A short note on fiscal regimes and fiscal policy

There is a reasonable debate about how much taxes matter. Most economists would agree that taxes do matter. However, the way in which taxes matter is often not altogether clear. More often than not when discussing taxes the tendency is to concentrate on the short-term implications of tax policy. Economists, for the most part, ignore the historical issues associated with the rise of what Joseph Alois Schumpeter, in his essay on fiscal history, called the Tax State, an admittedly, as he noted, a pleonastic concept. Schumpeter was concerned with the long-term implications of what might be termed a tax regime, rather than tax policy.

Read the longer post here.

Mark Blyth and Eric Lonergan on Why Central Banks Should Give Money Directly to the People

By Mark Blyth and Eric Lonergan

In theory, governments can boost spending in two ways: through fiscal policies (such as lowering taxes or increasing government spending) or through monetary policies (such as reducing interest rates or increasing the money supply). But over the past few decades, policymakers in many countries have come to rely almost exclusively on the latter. The shift has occurred for a number of reasons. Particularly in the United States, partisan divides over fiscal policy have grown too wide to bridge, as the left and the right have waged bitter fights over whether to increase government spending or cut tax rates. More generally, tax rebates and stimulus packages tend to face greater political hurdles than monetary policy shifts. Presidents and prime ministers need approval from their legislatures to pass a budget; that takes time, and the resulting tax breaks and government investments often benefit powerful constituencies rather than the economy as a whole. Many central banks, by contrast, are politically independent and can cut interest rates with a single conference call. Moreover, there is simply no real consensus about how to use taxes or spending to efficiently stimulate the economy.

Read rest here.

The rise and fall of the Tax State

David asked me about this paper, published in an interdisciplinary book (meaning a book that nobody, in any discipline, reads). It is about what Schumpeter referred to as the Tax State (the paper is "The Crisis of the Tax State" from 1918). By the way, this paper, written right before he actually became Finance Minister in Austria, is by far his best, much more relevant than his cycle theory, which remains essentially Austrian and associated to real shocks (yes there is a link between Schumpeter and the Real Business Cycle School).

My take from the conclusion:

The rise of the tax State can be seen as a struggle over who would carry the burden of taxation. Originally taxation was the sole burden of the working class, while the elites were free from taxes. Public debt as a form of repayable taxes fell on the shoulders of the elite; but that was not an excessive burden. Industrial development, urbanization, the democratization process, the enlargement of the franchise and progress in general meant that the burden of taxation was gradually shifted towards the privileged. That, however, has proved to be more problematic. The revolt of the elites has reversed considerably, in a relatively short period of time, the long process of formation of the tax State.

The general unifying theme of the book, I should note, was power, and I suggested (not very originally I might add) that it has been often absent in mainstream economics.

The role of the State in US Development

As part of Peter Ho's talk yesterday, two graduate students presented some of their research. One of the topics, was the role of the State, the Fiscal-Military State in particular, in the early process of industrialization and development in the US, which was, as noted by Peter, very much in line with his arguments for managed trade. Here is a link to a paper I wrote on the rise of what Schumpeter termed the Tax State. On the Fiscal-Military State read this. The classic book by John Brewer, The Sinews of Power, was essential in the development of some of these ideas, in the sense that it shows the fundamental role of the State for industrialization and the creation of a global empire. The argument put forward, in the talk yesterday, was that the US development can only be understood from a Fiscal-Military Developmental State perspective.