So tomorrow Glenn Beck and Sarah Palin are hosting the 828 "restoring faith and honor" rally at the Lincoln Memorial. There is a great deal of excitement among the people that support the Tea Party platform mostly because they believe they are in the process of revitalizing America. From what I am understand, the Tea Party is strictly a fiscal advocacy group concerned with government spending, size and the deficit. (Gallup Poll Data). According to a Gallup poll, the two greatest concerns on the Tea Party is that the government is too large and the deficit is too big. By no means are these concepts radical, but in my opinion, very fair points. However, it is concerning on the method that political backers of this movement propose to handle the deficit. It is being proposed that cutting taxes will actually increase government revenue. The rationality behind this is that lower taxes equal larger economic growth because more money is in the hands of people, and when they spend the money, it creates more jobs. The more jobs created directly results in an increase in government revenue because more people are paying taxes. This concept is the trademark of Art Laffer's reasoning for the Reagan tax cuts in the 1980s. Unfortunately, he under estimated the optimal level of taxation and government revenues decreased. To be fair, Reagan did not inherit an economy that was recovering from stagflation and was recently throw into a recession.
The question that I ask myself is if lower taxes will really create economic growth and benefit the economy as suggested by the Tea Party. In the short run, I say yes. The current economy is very fragile and in need of as much stimulus as possible. In my opinion, and along with trained economist, deflation can throw America into another recession, and hinder all action Congress and the President has taken to stimulate the economy. This is a very dangerous thought because if long term unemployment persists, the structural level of unemployment can increase to more than six percent. According to the Ricardian Equivalence theorem, a sharp cut in taxes now will mean the need for higher taxes in the future, resulting in slowing of the economy at a later point in time. Even resetting the tax rate from the Clinton era would greatly benefit the economy in the long run (These taxes should be enacted once the economy is more stable).
My rationality for the use of the Riccardian Equivalence is this. By cutting taxes, you are creating a multiplying effect for every dollar spent. For example, for every extra dollar spent by a consumer, this will flow throughout the economy. With more dollars in the economy, inflation will occur and interest rates will drop. However, at the same time, the nominal level of national debt will increase because of interest on the debt. The decrease of interest rates drops the value of the dollar, causing less foreign and domestic firms/governments/etc. to invest into the dollar. To fund current government programs in the future, the government can cut spending, borrow more, or raise taxes. The problem with spending cuts is it won’t solve the debt problem. The issue with more borrowing is if interest rates drop to a level where investors feel they cannot make money on their investment, then they will not lend as much money we need. This is a somewhat plausible scenario, mostly because if the value of the dollar slips below the value of other currencies, investors will lend to the currencies that have higher rates. The last option is to raise taxes. The increase in taxes will slow economic growth, resulting in interest rates and the value of the dollar to rise. The tax increase in the future will be larger than if tax increases were instituted after the economy recovers, unless there is a significant growth in the workforce. The tax increase is the most viable option for future ways to control the debt and maintain our spending in the future.
In my opinion, it will benefit America as a whole if the debt levels can be brought down now to avoid even higher taxes in the future. The obvious answer to the question if debt should get passed along to the next generation is no. However, a great deal of the platform proposed by the Tea Party movement consists of tax cuts along with spending cuts. There are several plans floating around Tea Party backed politicians, including privitization of Medicare, but there is no tangible plan for spending cuts by the party. It does not seem that the decrease in spending will equal the loss of revenue from the tax decreases. This is why I feel that we should bite the bullet now and be taxed at a higher rate, while cutting spending to bring down the debt. The debt is not of grave concern at this moment in American history, especially because other countries GDP to debt ratio is much higher than Americas. But there is no doubt that the debt will continue to grow, and a large percentage of government revenue will need to be spent on interest on the debt. In this case, I truly believe it is better to have some bad years now then horrible years in the future.
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