Monday, April 16, 2012

Learning the wrong lesson?

Okay, I just read an article by Fraser Nelson of the UK-based Spectator, entitled Sweden's secret recipe.  In it, Mr. Nelson and the Finance Minister of Sweden, Mr. Anders Borg, seem like they might be learning the wrong lesson from the Swedish experience of tax cuts.  I'm just going to take Mr. Nelson's word that what he wrote is true (although it might bare further scrutiny...).

Mr. Nelson explains the reasoning behind the  most important economic policy decision (seemingly, to Mr. Nelson and perhaps Mr. Borg) under discussion:

"[Mr. Borg] even cut property taxes for the rich to lure entrepreneurs back to Sweden. The last bit was the most unpopular, but for Borg, economic recovery starts with entrepreneurs. If cutting taxes for the rich encouraged risk-taking, then it had to be done. ‘In most cases, the company would not have been created without the owner,’ he says. ‘There would be no Ikea without [Ingvar] Kamprad. We would not have Tetra-Pak without [Ruben] Rausing. They are probably the foremost entrepreneurs we have had in the last few decades, and both moved out of Sweden.’"

Okay, so the expectation is that, presumably, tax cuts for the wealthy are going to improve the economy by increasing investment.  But Mr. Borg had to pay for this with pesky tax cuts for the little guy:

"Just as George Osborne took a hit for reducing the 52p tax to a 47p tax, so Borg’s party paid an political price for helping the rich. ‘If you are going to survive that politically, it is very important to cut taxes on low-income earners.’ He focused the tax credit on the low-paid, giving some the equivalent of a month’s extra salary every year. But there was still resentment. ‘We lost a lot of voters when we cut the property and the wealth tax, I don’t make any excuse for that. It was a severe blow to our support.’" (emphasis mine)

Mr. Borg traded tax cuts for low-income workers for tax cuts aimed at those with the greatest wealth in society.  Which one was the more successful policy, foregoing revenue from the wealthy or increasing low-income workers' disposable (after-tax) income?

"What even Borg did not expect was that his tax cut for the low-paid would increase economic growth so much that it has almost entirely paid for itself. Borg had created something that Osborne’s critics say does not exist: a self-financing tax cut." (emphasis mine)

Mr. Nelson then goes on to... not discuss the impact of the decrease in the wealth tax.  So I guess Mr. Nelson gives ground... tax cuts for low-income individuals have a greater impact than tax cuts for the wealthy.  Except, that he didn't say that.  He just never mentioned the wealth tax's impact after that.  Surprising, since this is certainly a supply-side article.

A few more little gems:

"‘There was some criticism at the time that we were borrowing to finance tax cuts,’ he says. But Sweden could do it, because it was expecting to return to surplus soon; Britain has no such luxury, he says. His main advice to Osborne is: ‘Keep on dealing with the deficit, because deficits destroy everything else.’" (emphasis mine)

So Mr. Borg is suggesting that the UK needs austerity, even though his policy was to cut taxes, increase the deficit, but fuel a recovery.  Isn't that something called hypocrisy?

"Borg’s tax-cutting policy was accompanied by a 268-page book explaining the dynamic link between lower taxes and more jobs."

Tax cuts can increase aggregate demand, increasing aggregate demand when the economy is depressed creates jobs.  I'm not sure if you really need a 268-page book for that.

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