Friday, March 16, 2012

Bruce Bartlett, Keynesian?

It appears that Bruce Bartlett has finished turning his academic truck around and finally learned to stop worrying and learn to love Keynesian economics, at least as it relates to tax policy. Three days ago he wrote in a blog post at the New York Times Economix (HT: Tom Woods). that higher tax rates on the rich will increase government revenue. Responding to a Wall Street Journal op-ed written by Alan Meltzer, Bartlett writes, "If the rich are going to continue to get richer in low-tax countries and high-tax countries alike, then it must mean that high tax rates have far less of a disincentive effect on the rich than conservatives like Professor Meltzer continually proclaim."

Later in the piece he specifically goes after supply-side economists, who have been claiming since the Reagan administration that if we raise taxes too high, tax revenues will actually fall, because the incentive to be productive will diminish to the extent that the tax base falls.
A common reason given by conservatives for why tax rates must not be increased is that the government won’t get much, if any, additional revenue and might even get less due to the Laffer curve. If tax rates are too high, they say, the rich will stop working and investing in job-creating businesses and instead spend all their time vacationing and seeking out tax shelters. Therefore, revenues will fall.
However, one never sees conservatives cite any empirical evidence in support of their contention. It is simply asserted as self-evident that the rich will go on strike, as they did in Ayn Rand’s famous novel, “Atlas Shrugged,” even though the nation clearly did quite well during times when the top income tax rate was far higher than it is now.
Bartlet should know what he is talking about. He once traveled in Austrian circles and then himself became enamored with supply-side economics. More recently, he became famous for his criticisms of George W. Bush. Of course, there is plenty for which to criticize Bush. In his last term alone, he increased total federal government spending by over 48%!

Nevertheless, now Bartlett has moved past being a Bush critic to what seems to be approaching a full fledged Keynesian economist by arguing that increased taxes does not cause a drag on the economy because "the nation clearly did quite well during times when the top income tax rate was far higher than it is now."

The economic history he cites, however, is not an argument for higher taxes. It is merely evidence that there are more things that affect relative prosperity than taxes. More important than taxes is government spending. The problem is that we spend so much and it has to funded somehow. Sometimes its funded through taxes, sometimes through debt, and sometimes inflation. All of these funding sources create negative economic consequences. Additionally, government spending directs scarce economic goods away from their most highly valued uses, hampers the market division of labor, and, hence, reduces social productivity, leaving us relatively impoverished.

Bartlett's position on taxation is a stark change from what he wrote in, "Keynesian Policy and Development Economics," a chapter in the book Dissent on Keynes, published back in 1992. Criticizing the Keynesian perspective on taxation, he says,
In the Keynesian model, taxes affect the economy only through their impact on aggregate demand. Thus, all that matters is the aggregate amount of tax revenue relative to spending; it does not really matter what the marginal tax rates are or what the structure of taxation is, except to the extent that progressive tax rates are preferred to regressive ones because those with higher incomes might be inclined to save some of their income, thus depressing aggregate spending.
I am relieved to see that he does not seem to be calling for "the United States go back to the top rate of 50 percent that prevailed during most of Ronald Reagan’s administration, let alone the 91 percent rate of Dwight Eisenhower’s." However, focusing on the lack of government revenue is concentrating on the wrong side of the fiscal coin. The best thing Bartlett could do is to remind his readers of the New York Times that the real economic culprit is not excessively low taxes on the wealthy, but excessively high government spending.

1 comment:

  1. Bartlett, as many do who comment on the higher tax rates of the mid 20th century, conveniently forgets that associated with those rates were many more exemptions such that the total effective rate was not very different before rates were dropped in the early 1980s as they were after. It does no good to talk about marginal rates with the complex tax code that we have. Those rates are basically useless data when trying to find a correlation between tax rates and revenue/output. We all need to agree upon using effective tax rates and calling people out who use marginal tax rates.