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Debt Will be More Manageable with Smart Tax Cuts

Atlantic Review appreciates that two Wall Street Journal contributors respond to our blog post on their article.

George Pieler and Jens Laurson took issue with the French finance minister's claim that German productivity ails Europe's economy. Joerg Wolf agreed with their criticism in Atlantic Review's post Germany as Maya the Bee, but expressed disagreement on the issue of tax cuts, even though that was not a central part of their article.

Jens Laurson and George Pieler have now submitted the following riposte, which we appreciate and are happy to post here:

In commenting on our Wall Street Journal piece ("Not so Faaaaast, Germany"), Joerg Wolf, Editor of the Atlantic Review, disagrees with the following observation: "Germany should cut taxes.  But it should do so for its own good..."

Mr. Wolf makes three points which we should like to examine; hoping to clarify an evident misunderstanding that has arisen.

Mr. Wolf says Germany has been advised to cut taxes "especially of top earners, over the past twenty years.  Such advice is neither helpful nor original and creative."  Well, neither originality nor creativity was our intent, nor is that an argument against the argument. The question is, whether it is good advice. Certainly if it is such oft-repeated advice there must be something to it?  For the record, we think cutting taxes is good-indeed essential-advice. This is partly because Germany has one of the highest top personal tax rates in world (47%). More worryingly, the German state absorbs nearly half the nation's GDP which means an astonishing, if hidden loss of productivity.  This formula has worked for Germany so far, a reflection of popular acceptance of high taxes in exchange for government-guaranteed income security programs.  We don't think that will work so well in the future, though. The German tax cuts over the last two decades Mr. Wolf mentions, in any case far outweighed by the tax increases in the same time, are irrelevant to this discussion.

Mr. Wolf states tax cuts are "not feasible. Higher taxes are needed to pay off debt." Yes, German debt coming out of the recession is higher than anyone would like.  But there is always some-even considerable-debt:  that can't mean taxes always must rise, even especially if they throttle economic activity.  Like all policy choices, especially fiscal ones, the mix of debt, taxes, and spending are wholly subject to political control. If Germany lacks the will or interest in controlling spending, then it must have higher taxes.  But that is a choice the nation makes, not some sort of morally-superior repudiation of debt.  Again, we think the debt will be more manageable with tax cuts that reward effort and productivity, coupled with restraint on overall spending. With nearly half the nation's wealth-generation going to government, it is absurd to think nothing may be cut.  To suggest that Germany's taxes are so high because of spending on infrastructure or education is, frankly, absurd-which one look at the percentages of spending reveals.

We also did not in any way imply that tax cuts should necessarily be afforded with higher spending. If the German political parties, even the alleged liberal or fiscally conservative ones, don't want to stop the gravy train of redistributing and borrowing money to-in essence-pay for votes (hotel industry, low income earners, pharmacists, Opel employees-the list goes on), then they will have to be forced in some way. Tax cuts could be the right instrument to rein in spending. If debt and good intentions are going to get a passing grade for arguing the 'impossibility', even 'irresponsibility' of tax cuts, we're making it too easy for politicians. The thinking that underpins this is misguided.

Lastly, Mr. Wolf says "Both Germany's finance minister and the federal president, who used to run the IMF [emphasis added], ruled out further substantial tax cuts."  Any first semester student of logic can smell the argumentum ad verecundium-the appeal to authority-at three paragraphs against the wind. Perhaps a German reflex, but unfortunate, since it is a logical fallacy rather than a point well made. Never mind that one could spend hours debating whether the IMF credential is actually a positive or negative one. Or that, with an (equally fallacious) counter-argument, one could point to the present IMF Mission Chief to Germany having said this week that "there would be advantages to tax cuts that would be tailored to boosting growth, however, tax cuts-any tax cuts-would need to be done in a fiscally responsible manner." If someone who once ran the IMF says "no tax cuts", we must not have them? What Mr. Köhler has said on economic matters as of late, often contracting his rhetoric even during his first term as President, surely deserves much more scrutiny than that.

Mr. Laurson is editor-in-chief of the International Affairs Forum. Mr. Pieler is an attorney and former tax counsel to the Senate Finance Committee.

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Pat Patterson on :

Shoot, considering our debt to GDP ratio is approaching Germany's I would be happy to have even some dumb tax cuts.

John in Michigan, US on :

A big part of the tax (or debt) question is empirical. What is the shape of the [url=http://en.wikipedia.org/wiki/Laffer_curve]Laffer Curve[/url] in Germany? Is the current German tax rate above or below the optimum? The discussion here seems to assume that Germany's tax rate is below the optimum, and therefore, raising tax rates will result in increased revenue. However, if the current rate is above the optimum, then this reverses the logic of Joerg's original argument completely! A high deficit creates an imperative to cut taxes, while a low deficit or even a surplus would be an opportunity to raise taxes (which would cause revenue to decrease, but which might be desirable for reasons such as strict egalitarianism, limiting growth, or to pander to populist 'social justice', 'eat the rich' sentiment.) The [url=http://www.econlib.org/library/Enc/MarginalTaxRates.html]experience of many European countries during 1979-2002[/url] suggests that, in general, lower tax rates resulted in higher revenue, which suggests that the tax rates (before they were lowered) were above the optimum. It is possible that European rates are still above the optimum. Certainly, this seems more likely in high-tax countries like Germany and France, than it does in low tax countries like Poland. It would certainly be an interesting experiment to test out lower rates and see what that does to revenue. Indeed, I would go a step farther and insist that is absolutely vital to demonstrate that the current German tax rate is below the optimum, before going any further in the discussion of the spending/tax/deficit trade-off. Discussion of those trade-offs is meaningless unless we can be certain that raising taxes will truly increase revenue.

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