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13 IRET Policy Bulletin 1 (1984)

handle is hein.taxfoundation/iretpbul0002 and id is 1 raw text is: ED ro U institute forresearch on mie nnm rneconomics of HUMICtaxation D Y - 1835 K Street, N.W. Suite 405 bIN 9Washington, DC 20006 R h in (202) 293-0819 THE ANATOMY OF THIS RECOVERY: NO CASE FOR TAX HIKES Summary Budget and tax policy makers seem to be laboring under false impressions about the economic recovery, and they are gaining support for punitive tax increases from business leaders who are also misinformed. The drive for tax hikes to reduce the deficit relies on the argument that the budget deficit is responsible for high real interest rates which crowd out business and household capital formation, artificially strengthen the dollar and erode our exports and trade balance, making the recovery uncertain and sus- tained economic growth improbable. But the fact is that gross private domestic investment, not consumption growth, has been the prime mover in this recovery. In fact, the surge in gross private domestic investment has been sub- stantially stronger than in the average first year of all of our postwar recoveries. Record-breaking deficits have not impaired the recovery. In contrast, the tax increases we are likely to get as part of a deficit-reduction strate- gy will raise costs for all businesses and households and weaken our forward economic momentum. One of the most distressing things about the current policy scene is that fantasies have overshadowed actual events in the real world as influences in the shaping of economic policy. The best example of this preference for fancy over fact in policy making is the well-nigh universal, albeit mistaken, view that budget deficits impair the economy's recovery and subsequent growth by (1) crowding out private investment (business capital formation, residential construction, and consumer durables) and (2) depress- ing our exports. Ostensibly, bad things happen because govern- ment borrowing competes with private borrowing and drives up interest rates. Higher interest rates, presumably, restrict private capital formation, housing, and purchases of consumer durables. Higher interest rates, allegedly, also act as a magnet Note: Nothing written here is to be construed as necessarily reflecting the views of IRET or as an attempt to aid or hinder the passage of any bill before Congress.

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