We are often told to “follow the science.” This is true of wearing masks, how we teach children to read, and addressing the perils of climate change. So we should probably better do the same with the economy, no?
Consider the new Congressional Budget Office report on that very thing, the budget, the economy, and how we tax it. Let’s assume that we want the Federal government to spend lots more money on infrastructure. I don’t, because I’m certain that the money will be sprayed up the wall like the last few trillions were.
Still, the CBO report is useful in laying down the basic science of taxation. Whatever we tax, we’ll get less of. Tax corporations and there will be less corporate activity. Tax the income from capital investment and there will be less investment. Tax labor incomes and fewer will work so hard to make that money. Put simply, if people get less from doing something, they’ll do less of it. Toddlers grasp this: they will do more for two pieces of candy and less for one. In the jargon these are known as “deadweights.” That is to say, things that do not happen, economic activity that is wiped out by taxation.
Yes, it’s true that we can buy lovely things with the money that has been taxed, or at least we might. But it is still true that the act of taxing itself reduces economic activity. Worthwhile tax and spend is defined as that which is even more lovely in its results than what we’ve lost by financing it.
The tricky bit of the science here is that different methods of taxation have different deadweights. We lose more by taxing corporations or capital incomes than we do by income tax. But the most basic point that comes out of the CBO’s report is also the most important: taxing productive economic activity to fund infrastructure programs will harm the economy.
We’ve been warned.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute.
