Fiscal Policy: If You Want to Play the Hand, You Have to Ante Up

by: Brad DeLong

Glenn Hubbard, writing in the Wall Street Journal, wants "President Obama [to]... commit to retaining the low tax rates Congress passed in 2003."

Seems to me that he wants to play his hand without anteing up any of his chips.

Thus for me the dominant consideration is that this is the Wall Street Journal trying, once again, to weaken and impoverish America by raising the long-term debt and its burden on the economy. If there were PAYGO-style offsets on offer to fund the extension of the "low tax rates Congress passed in 2003," then we could talk. But there aren't any offsets. There never were.

I've watched this blowing open the deficit and destabilizing America's long-term finances for thirty years. America is poorer and weaker because of it. And I am tired of it.

If we were in a world in which Glenn Hubbard and the Wall Street Journal had PAYGO-style offsets on either the spending or the revenue side to offer in order to fund the tax cuts to produce permanent differential low tax rates on capital income and permanent low tax rates on high-income individuals, then we could talk about all the other considerations that should affect our decision.

Those considerations would be, in rough order of magnitude:

  • Taxes on capital income and on the rich are to a substantial degree taxes on thrift and enterprise, which have powerful external benefits to everyone--and we would much rather tax thrift and enterprise lightly if at all.
  • These taxes are paid by the rich, and if you had asked us before we were born, before we knew who our parents are going to be, before we knew whether we would be rich or poor, we would all have said we wanted taxes on the poor and middle class to be low and taxes on the rich to be high--the rich can, after all, afford to pay.
  • These taxes on capital income and on the rich are to a substantial degree taxes on luck and on successful rent-seeking--and thus we want such taxes to be high.
  • Cutting taxes temporarily now, even taxes on the rich and on capital income, is a fiscal stimulus--and given the politics we need every stimulus to the economy we can get.
  • Cutting these taxes, however, is a particularly weak fiscal stimulus--we would rather do almost anything else with the money.

But we are not in a world where Glenn Hubbard and the Wall Street Journal offer PAYGO-style offsets on the spending or the revenue side to fund the reductions in taxes necessary to create the permanent low tax rates that they seek. And I am very tired of seeing the Wall Street Journal try, yet again, to weaken and impoverish America by raising the long-term debt and its burden on the economy. I've watched this for thirty years. America is poorer and weaker because of it. And I am sick of it.

At the end of his article, Glenn Hubbard pleads:

Deficit reduction is a legitimate object of concern. But if this concern is the dominant one, I am aware of no serious analysis that would claim smaller costs to the economy—in lost output and foregone economic growth—of raising capital income taxes as opposed to increasing other taxes or limiting deductions or reducing federal spending...

So what other taxes would he raise? What categories of spending would he cut? Show us the money and we can talk.

But I know of no serious analysis that claims, I do not believe that there could be a serious analysis that claims, net benefits to the economy--in higher output and faster economic growth--from yet further unbalancing the long-run finances of the American government