Saturday, 12 October 2013

IMF says tax the rich so as to cut the deficit. That’s debatable.

See here (and h/t to Mike Norman, by the way.)
First, if you’re a simple soul and/or of a socialist disposition, you’ll agree with the IMF because taxing the rich for you is a priority. 
Second, if you’re a bit more sophisticated you’ll argue that the IMF proposal is a good one because taxing the rich does not greatly affect the weekly spending of the rich, so government finances improve, while there isn't much of a cut in aggregate demand, and hence much of a cut in numbers employed.
Third, if you’re really sophisticated, you’ll object to the IMF idea on the grounds that the question as to what the optimum distribution of wealth is is ENTIRELY SEPARATE from the question as to questions surrounding stimulus, deficits, national debts, etc. To illustrate, if for the sake of argument the distribution of wealth is currently at its optimum (which it doubtless isn't), it is not very clever to disturb that optimum with a view to dealing with an entirely separate issue: stimulus, deficits, national debts, etc.
That’s a bit like arguing that because the resistance between your car tyres and the road varies inversely with tyre pressure, therefor you should keep the pressure at double the car manufacturer’s recommended pressure with a view to improving fuel consumption. Over inflating car tyres does indeed bring better fuel consumption, but it’s at the expense of tyre wear, the car’s handling characteristics, etc. So on balance, over-inflating is not a brilliant idea.
To put all that yet another way, the above IMF idea contravenes the Tinbergen principle. Jan Tinbergen was a Nobel Prize winning economist, and his principle was roughly along the lines that each policy objective requires one policy instrument, and moreover, if a given objective needs adjusting, that should be done with or via the relevant policy instrument, not via some other policy instrument (which is what the IMF proposes).

A bigger national debt?
However, unsophisticated folk will object to that Tinbergen argument on the grounds that if the rich aren’t taxed, that means a correspondingly larger deficit, which in turn leads to a larger national debt.
I gave the answer to the latter point in this post. And the point I made there was essentially the same as Keynes dictum: “Look after unemployment and the budget will look after itself”. Or in plain English: “Stuff the deficit and debt: they are total and complete non-problems.”

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