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Economics Archives

March 2, 2015

Reminder: Austerity means tax hikes

The Wall Street Journal reports:

BRASÍLIA—President Dilma Rousseff’s administration, fearful of a potential loss of Brazil’s investment-grade debt rating, is stepping up austerity measures, angering supporters and exacerbating an already painful economic slowdown.

The government on Thursday announced a cap on government spending and investment, as well as additional tax increases for businesses, moves aimed at shoring up Brasília’s deteriorating finances. [. . .]

Many analysts have praised Brazil’s newfound fiscal discipline as essential to its long-term prosperity. Still, higher taxes and less government spending mean less money in the economy to spur growth and job creation in the short run. Brazil’s official jobless rate climbed to 5.3% in January from 4.3% in December. Official data due late in March are likely to show the country GDP contracted in 2014.

A curious feature of current debates in political economy is that leftists who declaim against austerity very frequently desire a key aspect of it, while right-wingers who defend austerity want no part of the same: namely, tax increases. The infamous “sequestration” budget deal, stumbled into by the White House and Congress, was an austerity measure. It raised taxes (on income, capital gains and dividends) and cut spending. European austerity programs have routinely hiked business, income and consumption taxes. Greek Socialists, having won a recent election, exasperated Eurozone bailout negotiators, and earned a brief reprieve on their debt payments, continue to promise constituents in Greece that they will relieve their austerity burden — in part by lowering business and value-added taxes.

As a check on public sophistry, it is vital to keep these details in mind. Democrats in the US Congress, along with the White House, are constantly angling for new forms of taxation, either for openly punitive purposes (carbon taxes) or out of a yearning for more revenue. This is their austerity policy, whether they realize it or not.

Meanwhile, unless they are prepared to compromise on raising taxes, Republicans should eschew defending austerity. It is perfectly plausible to favor a policy of spending cuts without tax increases, or even alongside tax reductions. But this is not, strictly speaking, austerity.