Monday, July 11, 2011

Geithner calls spending cuts what they really are: tax increases

On Face the Nation yesterday, Treasury Secretary Geithner said that the proposed cuts in Medicare would reduce medical coverage for seniors by a total of $6,500 per year. He called that "the same thing as a tax increase."

Finally, someone high up in the Administration characterized spending cuts as what they really are: the fiscal equivalent of tax increases. The only difference being, who they affect. Tax increases fall primarily on upper income people whereas spending cuts (tax increases) are borne by the middle and lower income earners.

So the hypocrisy of Republicans should have been exposed. While Republicans stand united against tax increases (for the wealthy), they are advocating tax increases for the middle class and poor.


Crake said...

It is likely worse than that. Instead of creating jobs (who would with lack of demand) with that not-taxed money as the GOP claims, it is likely being invested in ways that harm average people.

My assumption: in the low interest rate environment, investors/savers are likely become less risk averse in seeking higher returns, a situation pushing money to higher risk assets, which includes commodities, which is pushing up prices in those commodities. And those price increases hit average consumers more than they hit the “rich.”

Tom Hickey said...

Deficit expenditure injects non-government net financial assets Taxes withdraw NFA. It should be clear that whether expenditure is decreased or taxes increased, the net affect on NFA is the same. The question is simple where the reduction is targeted.

The neoliberal program is to cut taxes so as to reduce the reduction of NFA among those who pay the most tax (the rich), and to reduce spending to reduce the NFA of recipients of transfers like SS, Medicare, and Madicaid. This predominantly affects the middle and poor.

The "low taxes and small government" mantra is the propaganda tool to put over this sleight of hand that picks the pocket of the middle and bottom and put it in the pockets of the top. The sorry thing is that this way everyone becomes worse off because the circular flow of money that drives the real cycle of production-distribution-consumption is disrupted.

The wealthy save more than the middle and bottom so increasing the NFA of the top while reducing the NFA of the middle and bottom creates demand leakage that leads to economic contraction and underperformance, the opportunity cost of which is huge, ultimately affecting everyone.

Combine this with the push to tax income rather than economic rent, and the concentration of wealth (savings) at the top severely disrupts circular flow of money that turns the wheels of commerce.

This push for tax cuts at the top and spending cuts that chiefly affect the middle and bottom is based on a fallacy of composition. The appeal is to the wealthy and powerful who control governmental policy, each of whom wishes to improve individual position. But in aggregate, the effect results in demand leakage that disrupts the entire economy and affects everyone adversely.

WillORNG said...

Cuts in net public spending suck or hoover money out of the economy, whether by tax increases or spending decreases, simple as...

On a similar vein, tax breaks are actually spending increases.

Tom Hickey said...

It becomes clear when we speak in terms of net increase or decrease in non-government net financial assets. Fiscal policy then targets where these increases/decreases occur. This has an impact on circular flow, since injections at the bottom are spend and those at the top are largely saved.

Matt Franko said...

No Tom sometimes they are apparently spent on $350 bottles of wine!

PS What is the 'multiplier' of a $350 bottle of wine? ;)

Tom Hickey said...

"PS What is the 'multiplier' of a $350 bottle of wine? ;)"

Probably runs in the millions, Matt. :(