LogFAQs > #923646138

Mr Lasastryke posted...

i mean, earlier in this topic you were spouting super conservative things ("lowering taxes helps the poor because it creates jobs!"). don't know how you can say stuff like that and claim that you're not a conservative, unless you're trying to pull some gary johnson-ish "i'm socially liberal, economically conservative" nonsense.

I don't think I said that. I said that lowering taxes on the working class helps them because they have more money since they can pay less taxes. That seems uncontroversial to me.

As far as lowering taxes on the rich to create jobs, I think I said that conservatives believe this in good faith, not that I necessarily agree. I think, based on theory, it's fairly clear that the optimal tax rate to create jobs is not 100%. Then, it's an open question whether that tax rate is 0% or something else. If it's not 0, then there's same logic of the Laffer Curve applies and there is some tax rate above which cutting taxes would create jobs. If it is 0%, obviously there is a tax rate above which cutting taxes would create jobs.

As for what I think actually would be the ideal tax rate for maximizing jobs? That's a complex factual question, and I don't think anyone really knows. Certainly economists cannot agree on this. Muffin would say that it is 0%, and I would tend to disagree.

Based on the record low unemployment in the US now, I would suggest that empirical evidence suggests the current rates are pretty good. But obviously one data point is hardly conclusive.

I think the more relevant question right now is whether Ricardian Equivalence is still a relevant concept for the US. This is the idea that with a rational market, government spending based on borrowing cannot create jobs because in the long run, the only way for government to spend is to tax. Even if it borrows in the short run it will have to repay the loans in the future, and will have to collect taxes in the future to do so. A rational market would see government borrowing in the short run and expect higher taxes in the future to pay for the borrowing, and would therefore allocate more money to saving in anticipation of having to pay future taxes. Thus, there is no net increase in spending across the whole economy (private + government) and the government stimulus plan fails.

The Ricardian Equivalence concept is relevant because the modern Republican concept of a tax cut is essentially the same as the old Democratic concept of deficit spending, just dressed up in different rhetoric. This is because the modern Republican tax cut does not call for any decrease in government spending. Ergo, it calls for an increase in government borrowing. Both of these are attempts to increase total national spending to stimulate the economy and create jobs in the short run. Ricardian Equivalence says neither should work because rational actors should expect higher taxes in the future to pay off the increased government debt, and would cut spending to save for that day.

There's been a lot of research over the years regarding how deficit spending (the old/Democratic version of this) might produce net gains to the economy by using the scale of the government to allow borrowing at a lower interest rate than its citizens can get. And there's been a lot of debate among economists as to whether there is any advantage to this or if the lower interest rate is outweighed by the inefficiency of government bureaucracy.

But with Trump in office, and following years of economic growth in which the market has seemingly only cared about the short term, we now have a new reason why Ricardian Equivalence might not be applicable. Maybe people don't expect higher taxes in the future to pay off the national debt because they don't expect the debt to ever be paid. And it's not their problem - we can live in the moment and spend other people's money!
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September 1, 2003; November 4, 2007; September 2, 2013
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