To spend is to tax, but spending more != taxing more

Apropos of my continuing thoughts on the merits of how/when to pay for government spending, Brad DeLong has a post up quoting someone making the point that spending now equals taxes later.

The implication, though, is that more spending means a hike in tax rates, rather than simply requiring more money down the road. As I've intimated in my previous posts, I'm not sure that really follows.

This chart shows the debt as a share of GDP since the turn of the 20th century. The main story it tells me is that the residual, vestigial debt of the 19th century was a constant ~10% of GDP, it shot up to ~35% to pay for WWI, then was almost back to 'normal' (essentially paid off) when the Great Depression hit, then it zoomed up to 40% to pay for the New Deal, then up to 120% (!!!) to pay for WWII, then by 1956 was about 2/3rds of the way towards paying off the WWII charge. I see returning to New Deal levels around 1969 (~40%), then a little bit is made on paying off the New Deal in the 1970s, then Reagan/Bush/Clinton kicks in and we're back up to, at worst, the mid Eisenhower administration level of debt (including the surplus interlude) to GDP. This is despite the fact that the nominal/real amount of the debt has constantly increased, and that except for 3 years during the drastic drawdown to 1969 the Federal budget was in deficit, and in Kennedy’s term there was a rather radical cut in taxes that was not rolled back. In other words, large and persistent deficit spending and tax cuts were consistent with eliminating 80 points of debt-to-GDP.

Additionally, I recall interest rates being high in the late 70s (and the ‘low’ debt) vs. record low interest rates in the 90s (with the supposedly massive debt), so I remain deeply skeptical of the idea that either the deficit or the absolute size of the debt have nontrivial impacts on broader interest rates.

What all of this means is that so long as the economy is growing, and growing at a decent clip, more debt today only means taxes tomorrow, not that there must be more taxes. The 1993 tax hikes, as modest as they were, were not the proximal reason for the surpluses of the late 90s; the booming stock market was. That same booming market shrunk debt-to-GDP on its own, notwithstanding Clinton administration efforts to retire debt faster. I maintain that what is needed is not PAYGO but a tax rate optimized for growth. A growing economy shrinks all debt loads over time…

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