What happens when the government believes its own propaganda?



This is Joseph.

Tax cuts cause dynamic growth is a common talking point that fails most of the tests of being a clear and universal principle. There are high tax nations (Germany, 48%) that have strong and robust economies (US$ 45.7K per capita). There are low tax nations that struggle (Greece, 35%) with US $17.6K GDP per capita. 

This is especially true with the idea that it is tax cuts on the wealthy that drive growth. The United States had it's highest income taxes on high earners in the 1950's -- hardly a period of sustained slow growth. Now this is not to say that taxes have no effect, but that it is a complex relationship with feedback that is not really subject to simplistic analysis. But there are simple examples which should make you question the unthinking conclusions of "taxes always lower growth" but it is also the case that the contrary isn't true. It is my suspicion that it is all about how the taxes are spent and the efficiency of government that is driving these factors. 

As we mentioned a few days ago, the UK did a serious of massive tax cuts. The consequence appeared to be the markets thinking that the government had lost its mind and a sudden massive increase in borrowing costs, requiring the central bank to intervene. Pension schemes faced serious risks of insolvency as they suddenly watched the value of their bond holdings plummet. Home (Read more...)