Thursday, June 30, 2011

Budget, distinctions without a difference

Harvard economist Greg Mankiw links to his column to make a point about the budget discussions, namely that what might seem to be opposites are in fact nearly identical.  That is the case with targeted tax cuts and spending.  In essence both amount to getting money for doing something the government wants you to do.

I think the basic point holds, with some caveats.  For a tax cut to be of benefit one has to have taxable income.  This is probably a more important matter for business than for personal taxes, and within business would tend to benefit larger and established as against smaller, start-up companies.  And it should also be noted that the more income you have, the higher the marginal benefit of the tax cut if the relevant taxes are graduated. 

In short, as would be commonly understood, spending would tend to be progressive and directed tax cuts would tend be regressive.  But what wouldn't be generally understood is that they are more alike than different; either way you're getting money for doing what the government wishes.

On the whole, I thinking spending has the advantage of being visible and less pernicious.  This also suggests that a size of government measure like spending to GNP is inadequate.

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