Demand-side Tax Cuts

The Wall Street Journal todays laments that millions of wage earners no longer pay any direct federal taxes and, consequently, supposedly have no stake in national tax and spending policy. Interesting take.

More importantly the current notion that we need a "fiscal stimulus" ignores the real reason for the recent boom-bust cycle: it certainly was not a lack of aggregate demand that led to the collapse in stock prices: The link points out: "Our problem is a trade cycle, not recurring slumps due to insufficient spending. The key problem that we face is in coordinating the supply of goods with the demand for them through time. Mises and Hayek correctly identified interest rates as being central to this problem. Of course, when government policies force wages up, unemployment ensues. The key point is that demand is irrelevant to unemployment and the trade cycle.

"Of course, heavy taxes can slow economic development. So, there are reasons to link taxes to economic performance, but there is a more important point that is being left out of this debate. Taxes are supposed to fund necessary functions of the government. By arguing over how to stimulate the economy, many overlook the fact that government spending consists largely of overt transfers that benefit narrow interests. This issue got more play during the time when campaign finance reform was in the news. By recognizing the irrelevance of Demand Side economics, we can refocus our attention to real issues."