The fixed-pie crowd has a tough time distinguishing between
philosophy and economics and when they do, they make poor arguments like:
“redistributing wealth will allow ‘middle-class families’ to spend more money
and, thus, increase economic growth.” Hmm. How do we know that consumers
will spend money more productively than hirers?
Empirically, we’re seeing the limits of that notion right now: far from
spending their FICA tax holiday money, consumers are paying down debt.
Supply-siders also frequently blur economics and
philosophy. They desire a less pervasive
federal government and thus support all tax-cutting initiatives, often times without actually doing the work to figure out the real economic implications.
The place to spend our intellectual energy is optimal tax structure. Optimal tax proponents agree with research
which suggests that high marginal income tax rates act as a drag on incentives
to produce. They also know that we can’t
simply cut our way to paying off our debts.
Backing optimal tax rate policies does not limit you to one
political philosophy. It just means
you’re thinking rationally about government income and expenditures, and tax payer incentives and disincentives. In other words, optimal tax structure is the
land of grown-up fiscal management—the domain of economic reality.
So, OWSers and blind-faith supply-siders, pull up a chair! The pie is delicious—and capable of growth—and the
price ain’t so bad, in reality.
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