Friday, February 25, 2011

Taxes, spending, deficits

A lot of my favourite bloggers in the US are going crazy over the absurd debate on the budget deficit over there. Republicans - who are within days of shutting down the federal government, again - have managed to convince many people that they are the ones who want to cut the deficit, when in fact their proposals would increase it.

How do the Reps get away with it? I think part of the answer lies in the inability of most citizens to understand the very basic concepts of fiscal policy, particularly that deficits = spending - taxes. As a result of many voters' failure to get their heads around that admittedly difficult equation, sloganeering along the lines that deficits = spending get a grip on our public debate. So, the Republicans argue for tax cuts, which increase the deficit, and then justify the spending cuts -  a trick they have been successfully playing for 30 years. Here in the UK, we have similar problems. Mervyn King - an increasingly partisan independent central banker - and the Lib-Con coalition have managed to firmly entrench in voters' minds that the deficit is solely a question of spending.

Academics are no better - the number of books and papers on government spending clearly outstrips those on taxation, at least in political science. Why is it that we only focus on that side of the ledger? Psychology may give us part of an answer, particularly in this period of pressure on spending and slow growth in living standards (I'm talking about the last 30 years here, by the way, not just the crisis). The fact is that tax rises are keenly felt when growth is slow, and spending, of course, is difficult to reduce, because people don't like to lose what they think they have. Moreover, spending may often be on public goods, but the taxation is very much on private income, so the temptation to free ride is strong. The successful politician will be the one who appears to provide public goods for free.

Hence the nature of the debate revolving around spending cuts, rather than increases in taxation. But if the left gives up on the taxation argument, it will always be under pressure. An effort needs to be made to persuade people that taxation matters, and that the median voter pays less in tax than they get in benefits. Easier said than done, but some research on how we get median voters to accept higher taxation is a matter of urgency for the progressive agenda.