Those who want stimulus effected
primarily via monetary rather than fiscal policy often disparage fiscal policy
by referring to the alleged distortionary effects of fiscal policy. E.g. see
Scott Sumner. And this NBER paper simply
prefixes the word “taxation” with the word “distortionary” about thirty times
with no explanation as to why taxes are necessarily distortionary. And if you
Google “fiscal” and “distortionary” you’ll find plenty more in the same vein.
The flaws in the “distortion” idea
are as follows.
Obviously any type of tax (or its
opposite, a form of government spending) CAN BE distortionary. It doesn’t take
a genius to think a distortionary form of taxation: e.g. a tax on people with
red hair, to take a silly example.
Conversely, it doesn’t take a genius
to think up types of taxation which are pretty much distortion free: e.g. a
sales tax on ALL GOODS AND SERVICES.
Next, the fact that most taxes do in
fact contain an element of distortion is not a characteristic of fiscal policy
AS SUCH: it results from, or is a characteristic of some sort of political or
social objective. E.g. whisky is taxed far more heavily than soft drinks, and
for obvious social reasons.
Put that another way, it would be
perfectly feasible to have ZERO fiscal stimulus, and indeed zero government
spending on real goods and services, while retaining a whiskey tax: we’d just
collect money from the whiskey tax and distribute the money to the population
at large.
In contrast to taxes (fiscal “anti-stimulus”
so to speak) there is government spending (i.e. stimulus). And here again,
fiscal stimulus does not need to be distortionary. For example the same
percentage increase on ALL FORMS OF government spending, plus some sort of
boost to household incomes that induced households to increase their spending
by the same percentage would not be distortionary: or at least would not
involve any more distortion than already existed.
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