September 15, 2003

#122: Catch 22

P. Krugman

The Tax-Cut Con by Paul Krugman in the New York Times Sunday Magazine (09/14/03) shows clearly where he is headed over the coming months�possibly years. Basically, he has given up on a "double dip" economy and on Japanese style "deflation" occurring here and admitted that the U.S. economy is likely to recover�drum roll please!

But, of course, insurmountable problems lie ahead because of the Bush tax cuts, the needless war in Iraq, the administration's conflicts with corporate interests and all of the the usual Krugman spiel. Basically, we can't afford to do all the things that need doing without soaking the rich with more taxes.

We will confine ourselves to two points:

Krugman makes no distinction between the statutory and economic incidence of taxation. This is one of the first things undergraduates learn in a public finance course. "Incidence" is economists jargon for who pays the tax. The corporate income tax is a classic example. The statutory incidence is clear since a corporate officer writes a check to the IRS. But the economic incidence is entirely different. After writing the check the corporation passes the tax along, i.e., passes along the economic incidence, to consumers by way of higher prices, to workers in lower wages, and to shareholders with reduced dividends, retained earnings and share valuations. Ultimately, a corporation pays no tax! This example is classic because it illustrates the age old axiom that there is no free lunch and the one who actually pays may not be the one you think. Krugman knows all of this, but shamelessly exploits the corporate tax as a soak the rich initiative. In fact, the corporation tax is a drag on investment and capital formation. His colleagues must cringe. It illustrates how low he has sunk academically, intellectually and ethically.

Krugman delights in citing studies that show a long-term budget gap (because of the Bush tax cuts, of course) that is unaffected by economic growth rates. Ever wonder why an economy growing a 4% (which we expect to occur soon) wouldn't have better budget prospects than an economy growing at 2%? Here's the dirty little secret. The economists conducting these studies ASSUME that government discretionary spending rises proportionally with GDP. Talk about a catch 22! They don't even allow for the possibility that higher growth rates might be used for something other than more entitlement programs. In our view the Brookings study by Alan Auerbach, William Gale and Peter Orszag (cited by Krugman) represents nothing more than a liberal establishment terrified of losing the tax base which allows them to control spending by productive members of society. Without that tax base, some of these Brookings guys might actually have to work for a living!

[The Truth Squad is a group of economists who have long marveled at the writings of Paul Krugman. The Squad Reports are synopses of their discussions. ]

Posted by John Weidner at September 15, 2003 8:20 PM
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