Catallaxy Files

I gave a talk to the Association of Certified Chartered Accountants last night on the question of whether governments can tax us back into prosperity after the GFC. The short answer is ‘No’.

I showed several graphs of government spending and taxing over the past 20 – 30 years for Australian, the Euro-zone, the OECD and the US. For most economies tax is at long-term average, but spending is out of control and has been out of control for a long time. The GFC is not the cause of current debt and deficit for most economies. They have had a long history of fiscal indiscipline. The key to fiscal discipline is to restrain spending and then cut taxes. Cutting taxes without cutting spending leads to large public debt.

I then spoke about the Rahn curve

and the Laffer curve. I then spoke about how taxation impacts the economy (using the Solow growth model as a starting point ).

Five variables ? taxation can impact growth in five ways
Tax can impact the capital stock: Tax affects investment rate and depreciation
Tax can impact labour market: Tax affects labour supply, hours worked, acquisition of educations & skills
Tax can impact productivity growth: Tax affects R&D decisions and venture capital choices

Taxes also affect marginal productivity of capital by distorting investment away from highly taxed sectors
Taxes also affect labour output by distorting employment away from high social output – high tax industry to lower output – lower tax industry

Then I spoke about the failure of stimulus packages around the world and whether the Australian stimulus packages could be said to have ‘saved’ the economy (again, no).

In conclusion

Vulgar Keynesianism has failed. Again.
- This theory has been tried again and again and always fails.
Government spending needs to be restrained.
Economists have known this for a long time.
Adam Smith
- Great nations are never impoverished by private, though they sometimes are by publick prodigality and misconduct.
- It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the œconomy of private people…. They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expence, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.