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Deficit Reduction; Higher Taxes?

June 23, 2010 Leave a comment

Why is it that reaction to high deficits generally leads to more confiscation of private property? In this case, cash money in the form of taxes. It’s never been clear to me why more taxation would get a country out of debt woes (assuming there are truly sovereign debt woes. There are, to be sure, but it’s taken as given far too often these days to my view).

After all, if you tax an economy you effectively limit—or create a disincentive for—potential for economic growth. Well, economic growth is the name of the game when it comes to digging out of deficit trouble. Headlines will be dominated with “austerity measures”, and “painful” or “unavoidable” measures. But through history, the best way to solve budget/deficit problems is to fuel a dynamic, diverse economic engine to serve as a growing tax base to service said debt. (Don’t get me wrong, for the Greece ’s of the world austerity probably can’t be avoided—they’re just too small and their economies too narrow.)

What’s “painful” is cutting benefits. Painful, that is, for politicians. The last thing they want to do (as they value their political lives) is hugely cut programs and entitlements. It leads to unrest and protests and weakens their power (just ask Germany ’s Angela Merkel). So they limit that (I’d bet that that most economies, at best, will end up cutting a few percent off their budget when it’s all said and done), but they’ll gladly raise taxes the first opening they get.

For now, these measures seem small enough not to knock the global economic recovery. But this is a topic to keep a close eye on.

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