... let me send you Bruce Bartlett's way. He notes that taxes are in fact lower under President Obama and that there hasn't been a major tax increase in this country for 17 years. Why do people think there are higher taxes?
One other possibility is that taxpayers are operating on the basis of a sophisticated economic theory called "Ricardian Equivalence." According to this theory, budget deficits have no stimulative effect on the economy because taxpayers implicitly discount the future tax increase that will be necessary to pay off the additional debt. People increase their savings now, the theory posits, in order to prepare for this future tax increase, thus offsetting all of the stimulative effect of the deficits with an equal and contractionary increase in saving. ... The problem is that many people conclude from this arguably true statement that raising taxes to reduce the deficit would in effect constitute a double tax. We're being taxed once by the deficit, people think, so why should they have their taxes raised to reduce it?
... Of course, this is a non sequitur. People can't be taxed twice by the expectation of a tax and again by the actual tax itself. But more important, the underlying assumption of Ricardian Equivalence--that taxes will eventually rise to pay off the debt--is now seriously in doubt. Perhaps once it was true when people genuinely cared about a balanced budget. But today's Republicans and Tea Party members oppose all tax increases for any reason, no matter how big the deficit is. I really believe that many would rather default on the debt than raise taxes by a single penny. If this is true, then Ricardian Equivalence is a dead letter -- to the extent that it ever existed at all.
The Ricardian Equivalence is frequently cited by conservatives in Congress, as well. Bartlett's explanation also forgets that many other things -- from inflation that reduces debt to investments that produce efficiencies -- can result in a lower tax burden. Obviously, none of those factors will eliminate the eventual need to pay off deficits, but there are clearly a number of complicating factors that muddle the simplistic conservative analysis. Bartlett's whole piece is worth reading.
-- Tim Fernholz
