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Comment by Tyrek | Hacker News Reader

I'm still working through the paper, but this is actually an interesting one to me - The common response to this paper will likely fall along the lines of 'Tax cuts bad because it clearly doesn't stimulate growth'.

However, the counterfactual is more interesting here - it suggests that, from a purely macro perspective, that the spending enabled by higher taxes...does nothing for economic growth. (Note: this does not detract from the humane/ethical argument of redistribution, which I leave for others to cover)

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I don't think you can assume this from the conclusions or data of this study for a couple reasons:

  - The effects of increased spending are not necessarily the same as the inverse of the effects of decreased spending. I think you'd need to do a lot of work to get that relationship clear, or do a study specifically on raised spending vs. gdp. And historically the period in the US with the greatest growth in tax rate (the post-WW2 period) was also a period of tremendous gdp growth, but obviously there are a lot of confounding factors there.
  - Government spending is largely decoupled from revenue these days anyways. Tax cuts rarely come with proportional spending cuts and no matter what the US is still dumping ~a trillion a year into defense and related industries.

As the sibling comment points out, this study was done on taxes not spending. The government has more sources than taxes for its money supply.

I agree for the most part - I don't think that there's any strong conclusions w.r.t. spending here, but an interesting direction for future research.

What I'm struggling with, however, given the assumption above (spending is decoupled from tax revenues), is that while the paper suggests a lack of incentive to cut taxes, it equally suggests a lack of disincentive to cut taxes.

Actually this does NOT hint at an answer the counterfactual. Because spending is unchanged as a result of lower taxes from the government. Government spends as much as it did before cutting taxes (this is because the federal government doesn't spend taxes, but spends regardless of tax income. This is what is called the deficit).

If a study was done to answer the counterfactual, my bet is that the result of higher taxes would actually increase GDP because the rich will do everything possible not to pay for those taxes. So they will do things like spend more on R&D, or increase wages, or buy equipment. In other words reduce their tax burden. If given the choice between the government burning profits via taxes, or spending more on wages and investment, they will choose the latter.

Excess capital leads to asset bubbles. Non productive. Maybe even anti productive.

Some how we've simultaneously got both surplus capital and huge a decline of new business formation. Coincidence?

My pet theory (hunch) is that transaction costs discourage large funds from making medium and smaller sized investments. The uniqueness of Y Combinator kinda supports this hunch.

Could you point to the part of the paper that you're drawing these conclusions? It's been a while since I've done serious econ work, but I'm not seeing a spending variable when I scan through the paper.

That's my point, the paper doesn't answer the counterfactual or even hint at what the answer would be. You implied higher taxes allow the government to spend more, but this is not true since the government doesn't need taxes to spend. In other words, taxes are not necessary for spending.

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