We know how this story came out. The tax increases not only failed to raise the revenue, but the nation's unemployment rate went up even faster, peaking at 28 percent in February 1933, a month before Franklin D. Roosevelt was inaugurated as Hoover's replacement.
This bit of history has been shoved down the Orwellian Memory Hole by politicians, "distorians," and economists. In his column today, Krugman continues that sorry tradition.
Before going on, I will say that I am not impressed by the Republicans' "low-tax" rhetoric, given that government spending itself is a tax. (One does not even have to hold to perfect Ricardian Equivalence to make that statement.) Nonetheless, I don't think that Krugman's argument here is valid, and the premises from which he builds his argument are ridiculous.
As a "macroeconomist," Krugman operates from a completely different set of "opportunity costs" than what the Law of Scarcity describes. In Krugman's view, the "cost" comes when an individual keeps money he or she has made instead of having it confiscated by the government. (The Keynesian Balanced-Budget Multiplier "proves" that tax increases always have a positive effect and are more economically efficient than the result when individuals keep their money.)
Thus, when money is not confiscated from productive people, that is a "cost" to the country. Obviously, it would not take long to create the Reductio ad absurdum scenario, and I don't think that the person who told a roomful of economists in November 2004 that the pre-1981 70 percent tax rates were "insane" is going to agitate for super-high tax rates. At least not yet.
However, Krugman seems willing to accept anything the Congressional Budget Office produces (at least when the CBO is under control of the Democrats), and I will say that the semi-rosy scenario he claims would be the case if all tax rates rise to their pre-2003 levels is fantasy. He writes:
A few months ago, the Congressional Budget Office released a report on the impact of various tax options. A two-year extension of the Bush tax cuts, it estimated, would lower the unemployment rate next year by between 0.1 and 0.3 percentage points compared with what it would be if the tax cuts were allowed to expire; the effect would be about twice as large in 2012. Those are significant numbers, but not huge — certainly not enough to justify the apocalyptic rhetoric one often hears about what will happen if the tax cuts are allowed to end on schedule.How the CBO even can come up with something like this is ridiculous on its face. It really seems to be based upon the belief that individuals don't change their behavior at all when taxes are increased or decreased.
Now, I have not read any apocalyptic predictions on the pro-tax cut side, although Krugman has been throwing out enough doom to make up for any ridiculous claims from the Republicans. For example, he writes:
But while raising taxes when unemployment is high is a bad thing, there are worse things. And a cold, hard look at the consequences of giving in to the G.O.P. now suggests that saying no, and letting the Bush tax cuts expire on schedule, is the lesser of two evils.This really is akin to the scene in "Animal House" in which the band tries to march through a wall. Does Krugman really believe that the ONLY change would be revenues, and that the U.S. economy would perform just as before with the only difference being that the government would be in possession of $4 trillion more than if the lower rates remain? Furthermore, when government takes money from individuals, does that mean that the "country" always is better off?
Bear in mind that Republicans want to make those tax cuts permanent. They might agree to a two- or three-year extension — but only because they believe that this would set up the conditions for a permanent extension later. And they may well be right: if tax-cut blackmail works now, why shouldn’t it work again later?
America, however, cannot afford to make those cuts permanent. We’re talking about almost $4 trillion in lost revenue just over the next decade; over the next 75 years, the revenue loss would be more than three times the entire projected Social Security shortfall. So giving in to Republican demands would mean risking a major fiscal crisis — a crisis that could be resolved only by making savage cuts in federal spending. (Emphasis mine)
This is an interesting line of thinking. According to Krugman, the government is the "country," and the "country" is us. So, if the government has more money, then "we" always are better off -- except for those millionaires who always gain their wealth at the expense of everyone else.
There is nothing in Krugman's writings that would suggest that the optimum tax rate would be 100 percent on ALL private income. I am serious. If Krugman's view of the "country" is the government itself -- and his language points to that belief -- then the "country" is at its best when it has everything that everyone has produced.
Now, I doubt that even Krugman would be willing to give us this kind of scenario, although I never have read anything from him in recent years that would refute it. Instead, he tries to convince us that if individuals are permitted to keep $4 trillion of income (which I doubt would be the case -- those are unrealistic numbers, in my view), that it would be a "cost" to the "country." However, if the government is permitted to confiscate that $4 trillion, then we are better off, since "we" would be the "country."
In Krugman's world, if an individual is permitted to keep any income, that is a "cost" to the country, and even though the individual is made worse off if the money is confiscated, it is a "benefit" to the "country," given his own rhetorical definitions. So, we can have the scenario in which all individuals are made worse off, but the "country" is made better off.
That is economics? I don't think so. It is nothing but absurd set of political talking points.