European "Austerity" = Tax increases on the Rich

Discussion in 'Politics & Religion' started by Max E. Pad, May 23, 2012.

  1. Its funny all of these people like Obama, and Krugman trying to make the claim that Europe went into these deep spending cuts, when the only country in Europe who cut spending so far has been Greece, and that was because they are being forced to, because no one will buy their bonds. Of course guys like Krugman, dismiss the fact that the exact same thing could happen to us if we keep going, his solution to the mess is that we need to spend more in order to solve our deficit problem, which is counterintuitive to basic logic.

    It should come as no surprise though that Obama wants to raise the taxes on the rich, because he is already on the record stating that he doesnt care if it doesnt increase revenues, tax increases to him are about fairness, and its about punishing success, not about solving the deficit problem. He would rather see everyone make a little less, then have everyone make a little more, and some people make much more...... The mind set of people who think like this is baffling, and incredibly childish....

    European "Austerity" is really all about Tax increases on the rich. We now live in an economy, where the "Rich" have the most mobility they have ever had in history, and guys like Obama and Krugman really think they are going to stick around while one country soaks them, simply for punitive measures, when they could have the choice of living and being taxed in almost any country in the world? Didnt these chuckle heads learn anything when Eduardo Saverin renounced his citizenship to escape taxes? No, instead their solution was to figure out a way to tax him, on his way out, whereby they will never get another dime in tax revenue from him.

    Obama Pursues Higher Tax Rates, Growth Be Damned
    By Michael Barone
    n the run-up to this weekend's G-8 summit at Camp David, journalists have unfavorably compared European "austerity" with Barack Obama's economic policies.

    European spending cuts, the argument goes, have hurt people and are arousing political opposition, while Obama's proposals to keep federal spending at 24 percent of gross domestic product indefinitely are likely to succeed.

    Evil Republican spending cuts, in contrast, would deny the economy needed stimulus and wreak havoc on ordinary people.

    But the facts undermine the storyline. Veronique de Rugy of the Mercatus Center at George Mason University took a look at what "austerity" in Europe actually means.

    What she found is that government spending has increased or not appreciably declined in Britain, France, Italy, Spain and Germany. The only significant spending reductions are in Greece, where the bond market cut off funding.

    In the other countries, the big adjustment has been an increase in tax rates. European "austerity" is an attempt to reduce government budget deficits largely by increasing taxes and only to a small extent by reining in spending.

    Which, when you come to think about it, is the policy not of House Republicans -- who actually passed a budget -- but of Barack Obama.

    Over the past three years, Obama has pursued the goal of higher tax rates as relentlessly as Captain Ahab pursued the great white whale.

    Never mind that by some measures the United States, even with the "Bush tax cuts," already has the most progressive tax system in advanced economies. About 40 percent of federal income tax revenues come from the top 1 percent.

    And we know from experience that when top rates are increased above Bill Clinton's 39.6 percent, the intake is always less than projected. Since World War II, federal revenues have never risen much over 20 percent of gross domestic product, whether the top rate was 28 percent or 91 percent.

    The reason is that when rates get high enough, investors' animal spirits (John Maynard Keynes' term) are directed less at increasing productivity and creating wealth and more at avoiding taxes. And without increased productivity, you don't get robust economic growth -- which hurts everyone.

    There's another problem. High tax rates mean a volatile revenue stream, as California Gov. Jerry Brown is finding out. When times are bad, revenues dry up just when government needs money. California's budget deficit has zoomed from $9 billion to $16 billion in a few months.

    Barack Obama doesn't seem to care about these things. In the 2008 campaign, ABC News' Charlie Gibson asked him whether he would increase the capital gains tax rate even if it meant reducing government revenue, as has happened in the past.

    Yes, Obama said, "for purposes of fairness." He wants to take away money from people who have earned it even if government gets less to spend.

    Obama argues that government spending can generate growth. But money spent propping up state and local public employee unions and funding supposedly shovel-ready projects -- major features of his 2009 stimulus package -- didn't do much for the economy.

    In contrast, Obama's former chief economist Christina Romer and her husband David Romer, in a 2010 academic paper, wrote that "exogenous" tax increases, like letting the "Bush tax cuts" expire after the recession is over, are "highly contractionary."

    "Our estimates suggest that a tax increase of 1 percent of GDP reduces output over the next three years by 3 percent," the Romers wrote. "The effect is highly significant."

    Higher taxes are the prime ingredient of European austerity. The danger is that with sluggish growth revenues will languish and the bond market will shut down, as in Greece. Then spending gets cut with a meat cleaver, not a scalpel.

    House Budget Chairman Paul Ryan understands this. House Democrats' "balanced approach" -- with tax rate increases -- "just means let's start European austerity right now," he told The Washington Examiner last week.

    Ryan's budget, which passed the House, would cut tax rates but would also eliminate tax preferences. Many high earners would end up paying more. But because they wouldn't face higher rates on the next dollar they earn, there would be no incentive to seek tax shelters.

    You can find Democrats who agree with this approach, though they'd differ with Ryan on details. But they won't speak up as long as their leader keeps pursuing that great white whale.
  2. pspr


    The solution is to chop off the head of the snake. In November the guillotine will fall and heads will roll.
  3. Ricter


    We've covered this ground already.

    Yes, there's been austerity in Europe...

    <img src="">

    This article is relatively old, even at May 8th, given the recent rush of data debunking the utility of austerity (in Europe, during this recession).
  4. So because their governments were supposed to grow at ridiculous unsustainable rates over the next few years, bringing the rate of growth down to a level that is rational represents Austerity? Should these countries have simply allowed government spending to continue growing at 8-10%? Thats exactly the reason why Greece is now broke. None of these countries (except greece) are actually cutting spending, they are simply bringing growth of government to reasonable levels.....

  5. Paul Krugman and the European Austerity Myth

    With both France and Greece deciding to jump out of the left-wing frying pan into the even-more-left-wing fire, European fiscal policy has become quite a controversial topic.

    But I find this debate and discussion rather tedious and unrewarding, largely because it pits advocates of Keynesian spending (the so-called “growth” camp) against supporters of higher taxes (the “austerity” camp).

    Since I’m a big fan of nations lowering taxes and reducing the burden of government spending, I would like to see the pro-tax hike and the pro-spending sides both lose (wasn’t that Kissinger’s attitude about the Iran-Iraq war?). Indeed, this is why I put together this matrix, to show that there is an alternative approach.

    One of my many frustrations with this debate (Veronique de Rugy is similarly irritated) is that many observers make the absurd claim that Europe has implemented “spending cuts” and that this approach hasn’t worked.

    Here is what Prof. Krugman just wrote about France.
    The French are revolting. …Mr. Hollande’s victory means the end of “Merkozy,” the Franco-German axis that has enforced the austerity regime of the past two years. This would be a “dangerous” development if that strategy were working, or even had a reasonable chance of working. But it isn’t and doesn’t; it’s time to move on. …What’s wrong with the prescription of spending cuts as the remedy for Europe’s ills? One answer is that the confidence fairy doesn’t exist — that is, claims that slashing government spending would somehow encourage consumers and businesses to spend more have been overwhelmingly refuted by the experience of the past two years. So spending cuts in a depressed economy just make the depression deeper.

    And he’s made similar assertions about the United Kingdom, complaining that, “the government of Prime Minister David Cameron chose instead to move to immediate, unforced austerity, in the belief that private spending would more than make up for the government’s pullback.”

    So let’s take a look at the actual data and see how much “slashing” has been implemented in France and the United Kingdom. Here’s a chart with the latest data from the European Union (click on all images for better detail).


    I’m not sure how Krugman defines austerity, but it certainly doesn’t look like there’s been a lot of “slashing” in these two nations.

    To be fair, government spending in the United Kingdom has grown a bit slower than inflation in the past couple of years, so one could say that there’s been a very modest bit of trimming.

    There’s been no fiscal restraint in France, however, even if one uses that more relaxed definition of a cut. The only accurate claim that can be made about France is that the burden of government spending hasn’t been growing quite as fast since the crisis began as it was growing in the preceding years.

    This doesn’t mean there haven’t been any spending cuts in Europe. The Greek and Spanish governments actually cut spending in 2010 and 2011, and Portugal reduced outlays in 2011.

    But you can see from this chart, which looks at all the PIIGS (Portugal, Italy, Ireland, Greece, and Spain), that the spending cuts have been very modest, and only came after years of profligacy. Indeed, Greece is the only nation to actually cut spending over the 3-year period since the crisis began.


    Krugman would argue, of course, that the PIIGS are suffering because of the spending cuts. And since there actually have been spending cuts in the last year or two in these nations, does that justify his claims?

    Yes and no. I don’t agree with the Keynesian theory, but that doesn’t mean it is easy or painless to shrink the burden of government. As I wrote earlier this year, “…the economy does hit a short-run speed bump when the public sector is pruned. Simply stated, there will be transitional costs when the burden of public spending is reduced. Only in economics textbooks is it possible to seamlessly and immediately reallocate resources.”

    What I would argue, though, is that these nations have no choice but to bite the bullet and reduce the burden of government. The only other alternative is to somehow convince taxpayers in other nations to make the debt bubble even bigger with more bailouts and transfers. But that just makes the eventual day of reckoning that much more painful.

    Additionally, I think much of the economic pain in these nations is the result of the large tax increases that have been imposed, including higher income tax rates, higher value-added taxes, and various other levies that reduce the incentive to engage in productive behavior.

    So what’s the best path going forward? The best approach is to implement deep and meaningful spending cuts, and I think the Baltic nations of Estonia, Lithuania, and Latvia are positive role models in this regard. Let’s look at what they’ve done in recent years.


    As you can see from the chart, the burden of government spending was rising at a reckless rate before the crisis. But once the crisis hit, the Baltic nations hit the brakes and imposed genuine spending cuts.

    The Baltic nations went through a rough patch when this happened, particularly since they also had their versions of a real estate bubble. But, as I’ve already argued, I think the “cold turkey” or “take the band-aid off quickly” approach has paid dividends.

    The key question is whether nations can maintain spending restraint, particularly when (if?) the economy begins to grow again.

    Even a basket case like Greece can put itself on a good path if it follows Mitchell’s Golden Rule and simply makes sure that government spending, in the long run, grows slower than the private economy.

    The way to make that happen is to implement something similar to the Swiss Debt Brake, which effectively acts as an annual cap on the growth of government.

    In the long run, of course, the goal should be to shrink the overall burden of government to its growth-maximizing level.