Debunking Common Public Finance Myths

March 8, 2013

Many sources point to two decades of flawed housing policy and the adoption of long-ago discarded Keynesian economic policies as the fundamental causes of the recession. The latter has created an enormous accumulation of national debt that limits the policy options available to the Federal Reserve, Congress and state and local governments. Reforming tax and spending strategies will reduce the tax drag on growth, but only if prominent public finance myths are debunked, say Eric Fruits, president of Economics International Corp., and Randall Pozdena, president of QuantEcon Inc.

Many well-respected economists have advanced free market tax reform proposals that remove hurdles to real recovery and support both the economic wellbeing of states' residents and important public activities and services. Some of the proposals include eliminating state income taxes, repealing property taxes and replacing revenues with a revised sales tax and altering gift and estates taxes. An empirical analysis of these proposals lends credence to their theoretical foundations and suggests that these policies are appropriate alternatives for state policymakers facing tough fiscal choices.

Some claim that these proposals are not meaningful to the tax policy debate. These "progressive" critiques fail to exhibit economic expertise or modern analytical skills, and instead appear to propagate seven commonly-held public finance myths:

  • Strong empirical evidence suggests that increased government spending does not stimulate the economy and increased printing press liquidity will slow a recovery.
  • Whether in normal periods or during recovery from a recession, lower tax rates are associated with more rapid growth.
  • Despite claims to the contrary, a large body of evidence suggests that higher tax rates reduce income and output.
  • While abrupt austerity measures are commonly considered harmful to recovery, some literature suggests that properly configured austerity programs can be expansionary.
  • Significant real growth in income has occurred in the past 20 years despite the common citation of incomplete and contrasting statistics.
  • There are philosophical and economic efficiency arguments that weigh against policies to alter the distribution of income and many measures used by progressives inflate income disparity.
  • Impairing the incomes, savings and investment behavior of higher income individuals will harm the economy, and raising taxes will make the tax system even more progressive.

The progressive philosophy fails to realize that personal effort, entrepreneurship and risk taking are strongly related to the economic health of the nation. Together, free markets, low marginal tax rates, fiscal restraint and small government are the recipe for economic growth.

Source: Eric Fruits and Randall Pozdena, "Tax Myths Debunked," American Legislative Exchange Council, 2013.

 

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