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“Tax increases appear to have a very large sustained and highly significant negative impact on output.”

July 19th, 2009 · 2 Comments · Uncategorized

Gee. Ya Think? See page 20.

As my old professors used to say: “intuitively, we know that…”

Intuitively we know that taking money from productive members of society to build Lawerence Welk (or Sparta Teapot) Museums is probably bad for national productivity. Regrettably, many require deep empirical research from an ivory-tower institution to prove what common sense dictates. Thankfully we have it. (And from the Chair of Obama’s Council of Economic Advisers no less!)

Just in case you missed it:

very large
highly significant

negative impact

So, collectivists — can we finally put this one to bed now? If not, please don’t argue with me, take it up with Christina Romer. I’m just the messenger.

Thank you Christina Romer, the National Science Foundation, and the Economics department at U.C. Berkeley.


2 responses so far ↓

  • 1 Steve Roth // Jul 26, 2009 at 8:40 am

    1. Stipulated. But not based on this Romer paper, which has been widely discussed.

    A. It attempts to concoct a natural experiment post-facto by distinguishing between different types of tax changes based on deductions of the legislators’ “intentions” when instituting those taxes. Resoundingly unconvincing, IMHO.

    B. It only looks at only one country (the US), ignoring the only real natural experiment available–different countries with different policies over decades.

    C. Far more impressive long-term, cross-country analyses come to the same conclusion.

    Tax *increases* have a negative impact on growth–not high tax rates themselves. (Within the range that’s extant in thriving prosperous countries around the world.)

    That’s why we’re in such a terrible situation today–because we’ve been borrowing instead of taxing so insanely over the last 30 years of magical thinking.

    We have a terrible, terrible hole to dig ourselves out of, and the only way to do it is by (finally) paying our bills. Paying off loans doesn’t increase GDP. (This is true in both the public and private sectors, of course.)

    2. “Intuitively we know that”

    Intuitively we know that allowing marriage between blacks and whites will result in the collapse of civilization as we know it.

    When I catch myself *really wanting* to believe something that seems “intuitively” true–especially when it’s part of a fairly hermetic belief system, and especially when that belief system makes me look good to myself (this happens to me quite frequently)–that’s the time when I suggest to myself that I should question that belief most vigorously.

    3. The Romer paper is in fact the very type of Ivory Tower exercise in economics that I, at least, have a great deal of disdain for–abstrusely modeled, based on opaque and inherently subjective judgments portrayed as objective facts, and as a result many stages removed from the kind of fundamental, blocking-and-tackling econometrics that gives real insights into the real world, but which is not nearly as tenurable as analysis based on cap-T “Theory.” (Same problem in the Shakespeare world–the world’s great text editors and historians are shunted into dusty side rooms in favor of “Queer Theory”-ists and the like.)

  • 2 Steve Broback // Aug 1, 2009 at 11:56 pm

    I assume Christina has a persuasive rebuttal. I’ll let you take it up with her.

    Far from ivory tower, a refreshing breath of fresh air and common sense. Get a room full of economists together and most will agree, it’s “intuitive” that extracting money from the private sector will negatively affect output. Yes, even if you do it by borrowing.

    Testing different countries with different policies introduces so many messy variables (corruption, culture, etc.) that you’re comparing apples and oranges. In a nice, clean experiment where 50 state taxation rates in a single unified country are compared the results are clear.

    The best counterpoint is that government activity can increase output, and that is why they tax. Problem is that creating and enforcing property rights, education etc. is not what they are raising taxes for. Transfer payments are not all that stimulative. They sure make us all feel better though.

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