Cut Federal Spending, Don’t Raise Taxes

Creative Commons License photo credit: SOGKnives

In my previous blog blasting Nouriel Roubini for suggesting that Uncle Sam should raise taxes to close the budget deficit, I made this statement: “Tax increases will only hamper the ability of the economy to recover and worsen our fiscal condition in the long-run.”  Of course, you don’t have to take my word for it . . . so I thought I would review some pieces in the academic literature (at the international, national and state-level) that make the same arguments.

First, Harvard economists Alberto Alesina and Silvia Ardagna examine the economic effects of fiscal policy (pdf) in countries the constitute the Organization for Economic Cooperation and Development (OECD) from 1970 to 2007.  They find that:

“As for fiscal adjustments those based on spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based on tax increases.  In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions.”

Second, UC Berkely economists David Romer and Christina Romer (former Chair of the Council of Economic Advisors to President Obama), examine the economic effects of U.S. fiscal policy (pdf) since 1947.  The find that:

“The resulting estimates indicate that tax increases are highly contractionary.  The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes.  The large effect stems in considerable part from a powerful negative effect of tax increases on investment.”

Finally, economists Stephen Brown, Kathy Hayes and Lori Taylor examine the economic effects of fiscal policy of the U.S. states (pdf).  They find that:

“If anything, most public services do not appear to justify the taxes needed to finance them . . . this finding would seem to imply that other state and local public capital has been increased to the point of negative returns, perhaps because a growing stock of other public capital is indicative of an increasingly intrusive government.”

You decide . . .