Monday, October 3, 2011

Tyler Cowen on Taxes

In his Sunday New York Times column, Tyler Cowen challenges the "no new taxes" pledge many of the Republican candidates are stressing. It is a worthwhile column to read as he notes that no new taxes today, without spending cuts that are not going to happen, means a pledge to higher taxes in the future--at least if one is "fiscally conservative."

Back when the Reagan tax cuts were being discussed, I favored the cuts for two reasons. The first is that I thought the marginal tax rates were too high and discouraged investment while encouraging tax avoidance behavior. Second, lowering federal income would be the only way to lower government spending. I still think I was correct on the first point but not on the second point. Government tends to borrow when its income is reduced. Now, one of the points Cowen is making, is that eventually taxes will have to be raised. But we are still able to delay that because of the position of the US in the world economy. We are not Greece. But postponing deficit reduction is not a sustainable position. Fiscal conservatism consists of two major points--over time we must balance the [operating] budget, and the size of the federal government should be limited.

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