Progressive Econ 101: Tax Theories

To say we are in an economic funk is being charitable.  Unfortunately, the debate is breaking more along party lines than is really good for the country.  Let’s take a quick look at some of the ideas about taxes (and therefore government!) that are out there.

The Classic Idea – Taxes are a Deadweight Loss

Taxes are viewed as a price hike, which drives demand for goods down and alters behavior from the coveted free market.  The money removed as taxes is called a “deadweight loss.”  This idea is taught as fact in econ courses. 

Remembering Ronald – The Laffer Curve 

During Reagan’s time, Arthur Laffer came up with this idea over lunch.  There is a curve that looks like a rounded off  mountain – going up the mountain increases tax revenue by increasing the tax rate.  Once you hit the peak, tax revenues will go down even if tax rates go up because people will stop working as hard because the extra money will be highly taxed.  The tricky part of this is figuring out if  you’re on the up or down side of the mountain.  Looks really cool on a cocktail napkin and lets you pick up wealthy babes who might pick up your tab, but doesn’t really send more money to the Treasury.

The Sequel – Supply Side Economics 

Cutting taxes will stimulate businesses to hire more people and produce more goods and services so the businesses can make more money.  Usually works much better on paper than it does at actually adding cash to the Treasury.  A cousin to the Laffer curve and trickle down economics.  Was seen by some people as a way to sneak in cutting government but this didn’t work – government spending still grew.

“I Pledge Allegiance”  – Grover Norquist and Americans for Tax Reform

Grover Norquist has championed the “no-new-taxes” pledge for elected officials at the state and federal levels.  He wants to shrink government so he can drown it in a bathtub. Grover follows up on who signed and did not live up to the pledge.  Just like a frat – you pledge and the brothers keep you in line or your letters and pin will be ripped off, along with your pants.  Who signed:  Ed Royce, Gary Miller, Ken Calvert, Dana Rohrbacher, John Campbell,  Tom Harman, Mimi Walters, Chuck DeVore, Mike Duvall, Curt Hagman, Diane Harkey, Van Tran.  I knew many frat brothers who put the frat above their sisters, mothers, classes,  fathers and girlfriends.  I sense the same thing can happen here.

It’s a Manageable Problem – Keynesian Economics

Keynesian economics is a modern (meaning post WWI and Great Depression) school of thought.  Keynesian economics fell out of favor during the 1970′s when inflation hit big time.  Keynes believed that government has a role in managing demand in the economy as a way to move towards full employment. (To be fair, there’s a lot more to this idea, but I’m just loglining it for you.)   The government can use that Deadweight Loss tax money to create public works projects to put constituents to work.  Hmm, when constituents work, they can buy things, and the money they give to the shopkeeper lets the shopkeeper buy more things and pay his employees and maybe take his girlfriend(s) out to dinner.

Hey, maybe there’s something to this….