August 4, 2004

During political conventions, most economists hope that journalists will not ask them the relevance of the economic claims being delivered from the podiums and written into the platforms of the two major parties. 

Of course economics is important, but the fast and loose economic principles pronounced by the two parties are usually so difficult to defend that most economists would rather not be asked to try. 

For example, why are tax cuts for the middle class better than those for the rich or the poor.  I can answer why the politicians do not discuss reducing tax burdens for the poor.  This is because most poor do not pay income taxes.  (They pay lots of sales and payroll taxes, however, and have property taxes reflected in their rents.)

On the surface, one might argue that the rich can afford to pay more taxes, so they should.  However, the economic cost inflicted by raising taxes depends upon the value lost by those paying the taxes.  If the rich are more motivated by incomes (after all, why did they work so hard to gather them), they might actually feel more pain from paying a tax than the middle class. 

I always argued that the rich gain more from defense and justice, which protects their wealth, than others.  Therefore, they should pay more; but I cannot make that claim on strong economic grounds.  Thus, the claims that middle class tax cuts are better than tax cuts for the rich, a clear principle of the Democrats, is not easy to prove. 

Similarly, Republican claims that permanent tax cuts help the economy also rests on shaky economic grounds.  Certainly, when the private sector is unwilling to borrow, government can more effectively raise resources through borrowing than taxing.  Thus, temporary tax cuts to stimulate economic behavior in a soft economy certainly has many economic advocates. 

When the economy recovers, however, government borrowing will be displacing desired private borrowing.  Interest rates will rise and desired capital improvements may be delayed or never materialize.  If tax cuts create a structural deficit (that is a deficit that does not go away even when all resources are utilized at intensities that begin to threaten inflationary problems), those cuts may be very wrong. 

There is a movement within the Republican party to oppose any tax increases, even if they are needed to finance tax reductions that result in a better tax code.  In short, the no tax increase faction virtually denies any tax reform.  When I hear politicians claiming they have never and will never raise taxes, I want to ask if that is because they are happy with the current tax code.  (I know the answer to that question, but who said politicians must be consistent in their economic positions.)

Many Democrats also claim that taking resources from the rich to give to the poor will improve the country.  If such transfers cause the poor to lose incentives to remove themselves from poverty, many economists might even say that such a program is undesirable.  If the programs open up opportunities that otherwise are denied to the poor, then the programs might be beneficial. 

Even in this latter case, if the poor receive more opportunities, but the costs include reduced incentives to become more innovative by entrepreneurs and inventors, then this income transfer must be questioned. 

Certainly we would like to see the homeless housed, the starving fed, and the poor with more opportunities.  But none of these resource transfers are costless.  Why do the Democrats believe the costs of obtaining those resources can be ignored? 

Frankly, both parties are ignoring the costs of existing retiree programs promised by government even as both have added to those promises.  The Democrats want medical burdens to become even more of a government responsibility than they currently are.  The Republicans have launched a prescription drug program that supposedly is financed through shifting medical service purchasing behavior (that’s how the program is financed, even if you cannot understand what I am saying). 

Neither party has owned up to how the gap between what has been promised and what is being accumulated will be closed.  Will payroll taxes rise even further (either with higher rates or more earnings subject to the tax)?  Will retiree benefits be delayed even longer for the children of the current retirees?  Will some people who were promised benefits be denied because they “can afford it”? 

Will we allow individuals to administer some of their government retirement investments, although cash flow needs will never require any individual to opt out of the government programs without impairing the benefits of current recipients?  Will we run the government programs with fiduciary responsibility? 

Now those issues would make for an interesting debate.


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