As a “solution” to our economic problems, the government has been spending money on stimulus programs. Since the government can’t directly incent business development, this type of money ends up going to 1) minor infrastructure projects and 2) funds for local governments and states to spend on salaries, programs.
As we know, the government has to raise revenues to pay for these programs in the form of taxes. Then the taxes, which distort business activities in myriad ways, are paid out in the form of salaries and grants in a relatively inefficient manner through a variety of poorly managed government programs.
While it isn’t popularly known, the US has among the highest corporate tax rates in the developed world and it isn’t just a co-incidence that other venues such as Hong Kong and Brazil are seeing an upsurge in IPOs and stock listings. The US today is not a competitive place to start a business, all else being equal.
The current government is not only taxing the US at an unsustainable rate as far as competitiveness, it is spending money that it doesn’t have (deficit spending), which will burden the US and future generations with high interest payments. The current deficit for 2009 is estimated to be about $1.6 trillion dollars, which will add about $100 billion / year in interest payments (fluctuates depending on rates).
All of these taxes don’t help put people in meaningful (non-government) jobs. In fact, they hurt our competitiveness and hurt the businesses most likely to grow and create jobs. Since unemployment is important even to our elected officials (unlike debt, competitiveness and future interest burdens, apparently) because an unemployed electorate is an angry electorate, institutions like the NY Times have to start thinking about tax cuts as a way to spur job creation.
From the article, titled “Tax Cuts Might Accomplish What Spending Hasn’t“,
When devising its fiscal package, the administration relied on conventional ideas based in part on ideas of John Maynard Keynes. Keynesian theory says that government spending is more potent than tax policy for jump-starting a stalled economy. (Per the administration) it says that an extra dollar of government spending raises GDP by $1.57, while a dollar of tax cuts raises GDP by only 99 cents.
According to the Romers (on the President’s Council of Economic Advisors), each dollar of tax cuts has historically raised GDP by about $3 – three times the figure used in the administrations’ report. That is also far greater than most estimates of the effects of government spending.
While pretty much anyone reading this blog could have told you that tax cuts would have been a more effective way to stimulate the economy, it is striking that even the administration’s own advisers are waking up to this obvious fact.
Too little, too late, for everyone that will be paying for this mess in the future and unwinding the piles of ineffective government staff and programs that these dollars create, but still a glimmer of insight for that crew, at least.
Cross posted at LITGM
Perhaps as important as the tax levels is the increasing thicket of regulatory burdens, which is creating a business environment in which corporate executives cannot predict whether any given decision on complex tax, securities, or disclosure issues might or might not be legal. Sarbanes-Oxley alone has driven a substantial amount of the US small IPO market to Canada and the UK, and will probably be the gift that keeps on giving in that regard.
There is less there than meets the eye. That was one of the NYT’s token republicans who wrote that column, Greg Mankiw, who is an Econ Prof at Harvard and was GWB’s Economic adviser 2001-2003. It is most certainly not the editorial board of the NYT or one of its approved Democrat Party operatives.
Yes, Mankiw is an NYT outsider whose opinions run generally counter those of the editors, but it’s good that they published his column. (His blog is worth reading too.)
Not only are the current tax and regulatory rules burdensome to businesses, the current administration and Congress are creating tremendous uncertainty with their capriciousness, ideological dogmatism, corruption and incompetence. This uncertainty is a kind of tax that generates large costs but no revenues.
Time to cancel all business regulation!
It worked in Germany after WWII.
Just decriminalizing ordinary business decisions would be a good start.
Howard Jarvis, father of Prop 13 in California, pronounced the basic rule about government taxing and spending.
“You can’t ask pigs to back away from the trough; you have to kick the trough away.”
Greg Mankiw’s blog IS worth reading. I really enjoy it.
In my locality, you can read many grumbling letters to the local paper. They grumble about local government and its capricious decision-making. Yet, the obvious lesson to be drawn – don’t let the government be so involved in everything! – doesn’t seem to be, well, drawn. The message, somehow, becomes, “big bad business is responsible.” Well, sure, corporatism is a part of it, but corporatism is more likely to occur in a heavily regulated environment. Odd.
Oh. Taxes. Yeah, how come the party of the loyal opposition can’t make it more widely known, by hollering loudly and such, that the US has some of the highest corporate taxes around? You’d think that would be part of the loyal opposition’s “oppositioning”. Am I being too harsh? Unlikely, given the number of comments to Lexington Green’s last post… .
Econ 201: The Myth of the Economic Multiplier
A direct examination shows that money is used for transactions. Money and goods are repeatedly exchanged, but extra production is not “stimulated”. Only the original production that earned the money is created, then it is traded. The multiplier is 1.
Excerpt:
The appearance of 6 rolls at the table is new value appearing in the dinner table economy. The wave of spending and re-spending sends value around the table. The Economic Value approach sees 6 rolls of spending, followed by a wave of 5+4+3+2+1 of re-spending, for a total of 21 rolls of Economic Value, and a 3.5 Economic Multiplier (3.5 x 6 = 21).
But there are only 6 rolls. The re-spending distributes the rolls; it doesn’t create more rolls. The real value of 6 rolls is overcounted by looking at the roll-passing transactions.
/Excerpt
Some researchers find economic multipliers by looking at production and GDP statistics. They even find different multipliers for different industries, a sure sign that something is amiss with their methods. They are double-counting the effects of spending.
The government provides a greater lie. Obama’s team promotes the idea that taxes are better by a factor of 1.5 than private spending for stimulating the economy. The offered reason? The government spends all of the tax money, but the individual would save some of it.
By this admission, there is no extra stimulus from government spending, they are just spending the money that you wouldn’t spend for yourself! Stealing from you is supposed to be good for the “economy”.
Cargo Cult Economics: Government Multiplier on Taxes