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Brad DeLong: For Fiscal Responsibility, Raising Taxes Is Not Optional

August 25th, 2008 . by economistmom

I just read this post over on Brad’s blog and had to share it here, even though I’ve already posted today on how Warren Buffett feels many of us can afford to pay higher taxes (some like him, more than others), and of course, I’ve posted many, many times on my blog about how we need to raise taxes (in a thoughtful way) as a matter of simple logic and basic math.

By the way, by “raising taxes” Brad surely means (as I always do) raising tax revenues, not necessarily raising tax rates–just to respond to one of the comments on Brad’s site.  Here’s how Brad explains it (so well):

I believe that when we Americans look deep into ourselves and ask us what we want our government–because it is our government: it is our agent to do what we want with our money just as the guy in Florida we hire to keep grandma’s one bedroom condo in repair is our agent–to do, we conclude the following:

  1. We want to let the Bush tax cuts expire.
  2. We want to close the 75-year Social Security gap, half by raising the limit on earnings taxed by Social Security so that the upper middle class and the rich pay more for Social Security and half by reducing the rate of growth of benefits at retirement.
  3. We want to stop sending our soldiers–the best-trained and best-equipped high tech armed forces in the world–abroad to be military police in countries riven by sectarian conflict where they do not speak the language–and so return defense spending to its late-1990s share of GDP.
  4. We want to reduce but not eliminate the “excess” cost growth in Medicare and Medicaid: we believe our doctors, nurses, and druggists will learn how to do wonderful things over the next two generations, and we do not want those wonderful things in the way of medicine applied only to the rich but to the poor and old as well.
  5. Whether or not we decide to do (1) through (4) above, we want to raise taxes to cover whatever of the long-run fiscal gap remains, and so bring the federal budget back into balance over the long run.

Note that (5) is not optional. As the late Milton Friedman liked to put it: to spend is to tax. If the government buys things, it must get the money to buy them from somewhere. It can get the money from three places. It can tax. It can borrow–but then the borrowing has to be repaid with interest, and the more is borrowed the higher the interest and the worse the value the taxpayers ultimately get for their money when they are taxed to repay the borrowing. Or it can print the money and so inflate the currency–but that too is a tax, and an especially unfair, painful, and destructive one, as lots and lots of people victimized by inflation find their wealth doesn’t buy what it used to and what they expected.

We can argue over whether (1) through (4) is what we want to do–that is what politics is about. But whatever we decide to do with (1) through (4), (5) is not optional–not, that is, if we want to continue to have a rich country in the long run. And the politicians who have told you that (5) is optional from Ronald Reagan to George H.W. Bush to Robert Dole to George W. Bush and now John McCain are not your friends, or America’s friends.

8 Responses to “Brad DeLong: For Fiscal Responsibility, Raising Taxes Is Not Optional”

  1. comment number 1 by: Fred

    “By the way, by “raising taxes” Brad surely means (as I always do) raising tax revenues, not necessarily raising tax rates–”

    1) :

    We want to let the Bush tax cuts expire.

    What part of letting the Bush tax cuts expire is not an increase in tax rates?

  2. comment number 2 by: Patrick R. Sullivan

    Professor DeLong gets off to a bad start with:

    ‘…because it is our government: it is our agent to do what we want with our money just as the guy in Florida we hire to keep grandma’s one bedroom condo in repair is our agent…’

    Government isn’t like the condo caretaker at all, he’s got an incentive to please his customer by giving value for the customer’s money. Those aren’t the incentives facing government.

  3. comment number 3 by: economistmom

    Fred: valid point. But note that Brad lists the expiration of the Bush tax cuts as separate from the point that we’ll have to raise taxes (i.e., tax revenues) even beyond that. I would actually argue that letting the preferential rates on dividends and capital gains expire (or at least come up a bit), and stopping the estate tax from outright repeal, are two examples of reversing the Bush tax cuts in a progressive way, raising revenue and “leveling the playing field” (leveling effective marginal tax rates) at the same time.

  4. comment number 4 by: Jim Glass

    DeLong quotes Friedman:

    As the late Milton Friedman liked to put it: to spend is to tax. If the government buys things, it must get the money to buy them from somewhere

    Friedman did say that, and I’ve cited him on that a number of times myself, even in comments here.

    But DeLong really shouldn’t quote Friedman on this as an argument to increase taxes without continuing on to give Friedman’s own take on the subject — lest Friedman’s opinion on it be misrepresented to some.

    Friedman again:

    I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible. The reason I am is because I believe the big problem is not taxes, the big problem is spending.

    The question is, “How do you hold down government spending?” Government spending now amounts to close to 40% of national income not counting indirect spending through regulation and the like…. The real danger we face is that number will creep up and up and up.

    The only effective way I think to hold it down, is to hold down the amount of income the government has. The way to do that is to cut taxes.

    And Friedman’s famous explanation of what’s wrong with government spending…

    There are four ways in which you can spend money.

    [] You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money.

    [] Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost.

    [] Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch!

    [] Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40% of our national income.

    That’s a pretty different view of how the gov’t spends money than DeLong’s idea that the govt’…

    “is *our* agent to do what *we* want with our money just as the guy in Florida we hire to keep grandma’s one bedroom condo in repair is our agent…’”

    The agency problem between a guy maintaining a one-bedroom condo and between politicians spending 40% of national income seems rather different in nature. After all, the guy running a condo doesn’t have the ability to run up any unfunded liabilities without getting fired, while the politicians have already run up $53 trillion at present value.

    Friedman if alive might ask DeLong: Since clearly the politicians aren’t anyhwere near as accountable as the guy we hire to caretake granda’s condo, what changes would you make in their agency relationship to make them so? Before we delegate a great deal more spending power to them?

  5. comment number 5 by: Jim Glass

    By the way, if one wants to see the difference in efficiency that results between spending our own money on ourselves (such as DeLong’s hiring a caretaker to look after a family condo) and Friedman’s #4 relationship, politicians spending other peoples’ money on other people …

    if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government

    … relating specifically to government-run health care, here’s a nice illustration. One of many.

  6. comment number 6 by: Brad DeLong

    Friedman spent his 90th birthday celebration at the White House yelling at George W. Bush for turning the surplus into a deficit.

    ‘Nough said.

  7. comment number 7 by: Patrick R. Sullivan

    If you don’t know what complete, unconditional surrender looks like, Prof. DeLong just gave us a perfect example.

  8. comment number 8 by: Jim Glass

    Friedman spent his 90th birthday celebration at the White House yelling at George W. Bush for turning the surplus into a deficit. ‘Nough said.
    ~~~~

    Well, that would’ve been in 2002, and if true it’s interesting and a referral to a credible source with some details about it would be illuminating.

    Because in early 2001 Friedman was saying the (then promised) Bush tax cuts weren’t big enough. And in early 2003, well after the birthday party, he was saying the (since increased) tax cuts were just fine.

    Hmmm… but 2002 was Bush’s biggest increase-in-spending year. So if Friedman really did spend his birthday “yelling at” Bush about his budget, maybe it was for increasing spending too much?

    That would be entirely consistent with Friedman’s stated opinions, at least.

    Otherwise, the claim amounts to saying Friedman was repeatedly overtly dishonest in public regarding his opinion of the cuts, as per in 2003, linked above.

    Is that really the claim?