Joe Sixpack on Taxes

Regarding the supply-side foofaraw, I loved this comment by “8” on this Alex Tabarrok post:

How hard is this to understand? The taxpayer doesn't care about maximizing government revenue.
Politician A: Mr. Joe Sixpack, we can maximize government revenue by raising taxes by 10%, because you see, we'll only lose 9% to slower growth, so our revenue actually increases! Then we can spend it in lots of ways to make you happy!
Joe Sixpack: So, you're raising taxes by 10% and you're going to slow the economy?
Poltician A: Don't look so glum! It's for the children!
Politician B: Me cut taxes. You keep money, economy grow fast. Ugh. Me like cookie.
Joe Sixpack: I pick B.

That pretty much gets to the heart of this. Or, as NBER chief Martin Feldstein puts it:

financing additional government spending by an acrosss the board rise in all marginal tax rates would make the cost per dollar of government spending equal to $1.76.

These two facts — that the actual revenue is only 57 percent of the static gain and that the deadweight loss is 76 cents per dollar of revenue — should be central to any consideration of tax policy. And yet they are not.

It is possible that the state can make its citizens better off by taking $1.76 to spend $1.00, if those very expensive dollar bills are spent on highly valuable public goods folks can't coordinate to provide privately. But I reckon this kind of bona fide public good is a pretty small part of the existing budget.

Also,  people's money is, well,  their money, and it is obviously wrong for other people to take it from them absent a special justification. If the government is taking more than is justified, then it should cut taxes and cut spending. It happens that the government is taking more than is justified. So it should cut taxes and cut spending. It seems like a number of folks on the left are practically hyperventilating with excitement over this supply side business, but it strikes me that 8 has both the economics and the politics right.

Author: Will Wilkinson

Vice President for Research at the Niskanen Center