Fiscal Policy and Taxation
The columns in this chapter stress three main themes: (1) the limitations of fiscal policy as a means of countering inflation or recession; (2) the relation between taxes and the scope of government; and (3) the defects of the individual income tax.
The first theme, as noted in the introduction to Chapter 2, is the mirror image of the emphasis in that chapter on the importance of monetary policy. As I say in the first column in this chapter, questioning whether higher taxes would necessarily be contractionary was, in the light of the economic orthodoxy of the day, "like questioning whether two plus two equals four." The failure of the 1968 surtax to stem inflation shook that orthodoxy, so the situation today is somewhat less extreme. Yet the stress in late 1971 and early 1972 on "expansive fiscal policy" (i.e., big deficits--and in 1974 on tax cuts--to stimulate the economy) both by the administration and its leading Democratic opponents, reveals that the belief in the potency of fiscal policy is still alive and well. It is kept alive primarily, I believe, by two factors stressed in these columns: first, the tendency to look only at the direct effects of government spending and taxes and to neglect the indirect effects; second, the failure to keep fiscal effects separate from monetary effects. Insofar as government deficits are financed via the printing press (whether literally in the form of currency or figuratively in the form of Federal Reserve creation of deposits to purchase government securities), the resulting monetary growth will stimulate spending, and it is easy to attribute this effect to the deficits per se rather than to the method of financing them.