William_T._Bianco,_David_T._Canon]_American_Polit

554554 Chapter 15 | Economic Policy

Given the tenuous relationship between fiscal policy and the state of the economy,

critics have suggested an alternative rationale to justify large budget deficits in

relatively good economic times. (Recall that a Keynesian perspective says that the

government should run surpluses during good times, and supply-siders argue that tax

cuts should produce surpluses rather than deficits.) Instead of being primarily an effort

to stimulate the economy, large tax cuts and budget deficits like those of the 1980s and

early 2000s are the only way to cut down the size of government—they are, as Reagan’s

budget director David Stockman called them, an attempt to “starve the beast.”^43 If

there is no money available, liberals will not be able to propose new programs, and

conservatives will be more likely to cut existing programs. The only alternative

is raising taxes, which is usually politically unpopular, even though our tax bite is

relatively small compared with that of other countries, ranking fourth from the bottom

of nations belonging to the Organization for Economic Cooperation and Development

(OECD) (see Figure 15.6). The other possibility, of course, is to simply accept large

budget deficits as a permanent part of the economic landscape. Although that may be

politically tempting, it is not a sustainable strategy in the long run.

Redistributive Implications of Fiscal Policy Fiscal policy may have a relatively

modest impact on the economy, but it determines how the tax burden is distributed

and which parts of the economy and policy areas benefit from federal spending.

In other words, fiscal policy has redistributive implications. There are two ways of

thinking about the characteristics of federal taxes: (1) the different types of taxes

FIGURE

15.6 45.9

45.3

44.2

44.1

44.1

42.9

42.7

39.4

38.8

38.6

38.0

37.6

37.1

37.0

36.4

34.7

34.4

34.3

34.0

33.6

33.5

33.2

32.7

32.1

31.7

31.2

30.7

30.2

28.2

27.8

26.3

26.0

25.5

23.0

20.4

17.2

Tax revenue as a percentage of GDP (2013)

Denmark

France

Belgium

Finland

Sweden

Italy

Austria

Hungary

Netherlands

Greece

Norway

Germany

Luxembourg

Slovenia

Iceland

Estonia

Portugal

OECD - Average

Czech Republic

Poland

Spain

United Kingdom

Slovak Republic

New Zealand

Canada

Israel

Japan

Latvia

Australia

Switzerland

Korea

United States

Turkey

Ireland

Chile

Mexico

Comparing

Global Tax Rates

Tax rates vary considerably around

the world. Given the data below, do

you feel that taxes in the United States

are too low or too high?

Source: OECD.org, Tax Policy Analysis,

Revenue Statistics, http://stats.oecd.org/

index.aspx?DataSetCode=REV (accessed

4/24/18).

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