Sunday, August 16, 2015

John Cochrane: The wrong austerity

Here is a comment from John Cochrane about the Greek version of "austerity".  The message is that Government is dysfunctional again.

A barrage of new tax measures are contained in the new bill presented to Greece’s Parliament

...diesel fuel tax for farmers going from 66 euros per 1,000 liters to 200 euros/1,000 liters from October 1, 2015, and to 330 euros by October 1, 2016. Farmers’ income tax to be paid in advance will rise from 27.5 percent to 55 percent. Income tax for farmers is set to rise from 13 to 20 percent for 2016 and to 26 percent for 2017.

Freelancers will be subject to a gradual increase from 55 to 75 percent in advanced tax payments for income earned in 2015, increasing to 100 percent in 2016. The 2 percent tax break for single payments on income tax is also being abolished from January 1, 2015.

Private education, previously untaxed, will be taxed at 23 percent, including the tutoring schools (frontistiria) that most Greeks send their children to but excluding preschools.

Greece’s vital shipping industry will also be subject to new tax rises. Among other measures, tonnage tax is to increase by 4 percent annually between 2016 and 2020. A special contribution by foreign cargo carriers will remain in place until 2019.

"Austerity" has been a contentious and vague word, descending to an all-purpose insult from the pen of Krugman et al.

But on one point I think we can agree. Steep tax increases, especially steep increases in marginal tax rates on people likely to work, save, invest, start new businesses, and hire others, are an especially bad idea right now. The only hope to pay back debt is growth, and this sort of thing just kills growth. Part of growth is also keeping smart young Greeks in the country, which they are leaving in droves.

Sure, I look at the margins,  incentives, and "supply," while Keynesians look at taxes as just "money in pockets" that drives consumer spending and "demand."  But looked at either way, this is really counterproductive.

In practical terms, there is a Laffer curve, whether of supply side incentives or demand side multipliers. And for paying back debts, the long-run Laffer curve matters:  the effect of taxes on business formation, expansion and growth; on people moving to and from a country. The contentious short-run Laffer curve is on the question whether people with jobs work fewer hours at high taxes. Maybe yes, maybe no, but that's not the issue for Greece or for her creditors.

I think the Europeans think they can just raise tax rates and produce more interest payments. Alas, you have to let a garden grow before you harvest the fruit.

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