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19 Economic Report 1 (1983)

handle is hein.taxfoundation/iretecr0019 and id is 1 raw text is: DEALING WITH THE DEFICIT: ARE TAX INCREASES THE ANSWER? The budget resolution's call for substantial tax increases in fiscal years 1984 - 1986 presumably expresses the conviction of the Congress that prospec- tive Federal budget deficits must be reduced and that major revenue increases are necessary to do so. These budget deficits, it is alleged, will have significant harmful effects on the economy, weakening if not aborting the recovery. Last year, it will be recalled, the deficits were asserted to be insuperable barriers to the recovery which is now very sturdily under way. There is no more substance to the deficit-abort than to the deficits-prevent recovery arguments, and one must hope that the Congress will recognize how flimsy the argurrents are and turn its back on tax increases which could severely impede the course of economic progress. The list of crimes of which budget deficits stand accused is by now familiar. Briefly summarized, these deficits allegedly * preempt the econcimy's saving, thereby crowding out private capital format ion; * raise interest rates or keep them so high that they prevent recovery in housing and consumer durables and curtail investment in new plant and equip- ment; and *by driving up interest rates, act as a magnet for foreign saving, which pushes up the value of the dollar relative to other currencies, thereby weakening U.S. exports and encouraging imports, slowing the recovery of employment and output. If deficits, per se, did indeed produce these results, there would be scne justification for the almost single-minded focus of Congressional fiscal policy on reducing deficits. Even so, it certainly would not follow that raising taxes is as efficient a means of reducing deficits as cutting spend- ing, in terms of mitigating the alleged harmful econamic effects of the deficits. The frequently expressed view that it is better to reduce deficits by reducing spending than by raising taxes but that if necessary tax increases are acceptable for this purpose is badly mistaken. Even worse is the aphorism that general taxes cut consumption but deficits cut investment. Views of this sort induce the Congress to adopt budget resolutions which direct the Federal Goverrment into a very bad fiscal policy, indeed. The by-now conventional views about deficits are mistaken on analytical grcunds and have no foundation in facts. The impatience of government policy- makers with theory is understandable, but their disregard of facts is inexcus- Note: Nothing written here is to be construed as necessarily reflecting the views of tRET or as an attempt to aid or hinder the lassage of any bill oefore Congress.

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