Happy Tax Week

It’s Tax Week and both houses of Congress are focused tax issues — the House is scheduled to vote on a plan to cut them for small businesses, while the Senate will vote on a plan to raise them for millionaires.

What’s lost in both these debates is the notion of what’s the appropriate role for tax policy in deficit reduction?  The One Cent Solution team argues that the US has a spending problem, and its only through spending cuts that we have a chance to balance the budget.

A new paper from Harvard supports this view.  Written by economists Alensina and Giavazzi, the paper reviews the success of past deficit reduction efforts and comes to a simple but clear conclusion — deficit reduction by spending cuts is both better for the economy and more successful at stabilizing government finances.

Here’s the key part of their writing:

“The accumulated evidence from over 40 years of fiscal adjustments across the OECD speaks loud and clear:

  • First, adjustments achieved through spending cuts are less recessionary than those achieved through taxincreases.
  • Second, spending-based consolidations accompanied by the right polices tend to be less recessionary or even have a positive impact on growth….
  • Third, only spending-based adjustments have eventually led to a permanent consolidation of the budget, as measured by the stabilisation – if not the reduction – of debt-to-GDP ratios.”

These findings are consistent with past reviews, most notably a paper by Kevin Hassett, Andrew Biggs, and Matthew Jensen

Specifically, we find strong evidence that expenditure cuts outweigh revenue increases insuccessful consolidations. We also find evidence that the type of the spending cuts is an important determinant of success, as is the type of tax increases.

So when someone tells you that the only way to balance our budget is to raise taxes, refer them to this work and make clear — raisingtaxes is not only the worst way to try to balance the budget, but its also bad for the economy too.

Happy Tax Week.

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