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1 David S. Logan, The Proper Role of Taxes in Deficit and Debt Reduction 1 (2011)

handle is hein.taxfoundation/ffchixz0001 and id is 1 raw text is: July 28, 2011 No. 278 The Proper Role of Taxes in Deficit and Debt Reduction By David S. Logan Introduction The White House and Congress are currently embroiled in debate concerning how to best reduce the nation's deficit' and debt. Similar international experiences provide evidence of what the most effective methods have historically been. These methods have been analyzed in studies by Goldman Sachs (GS) and the European Central Bank (ECB), comparing the experiences of countries which have attempted to regain control of similar deficit and debt problems. Though the two papers take slightly different methodological approaches to their analyses, the results and conclusions are remarkably similar: 1. Spending cuts are more effective than tax hikes.2 2. Deficit and debt reduction can occur while taxes are being cut.3 Lower Taxes Can Accompany Spending Cuts Perhaps the most striking and counterintuitive result of the literature is that spending cuts and tax decreases can yield a successful reduction of a nation's deficit and debt.4 According to the 2010 GS report, since 1975, 20 countries have needed large deficit/debt reductions.5 One-fourth of these reductions were driven by government expenditure cuts rather than tax increases. These proved successful in that each: 1. Positively affected the deficit 2. Reduced public debt 3. Generally boosted economic growth 4. Resulted in significant bond and equity market outperformance David S. Logan is an economist at the Tax Foundation. 1 Henceforth, deficit will be assumed to exclude interest payments. 2 Ben Broadbent and Kevin Daly, Limiting the Fall-Out from Fiscal Adjustment, Goldman Sachs Global Economics Paper No: 195. April 2010. SSebastian Hauptmeir, Martin Heipertz and Ludger Schuknecht, Expenditure Reform In Industrialised Countries: A Case Study Approach, European Central Bank, Working Paper No. 634. May 2006. 4 S. Alesina and R. Perotti, Fiscal Expansions and Adjustments in OECD Economies, Economic Policy, n. 21, 207-247, 1995. 5Broadbent et al, 2010.

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