The Taxation Distraction

Martin Wolf, the consistently excellent FT economic columnist, has an excellent blog post up which explains why a focus on taxation as a focus of economic policy debates is misguided.  he writes:

The focus of US economic policy discussion at present is almost entirely on fiscal deficits and the level of taxes. My view is that these are second or even third order issues. What matters far more is the capacity of the economy to offer satisfactory lives for the citizenry. This depends on far more fundamental forces than deficits and taxes, such as innovation, jobs and incomes. Evidently, I am arguing that taxes and deficits do not determine these outcomes. I am suggesting this because they do not.

So I want to address two widely held, but mistaken, views. The first is that lower taxes are the principal route to better economic performance. The second is that the financial crisis is a crisis of western welfare states.

He demonstrates this argument using the figure shown at the top of this post. Wolf lays out the full argument in his blog post, which deserves a full read.

In the US the debate over the role of government takes many forms (and it seems that blog posts on any policy subject eventually arrive there no matter what the starting point or initial direction of travel). The form of the debate at present is framed in terms of a Hamiltonian vs. Jeffersonian approach to government. Snore. It is old wine in new bottle s(in this case the bottles too are old) .

From a policy perspective, the important questions are not simply on how high are taxes and how much does government spend, but how it is spent and what that spending means for growth in GDP per capita. Moving discussion from the former to the latter is, to put it mildly, a challenge.