deficits and future taxes

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(email exchange)

The latest noise is that today’s deficits mean higher taxes later.


1. Taxes function to reduce aggregate demand.

2. A tax hike is never in order with a weak economy, no matter how high the deficit or how high the interest payments may be.

3. Future tax increases would be a consideration should demand rise to the point where unemployment fell ‘too far’- maybe below 4%.

4. That is a scenario of prosperity and an economy growing so fast that it might be causing inflation which might need a tax hike or spending cut to cool it down.

So when someone states that today’s high deficit mean higher taxes later, he is in fact saying that today’s high deficits might cause the economy to grow so fast that it will require tax increases or spending cuts to slow it down.

Sounds like a good thing to me — who can be against that?

And, of course, the government always has the option to tax interest income if interest on the debt is deemed a problem at that time.

>    On Fri, Jun 12, 2009 at 8:46 AM, James Galbraith wrote:
>   A comment in the National Journal, on the ever-green deficit alarmism that so preoccupies
>   people in Washington, to no good effect.
>   Also, my June 5 lecture in Dublin, at the Institute for International and European Affairs, on the
>   crisis.
>   With Q&A
>   And a small postscript, reprising the old story of Eliza in Cuba, which I’ve promised her I
>   will now retire
>   Jamie