Pethokoukis, Economics, Taxes and Spending

Why is the IMF telling the US to kill the sequester when tax hikes are the bigger fiscal drag?

The IMF is advising Washington to, among other things, kill the sequestration budget cuts in order to boost economic growth:

 On the fiscal front, the deficit reduction in 2013 has been excessively rapid and ill-designed. In particular, the automatic spending cuts (“sequester”) not only exert a heavy toll on growth in the short term, but the indiscriminate reductions in education, science, and infrastructure spending could also reduce medium-term potential growth. These cuts should be replaced with a back-loaded mix of entitlement savings and new revenues, along the lines of the Administration’s budget proposal. At the same time, the expiration of the payroll tax cut and the increase in high-end marginal tax rates also imply some further drag on economic activity.

Except that a new study from the San Francisco Fed estimates while US budget policy will knock as much as one percentage point a year from GDP growth over the next three years — 90% of the fiscal drag comes from higher taxes. 

So why isn’t the IMF talking about repealing the “super-cyclical” rise in taxes, everything from higher income tax rates for high-income households to the recent expiry of temporary Social Security payroll tax cuts to new taxes associated with Obamacare?

Anyway, the sequester is unlikely to continue in its current form for the next decade. The defense cuts, for one, are way too deep. So, too, cuts in the government’s public investment budget. But the tax hikes shouldn’t get a pass, especially since they were so ill-designed, as the IMF basically concedes when it sketches what smarter tax reform might look like: a) fewer deduction and b) taxing consumption rather than investment:

New revenues could be raised through a fundamental tax reform which would simplify the tax code and broaden the tax base through a reduction in exemptions and deductions, as well as through the introduction of a carbon tax and a value added tax.

7 thoughts on “Why is the IMF telling the US to kill the sequester when tax hikes are the bigger fiscal drag?

  1. Theory: Because the IMF is completely full of shit, and is populated with clueless neoKeynesians attempting to salvage their failure in the Court of European Elite economic stupidity?

  2. The IMF is us. We contribute more $$ to the IMF than any other country. Same for the UN. Why not cut spending on these two totalitarian cabals? Those are the kinds of spending cuts this American enjoys.

  3. “NEW REVENUES COULD BE RAISED” ADD A CARBON TAX
    AND A VALUE ADDED TAX???? JAMES YOU SHOULD BE IN THE BAMA ADMINISTRATION. THE PROBLEM IS SPENDING
    NOT THE ENHANCEMENT OF GOVT. MONEY COMES FROM THE PRIVATE SECTOR TO THE GOVT THEREBY SLOWING THE PRIVATE SECTOR. WHAT IS SO DIFFICULT FOR YOU
    IN BEING ABLE TO UNDERSTAND SUCH BASICS???

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