When facing budget deficits, lawmakers have several choices for addressing the problem. Most people seem to assume that raising taxes is the worst option. Not true. At a joint hearing in the Minnesota House this week, Paul Anton, chief economist at Wilder Research, pointed out that raising taxes to fight an economic downturn may be better for the economy than cutting spending. (You can listen to the audio for the February 6th hearing on-line.)
Why? If the goal is to keep money flowing in the economy, protecting state spending is a pretty sure bet. Every dollar of state government spending is just that…dollars that are guaranteed to go out the door. If you cut spending to fix a deficit, you are pulling those dollars away from services that were going to use those funds. And even worse, they were very likely to spend those dollars in Minnesota.
Nobel Prize winner Joseph Stiglitz and Congressional Budget Office director Peter Orzsag have argued that a better option is to raise taxes, particularly on higher-income households. Those families are likely to maintain their same level of consumption, but perhaps save a little less. They conclude in their paper that, “reductions in government spending on goods and services, or reductions in transfer payments to lower-income families, are likely to be more damaging to the economy in the short run than tax increases focused on higher-income families.”
By preserving state spending and raising progressive taxes, Minnesota can most effectively use the tools the state has at its disposal to rejuvenate the economy.