Wednesday, January 28, 2009

Do House Republicans Understand Tax Policy and Consumption Demand?

I submit that Congressman Jeff Flake does not:

Rep. Flake (R) was just on CSPAN moments ago talking about tax cuts in the Stimulus Bill. And he just made the argument that a lot of tax cuts in the bill go to 'people who don't pay income taxes', i.e., they're tax rebates … There's a decent case that one-off tax rebates aren't as potent as spending in terms of pumping money back into the economy. The one from last year didn't seem to have much of a punch. But whether the money goes into the hands of people who do or do not pay income taxes is a completely irrelevant point in itself. It's only relevant to whether you can focus tax breaks on wealthier people -- a political point. What's more, since people who 'don't pay income taxes' are overwhelmingly people with low incomes, those people by definition spend more than those with higher incomes, if only because they have no choice. It's just a straight-up nonsensical statement.

While I have been noting that Ricardian Equivalence would argue for the proposition that tax cuts do not increase aggregate demand while increases in government purchases would stimulate aggregate demand, we should recognize the role of borrowing constraints:

If “strapped consumers” means those facing borrowing constraints, it is precisely these households that are more likely to consume rather than save a tax cut.

Flake seems to be arguing that households that do not face borrowing constraints would be more likely to consume a tax “cut” than those that do face borrowing constraints. This proposition is precisely the opposite of what economic theory would tell us. Then again – economic theory tells us that increases in tax cuts (especially tax cuts for rich households) have less bang for the buck than increases in government purchases. Are these House Republicans hoping for the lowest bang for the buck or are they really this stupid?


Ken Houghton said...

"Are these House Republicans hoping for the lowest bang for the buck or are they really this stupid?"

I call false dichotomy, and vote Yes and Yes.

But not so stupid as the Obama administration officials who first took out contraception spending (for people who just lost health insurance and jobs) and the "cramdown" provision in the hope of trolling for Republican votes.

Anonymous said...

I'd look at the issue from a slightly different perspective. If Republicans are voting in bloc fashion and all are repeating the same rhetoric that would strongly suggest that no individual decision making on this complex issue is being made. That wouold subsequently suggest that the Republican position has been decided by only a small handful of their leadership, which in turn would imply that an alternative agenda is in process. The age old Republican agenda is simply to improve, as much as possible, the economic status of the one percenters. Damn the rest of the economy. If things get ever worse and you've still got a few million in the bank you should be able to increase your asset base substantially at bargain prices. Didn't that happen during the last banking crisis in the '80s?

It's not so much a matter of intelligent decision making in complex matters. It has more to do with obfuscating the issue inorder to take advantage of the circumstances. That is at the leadership level. You then only need to control the fools to whom you pander.

TheTrucker said...

About Ricardian Equivalence

You have to put this stuff in the right historical perspective and realize that gold was money and that it was relatively fixed in amount. As such, the money could be used for capital development or it could be used for government. That is exactly how both Smith and Ricardo looked at it. The same way the Republicans look at it. It is a combo pizza of:

1. "Government burns the money in a furnace and wastes it while the farmers and merchants actually actually put the money to use".

2. "There is a fixed amount of money that is shared between government and the private sector".

So if Ricardian government borrows then that money is "saved" by default in the form of bonds as opposed to being free for investment in the form of _real_ capital. In the world of fiat money that is not the case. Borrowing at zero interest does not "crowd out" any investment in the private sector.

But even with this, Ricardo (and Smith before him) could not foresee the tax system as we have and the transfer programs in which modern governments involve themselves. Indeed, if the borrowed money is used to pay the producers of infrastructure who will not be paying income taxes (or very little income tax), while the tax system will actually reclaim the money from the higher income people in the future then this is not "equivalent".


1. The people who will eventually pay the taxes are not actually known for certain. But there is a good likelihood that these will not be the same people who will benefit from the current spending.

2. The Ricardian model assumes a total waste of the funds (a war), while a stimulus package that is primarily spending on infrastructure is an investment in _real_ capital.

3. There is not real need to borrow. The money can be printed. This could not have been done in the time of Ricardo.

Using "Ricardian Equivalence" or "crowding out" as a foil against stimulus by infrastructure is just a lie. Republicans and their nroconomists will do _ANYTHING_ to prevent this package from going forth or they will do all they can to weaken it such that it will not utterly expose all the lying they have been doing since 1980. It matters who/what is taxed and it matters what is done with the proceeds.