Reply #10: Keynesian theory breaks down when deficit spending goes unchecked [View All]

[slackmaster]

We have problems on both sides of the balance sheet. California provides a fine example, where income has been reduced due to the condition of the overall economy. It takes only a simple majority in the legislature to spend money, but the law requires a 2/3 majority to approve new taxes.

Deficit spending is fine as long as the borrowing and spending are both done wisely and with a long-term vision of balance that does not depend on inflation to make the plan work.

Progressive taxation of higher income people also breaks down if you push it too hard. Try to tax people 100% of their income and surely your revenue will drop to zero. The trick is to make it attractive for high earners to stay within the tax base and not simply leave the country or go underground; to charge people at the highest rate they are willing to pay without deciding that avoiding paying taxes is a higher priority than creating wealth.

If you have a progressive tax system, the economy will grow and be more productive (Keynes, anyone?).

It's easy to talk in generalities but very hard to come up with a tax system that everyone feels is slightly unfair but grudgingly accepts as the cost of having an orderly society that meets peoples' needs. If you push taxpayers too hard they either leave or revolt. (California Proposition 13, anyone?)