As a layman follower of the Austrian school, which do you prefer: cutting taxes or balancing the budget?
In other words:
If a government’s budget were balanced, would you cut taxes (and thereby start deficit spending) or would you keep taxes at their current level in order to keep the budget balanced?
If a government were running a deficit, would you balance the budget at all costs (even if it meant raising taxes) or cut taxes even further (thereby increasing the deficit)?
If a government were running a surplus, would you use that surplus to pay off additional national debt or would you use that surplus to cut taxes?
My view is that in all cases the government should cut taxes on saving and investment, even if that means running a deficit or increasing the current deficit.
Take the US 2010 federal budget, for example. If it were politically impossible to cut any spending, I would try to cut corporate and capital gains taxes first, and then I’d go after death, payroll, and personal income taxes. If the government were to completely eliminate corporate taxes for fiscal year 2010, then it would increase its deficit by $100bn.* I believe that such a tax cut would be economically beneficial, since the increase in GDP would offset the increase in the national debt.
What are your thoughts on this subject?
*I’m assuming here that a significant portion of lost corporate tax revenue would be regained via increased personal income and capital gains.
Why does it matter how the government acquires the resources it needs to spend? The only “economically” sound reason to oppose deficit spending is if one is concerned about sovereign solvency. Now I don’t think that even a miniarchist should be too concerned about the solvency of the welfare and warfare State.
This reminds me of something I was wondering about:
Why doesn’t the Federal Government simply fund itself with pure inflation and not even bother with taxation? Wouldn’t it save a huge amount of administrative costs? Certainly the dollar would lose value faster, but would the resulting economic distortion be that much more difficult for businesses to navigate than the current bloated system of tax law they must submit to?
The US government will spend over 3.5 trillion dollars or $11,700 per person or $29250 per private sector working US Citizen. That is directly central planning 3.5/14.3 = 24% of GDP. There is no way to steal this much money and not cause huge economic distortions. The only solution is to make the government smaller. If the government say spent the same percentage it did prior to 1900 then that would be 3% of GDP. Granted this is a huge number: 440 billion dollars but far from the 3.5 trillion. At a spending of 440 billion dollars then who cares how you finance the govenrment.
It’s a difficult one. My thoughts are that it depends how the government would make up the difference. If they would just borrow more from private individuals, then this is not so bad because there is a chance (hopefully) that government debt will be written off at some point in the future (when the government is declared bankrupt). But then at this point we know they would just inflate to make up the difference anyway, which would have devastating consequences with hyperinflation. Hopefully, spending will be cut before it gets to this point.
It’s purely academic though. In principle, all tax cuts should be welcomed. It would be folly to oppose a tax cut on the basis that there is not a corresponding spending cut. Likewise, it would be folly to oppose a spending cut on the basis that there is not a corresponding tax cut.
So, yeah, I’d cut taxes rather than being overly concerned about balancing the budget. Then cut spending before default, followed by hyperinflation, becomes inevitable.
Well, I’m assuming that in this scenario we can’t dismantle the state anytime soon, so for the state to survive it would have to raise taxes later on (steal from futurity) to pay off debt. Still, I’m not particularly concerned about the solvency of the state. The whole edifice is going to collapse eventually so I say make sure that private interests have enough money to respond the impending crises, deficits be damned. So, the answer to all three questions would have to be “Cut taxes!” for me.
Why would you tax in one method that everyone knows about when you can tax in two methods of which only one is commonly looked at? They are hiding a portion of current taxes in plain sight. It would be foolish to draw attention to the inflation portion.
“But if you let the deficit grow, without an adequate tax increase, there will be an increase in interest rates.”
Interest rates are determined by time preference. Now, there are many ways in which the State can and does distort that rate, so unless you can show why it must necessarily follow that there will be less interest rate distortions if the government follows a balance budget, then I’m afraid you have no valid point.
I hope someone gets in office who starts to phase out Social Security, Medicare, Medicaid, etc. This may be a dumb question, but is there a way to opt out of these welfare programs while paying your annual taxes?
Pardon me if my memory is faulty, but the Amish and other religious groups existent prior to the creation of these welfare programs have an opt-out option in most cases.
@Main Topic
I would on principle cut taxes whenever possible, but I am concerned about how the government would fund itself given a deficit. Are we presuming that it is borrowing from a third party or is it simply cranking out the printing press? If the latter is true, then I fear the decrease of the dollar’s worth might be far more disastorous to the businessman than taxing them. I don’t suppose there is an option to get rid of legal tender laws while we’re at it?
Cutting taxes is the right answer. Either way, the same amount of wealth is extracted because spending is the same. But lower direct taxes on the production retains the incentive for more production.
It’s the supply side effect, and yes it’s important.
Interest rates are determined by time preference. Now, there are many ways in which the State can and does distort that rate, so unless you can show why it must necessarily follow that there will be less interest rate distortions if the government follows a balance budget, then I’m afraid you have no valid point.
Its really pretty straight forward, less money taken by the government means (and less bonds issued) means more for the private sector, why wouldn’t there be less distortions?
“Its really pretty straight forward, less money taken by the government means (and less bonds issued) means more for the private sector, why wouldn’t there be less distortions?”
The crowding out effect applies to direct taxation just as well as other methods of taxation. Unexpected increases or decreases in government borrowing can indeed distort interest rates, although only temporarily. But that’s not what can be inferred from your original post. You implied that there is somehow more capital available to the private sector if the government avoids deficits and only adheres to direct taxation.
From a purely calculation stance it’s easier to account for state expenses in direct taxation as opposed to guestimating your future expenses in expected inflation. So in that regard I’d say it’s easier for business’s and consumers to pay taxation directly as opposed to indirectly via inflation or business cycles. Deficit spending still brings the tax, it’s just hidden in such a way that individuals cannot adequately calculate for the economic distortions it will cause.
In short, direct taxation is a bit easier on economic calculation. Both methods bring about mal-investment and a misdirected consumption of natural resources, however one method is more immediately apparent and objective, while the effects of the other lag behind as people are fooled.
But that’s a false choice- Direct taxation or no inflation. It doesn’t exist. The OP has not suggested that the central bank disappear on account of balancing the budget.
Anyhow, you can’t speak about balancing the budget without speaking about what happens the day after when the funds run out again. So that the real world choice is really between:
Ceiling for direct taxes and deficit spending until breakdown.
No ceiling for direct taxes and taxes just go up and up and up until breakdown.
Don’t get me wrong. I’m not advocating for deficit spending. I’m just merely stressing the point that the only real issues is less spending vs everything else.