Higher Taxes, Higher Government Spending, Slower Economic Growth

J.D. Foster and Curtis Dubay, writing at The Foundry (“Of Course Higher Taxes Slow Growth — A Response to Diamond and Saez“), make mincemeat of Peter Diamond and Emmanuel Saez’s arguments for higher taxes on “the rich.” Implicit in Foster and Dubay’s takedown of Diamond and Saez is the demonstrably strong (and negative relationship) between government spending and economic growth.

Spending is funded by taxes, after all. And even when spending is funded by borrowing it amounts to a tax on the productive sectors of the economy. How is that? When government sell bonds to the public it redirects money from productive uses in the private sector to unproductive and counter-productive uses in the so-called public sector (i.e., government). The thievery is no less destructive — but more apparent — when the Fed creates money out of thin air to finance government spending.

So, the focus should be on spending, for which taxation is a proxy. The effect of government spending on economic growth is nothing less than disastrous. I have treated the subject at length in “Estimating the Rahn Curve: Or, How Government Inhibits Economic Growth.” Here is another version of the final graph in that post:

The bottom line is that for every 10 percentage points by which government spending rises, the rate of growth declines by 0.7 percentage points. If you think that 0.7 percent is negligible, try compounding it over a lifespan of 80 years. In that time, a sustained 10 percent rise in government spending will reduce the average person’s real income by more than 40 percent.

That, my friends, is soak-the-rich Obamanomics at work. Apologists for Obamanomics, like Diamond and Saez, should be ashamed of themselves for abetting economically destructive demagoguery.

Related posts:
The Causes of Economic Growth
A Short Course in Economics
Addendum to a Short Course in Economics
Enough of “Social Welfare”
The Case of the Purblind Economist
Economic Growth since WWII
The Price of Government
Does the Minimum Wage Increase Unemployment?
The Price of Government Redux
The Mega-Depression
The Real Burden of Government
Toward a Risk-Free Economy
The Rahn Curve at Work
The Illusion of Prosperity and Stability
Society and the State
The “Forthcoming Financial Collapse”
Estimating the Rahn Curve: Or, How Government Inhibits Economic Growth
The Deficit Commission’s Deficit of Understanding
Undermining the Free Society
The Bowles-Simpson Report
The Bowles-Simpson Band-Aid
Build It and They Will Pay
Government vs. Community
The Stagnation Thesis
Government Failure: An Example
Taxing the Rich
More about Taxing the Rich
Voluntary Taxation
Money, Credit, and Economic Fluctuations
A Keynesian Fantasy Land
“Tax Expenditures” Are Not Expenditures
The Keynesian Fallacy and Regime Uncertainty
Why the “Stimulus” Failed to Stimulate
The “Jobs Speech” That Obama Should Have Given
Regime Uncertainty and the Great Recession
The Real Multiplier
Vulgar Keynesianism and Capitalism
Why Are Interest Rates So Low?
Don’t Just Stand There, “Do Something”
Economic Growth Since World War II
The Commandeered Economy
We Owe It to Ourselves
In Defense of the 1%
The Real Multiplier (II)