Paul Krugman's Bad Nightmare

Paul Krugman

By Robert Wenzel

Paul Krugman is positively terrible when it comes to tax cuts.

He is the perfect example of a technician who thinks in terms of what is best for the state.

He recently posted this tweet:

The belief that tax cuts work miracles is really the ultimate zombie idea. No matter how often it fails, the right keeps pushing it https://t.co/NSJXe4lWvb

— Paul Krugman (@paulkrugman) November 19, 2019

The lead paragraphs of Krugman's referenced article read:

The verdict is in on President Trump’s 2017 corporate tax cut: It didn’t work.

The tax cut’s backers said reducing the corporate tax rate from 35 percent to 21 percent would increase the average household income by $4,000, raise economic growth above 3 percent and even pay for itself by generating more tax revenue. As the Wall Street Journal’s Greg Ip noted in a recent column, “Nearly two years later, none of those things have happened, and there is scant sign that they will.”

But there are only two ways that the tax cuts didn't work. That is if you think that either at least a matching increase in tax revenue should have occurred but didn't or that income increases should have occurred but didn't.

This is an extremely shallow way to look at tax cuts, and Krugman should feel embarrassed that as a Nobel Prize winner he is promoting such shallow thinking.

First, let me point out that immediately after the Trump tax cuts were made, I suspected that the cuts would not result in a greater gain in tax revenue (SEE: Laughing at the Laffer Curve: The Trump Tax Reform Con). But this doesn't mean the tax cuts were a bad thing. Money put back in the private sector is always a good thing.

As Murray Rothbard explained about tax cuts:

All business spending is investment because it goes toward increasing the production of goods that will eventually be sold to consumers. But government spending is simply consumer spending for the benefit of the income, and for the whims and values, of government’s politicians and bureaucrats. Taxation and government spending siphon social resources away from productive consumers who earn the money they receive, and
away from their private consumption and saving, and toward consumption expenditure by unproductive politicians, bureaucrats, and their followers and subsidies. 

In other words, since tax cuts result in less money collected by the government that is a plus. It means there is more money in the hands of the private sector: consumers and businesses.

And if household incomes didn't go up but households, because of the tax cuts, were able to keep more money for spending, then it was an all-around positive that resulted in an increase in the general standard of living.

Of course, to the degree the government attempts to borrow money to make up for the revenue deficit that is a bad thing. When government revenues decline, government spending should also be cut.

But Krugman's reaction of the horror, that revenue fell, is just his bad nightmare of a statist technocrat, who measures everything from the perspective of "how much did the government squeeze out of the people today?"  For the rest of us, a tax cut is a wonderful thing.

-RW