Beware Advocates Looking to Take Advantage of Economic Doldrums

As Justin points out, The Poverty Institute's Kate Brewster seems to be basing much of her "more taxes, increase spending" argument on the work of Peter Orszag and Joseph Stiglitz. Brewster states that they've determined that "tax increases on high earners are less harmful than spending cuts." True enough and plausible, but that isn't exactly the whole story. Orszag and Stiglitz were talking short-term.

The conclusion is that, if anything, tax increases on higher-income families are the least damaging mechanism for closing state fiscal deficits in the short run. Reductions in government spending on goods and services, or reductions in transfer payments to lower-income families, are likely to be more damaging to the economy in the short run than tax increases focused on higher-income families. {Emphasis mine}.

However, in the long-run, tax rates most certainly affect spending. For example, Christina Romer, President-elect Obama's appointed Chair of the President’s Council of Economic Advisors, has written extensively on tax cuts and revenue and shown that tax increases do influence behavior.

Our baseline specification implies that an exogenous tax increase of 1% of GDP lowers real GDP by almost 3%. Our many robustness checks for the most part point to a slightly smaller decline, but one that is still typically over 2.5%. We also find that the output effects of tax changes are much more closely tied to the actual changes in taxes than to news about future changes, and that investment falls sharply in response to exogenous tax increases.

Here in Rhode Island, we're still operating under the "temporary" sales tax increase of the early '90s. So while Brewster et al may be trying to tell us its better for the short term to raise taxes on the wealthy, we know that their actual goal is, and has been, to keep taxes higher, permanently and to increase--not reduce, not maintain--current levels of entitlement spending. This latest op-ed is nothing more than another example of one of the usual suspects attempting to take advantage of an economic downturn to re-institute failed policies of the past.