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1 Gavin Ekins, Time to Shoulder aside Crowding out as an Excuse Not to Do Tax Reform 1 (2017)

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FISCAL
FACT
No. 566
Nov. 2017


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Time to Shoulder Aside

Crowding Out As an Excuse Not

to Do Tax Reform

Gavin  Ekins
Research Economist


Key Findings

   *  Government   budget deficits absorb a portion of national or global saving,
      diverting the saving from supporting private investment. This is known as
      crowding out.

   *  However,  saving is flexible both in magnitude and where it is invested. It can
      grow and move  in response to higher borrowing needs and higher returns to
      saving and investment.

   *  Even relatively large budget deficits are dwarfed by huge levels of global
      saving.

   *  It takes very little change in interest rates to attract additional world saving to
      the United States.

   *  Consequently, government  budget  deficits have only a small effect on private
      investment. Crowding  out per se is of minimal importance.

   *  The source of the deficits does matter. Deficits created by tax relief do
      less damage to private investment than do deficits created by increases in
      government  spending.

   *  The United States is an open economy, closely integrated with world capital
      markets. Some  economic  models wrongly treat the economy  as largely closed
      to international capital flows, overstating the effect of deficits on economic
      growth, and understating the power of pro-investment, pro-saving tax
      reforms to boost investment, wages, and employment.  Their predictions are
      off the mark, and hamper Congress's work on tax reform.

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