Monday, October 12, 2009

The Tax Increases: Letter and Rebuttal

Recently I was asked if I was interested in being a signatory to a letter proposed by the OCPP. I have posted it below, but the essence is that there is a good economic justification for the tax increases passed by the legislature to deal with the current economic crisis. I believe there is so I signed the letter. Though I would prefer that all of the tax increases were temporary and that the state deal with the overall revenue situation in a comprehensive way after the crisis, I do support the increases. Quite simply I believe that the negative consequences of the increases (and there will be negative consequences) are far outweighed by negative consequences of inaction - particularly the long-term consequences of inadequate school funding.

Letter From Economists

Fred Thompson has a very interesting response to the letter in which he argues that now that the legislature has enacted a balanced budget, it is free to engage in deficit spending if the revenues don't materialize - which they won't if voters overturn the tax increases. Fred is much more informed than I of the intricacies of the state budgeting process, but I think most economists would agree that in a crisis, deficit spending is the preferred solution over tax increases. Here is Fred's full response:

Thompson Response

I am skeptical that deficit spending on the scale required to fill the gap would happen if the tax increases fail to materialize so I am not ready to suggest voting against the tax increases, but it is a very interesting argument. What do you think?

Fred also asks about the opinion of other economists in the state, if they or any other economist would like to participate in this discussion, I offer this blog as a forum.


Will N said...

Politically, Thomson's idea would never happen evevn if it is possible. But in addition, it would require actually borrowing money from some institution. Borrowing for cash expenses is pretty different from borrowing for capital. Especially for a state government. Since the only source of revenue is taxes and the reason for borrowing would appear to a lender to be that the state was unable to raise adequate taxes, it is hard to see many lending sources seeing that as an attractive loan to make.

Fred Thompson said...

You might recall that during the last recession, when the tax measure the legislature used to balance the budget was overturned, that is precisely what happened. The state issued about $1.5 billion in GO bonds.

Will N said...

Thanks for the clarification, Fred. For others, see also: which summarizes Fred's point that it is quite possible.