The Case Against (Temporarily) Abolishing Taxes

| Fri Jan. 18, 2013 3:06 PM EST

Matt Yglesias argues that since the federal government can borrow money at negative interest rates, it should borrow instead of taxing:

You're the mayor of a city. A storm strikes and ruins a whole bunch of your police cars. Now you need to buy new ones. You have two options for paying for the cars—you can borrow the money and pay the bill ten years from now, or you can raise taxes and pay right now. The case for paying later is pretty clear. In ten years' time your city's overall economic output will be higher so the burden of paying off the loan then will be lessened. On the other hand, the case for paying now is also pretty clear—lenders generally expect interest payments in exchange for their loans so the total cost of the debt option is higher. But wait! The city's accountants show up and point out that it's currently possible for the city to borrow at a negative real rate. Suddenly the interest costs are off the table as a reason to prefer paying sooner.

So what's left? Nothing. The city will be richer in ten years, so pay then. The logic becomes especially compelling when you recognize that the city's income will grow more rapidly under the lower-tax regime that encourages more investment in residential and commercial property and more business activity.

This is true. We should be borrowing more now, when interest rates are negative, and taxing less, since that slows down an already fragile economy.

However, this was written in the context of replying to a critic who thought it was crazy to suggest that we simply not tax at all. But the critic is right. The financial case for borrowing 100% of our budget might be sound, but the political economy case isn't.

One of the fundamental reasons for taxation is that it provides a constraint on democratic governments. If you want to appropriate a certain amount of the productive capacity of the country, you need to get permission from the citizens of the country, and you need to make that permission painful in some way. Otherwise the government will seize an ever bigger portion of the economy essentially by stealth. This is bad juju.

Borrowing is simply too easy. Politicians will always be attracted to it, because the money doesn't have to paid back until they're long out of office. This is one reason that so many states have burgeoning pension problems: politicians would rather hand out pension increases than pay increases, because the pension increases don't come due until they're long gone. Pay hikes, by contrast, require them to either raise taxes or else cut back on other spending.

But that kind of pain is useful. Societies do have to make tradeoffs, and human nature being what it is, those tradeoffs will only be made if the costs are fairly clear and fairly sharp. That's why maintaining the discipline of taxation is important even when borrowing costs are low.

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