How Higher Taxes Could Heal the Economy

By Daniel Indiviglio

Prosperity is in reach -- if the government would just spend more money. That was the message of a New York Times column by Yale economist Robert Shiller on Sunday. He attempts to take a common sense approach to explaining that the government could spend more to cut unemployment without raising the deficit: it would just have to concurrently raise taxes. This might sound simple enough, but the idea is political untenable, no matter how sensible it might sound to Shiller.

Most people belong to one of two camps when discussing government spending. Some people believe that the government can spend money in such a way that it enhances economic growth more than if the private sector had that money. Others believe that additional money collected by taxes would be better left for individuals and businesses to spend to promote economic growth. Shiller doesn't have to convince the former group that more spending could help; he has to convince the latter group. Let's look at a few things he says.

There are good arguments for balanced-budget tax increases. They don't lower average after-tax income, since every tax dollar goes directly to providing someone with income. Even those hurt by a tax increase may accept the sacrifice if they know it improves the chances that unemployed friends or relatives will find jobs.

Let's be clear: tax increases do lower some people's after-tax income. They just don't lower after-tax income for the entire nation. Shiller concedes this but believes that those harmed by a tax increase will understand that the collective good is worth the cost they face.

Perhaps he's right. Many Americans concede that taxes must rise. But few Americans believe they ought to pay more. Many people naively believe the rich alone can simply pay more in taxes and all of the U.S.'s budget problems will be solved. In reality, to increase spending and cut the deficit, you'll need to raise taxes across-the-board.

Shiller also makes this ill-conceived analogy: "the government would act as a kind of investment banker specializing in public goods." Oh Professor Shiller. The last thing the government's image needs is to be compared to a kind of investment banker.

But this does highlight precisely the problem conservatives have with enhanced government spending: they don't think the government can act as a kind of investment banker. They don't believe it has the skill or aptitude with which to wisely spend money the way the private sector does. They also doubt that the public goods are as productive to economic growth as the private goods.

Those are the obstacles that Shiller's argument faces and they remain intact. His argument won't convince anyone on the right that additional government spending is a good idea -- particularly after Washington's $787 billion stimulus came and went as unemployment climbed past and seems stuck near double-digits.

Read the full story at the New York Times.

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