mises.org / D.W. MacKenzie / Sept 12, 2016
Taxes are a contentious issue, the debate over which often generates more heat than light. Disagreements over taxes cause people on both sides of the political divide pitch to make snide remarks. Most of the debate over taxes among economists is, fortunately, relatively civil and productive. There is a good reason for relative civility: Economists have arrived at some generally accepted propositions about the effects of taxes on economic conditions. That is to say, the field of public finance in economics has progressed to a point where economists generally agree about basic propositions regarding the effects of taxes, and disagree over small or precise details.
Economists think that tax hikes will at some point cause revenue to decline. (This position is often referred to as “supply side” economics.) And why do economists generally agree on this? They agree because it is generally — and correctly — accepted that tax increases discourage productive trading. Of course, simple revenue maximization is not a legitimate goal, and the true tax-rate/revenue relation is difficult to estimate. Government officials should collect only as much tax as is necessary to fund true examples of “public goods”— and this fact makes taxation questionable. Yet public debate cannot even get past the more basic point about the limits of governmental powers to increase revenue.
Public debate over taxes remains acrimonious largely because the public has not learned the lessons of economics. For example, New York Times columnist Paul Krugman refers to those who accept these down-sides of taxation as “ignorant.” Krugman asserts that this “supply side” economics is “snake-oil,” a virus which “however often it may be eradicated from the settled areas, is always out there in the bush, waiting for new victims.”
But the economist Krugman seems to disagree with the columnist Krugman. According even economist Krugman, supply side economics works better than columnist Krugman thinks. The Krugman-Wells economics text explains how supply-side economics works.
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