Bartlett: GOP Has No Logic on Taxes

Bruce Bartlett writes in The Fiscal Times:

The main sticking point in negotiations between Republicans and Democrats on deficit reduction measures to accompany a rise in the debt limit is whether higher revenues should make any contribution. A key Republican concern is that any tax increase would depress the economy.

Given the slow patch that the economy is going through, any realistic threat to growth is one that has to be taken seriously. But the Republican position that spending cuts are expansionary while tax increases are depressing is not logically consistent. Both spending cuts and tax increases affect the economy in roughly the same way in the short run – by reducing aggregate demand. Fiscal contraction, whether on the tax side or the spending side, will have a negative effect under current economic conditions.

Of course, it goes without saying that there will be different economic effects depending on how spending is cut or taxes are raised. But the first-order effect in either case will be to reduce national income and depress growth. In the longer run, some spending cuts could well be expansionary if they altered economic behavior in a positive direction. In general, subsidies are a bad idea because they distort economic decision making and reduce growth below what would occur in a free market environment.