Arnold Kling  

When Government Gets Desperate

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It's the Prices, Stupid... Book Update...

Megan McArdle does not approve of California's revenue-raising tactic.


No, the government didn't actually increase taxes; it just raised the withholding. They'll give any extra funds back to taxpayers in April, and presumably fewer people will have to write checks to the government on April 15th.

This is a terrible idea on many levels. First of all, the government should not be taking forcible loans from its citizens...

Governments in desperation do desperate things. When I bring up the risk of a sovereign debt crisis, people reply, "Government would never do X. X would be political suicide," where X is anything other than borrow more money in the market.

At some point, borrowing in the market becomes prohibitively costly. California's extra tax witholding is just a preview. My guess is that some time in the next decade, "unthinkable" steps will be taken to keep the U.S. government in business. Extra tax witholding will seem fair and painless by comparison.


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CATEGORIES: Fiscal Policy



COMMENTS (12 to date)
silvermine writes:

Will they give the money back in April? Remember, this is the same state that this year already held on to refunds for an extra couple of months. Why not keep their forced interest-free loan for a little bit longer, right?

Pietro Poggi-Corradini writes:

Italy did that a long time ago (and might have become routine I'm not sure): where you had to estimate your taxes in November and put down a "deposit", say 20% of what you're going to pay in May. Essentially it's an interest-free loan to the govt.

ajb writes:

I think one problem is how credible are govt promises not to tax retirement savings in the future (esp. the Roth, but also whether the state will tax deferred accounts *just* at the standard rate). My guess is that they will tax retirement accounts by adjusting your Soc. Security payments depending on how much other retirement income you are receiving, thus sneaking means testing through the back door.

Randy writes:

Politicians have an idea of what they are worth. This is the primary factor in determining the amount and methods of taxation. They will always find a way to take what they believe they are worth, regardless of the effects on the general population. This is particularly important for our generation to understand, because our generation of politicians has an exceptionally inflated idea of its worth.

Steve Roth writes:

Arnold, I certainly share your concern. But question: US in 1946 had debt of 120% of GDP. Japan has 200% now. Neither collapsed. We have (for the moment) less than 100%.

What's the structural difference now that makes it so much scarier?

Why won't productivity gains and inflation solve it?

Ryan writes:

I feel like I'm on the 3rd or 4th deck of the Titanic. I have little money socked away(like 3-4k) and sizeable outstanding student debt, so I have limited to no ability to protect myself in the case of a hyper-inflation or drastically more invasive goverment wealth capture. So I'm destined to go down with the ship. I guess the only thing I have left to answer is how I wish to carry myself in the face of such despair inducing facts. I suppose I should take the stoic attitude and not succumb to the despair, or at least not let it overcome me.

gl Arnold. I hope you can find a good way to protect the wealth you have managed to earn.

q writes:

you don't think that private financial institutions would change payment deadlines as a way of getting interest free loans from unsuspecting customers?

i think this is just a case where a desperate government copies an obnoxious but prevalent private sector practice.

Robert Johnson writes:

Ryan,

As a borrow with no savings inflation is on your side. Not to worry! Just hope it comes soon!

Alright, hyperinflation is a problem. But maybe it won't come to that.

Colin K writes:

@Steve Roth:

Hemingway wrote that "you go broke bit by bit, and then all at once."

This is another way of Arnold's point that everyone thinks they'll get out before the bubble bursts.

Structurally Japan is well into its second decade of stagnant growth. On top of that, their population is aging rapidly with negative population growth and no immigration. This is not a good base on which to pay down a lot of debt.

Their industrial plant is massive and advanced, but relies virtually 100% on imported oil, iron, etc. to keep going. Inflating out will thus be expensive. They will probably not head into Argentinean territory anytime soon, but the terms of debt could start to get worse, and when you're financing debt with debt, that gets expensive really fast.

Another issue I wonder about is whether China would be happy to see Japan's economy savaged by a debt crisis. Maybe not yet, but 10 or 15 years in the future? It would be one way for them to cut their #2 strategic rival down to size, and perhaps with a lot less collateral damage than going after the US.

Dan Weber writes:

What's the structural difference now that makes it so much scarier?

The plurality of government spending in 1946 was on defense. It was easy to drop that.

A great portion of current Federal spending is on entitlements, which aren't going away. At least not without civil war.

Freedom Thinker writes:

Just to add to Dan Weber comment defense spending was also industrial base which means we benefited from inflation with exports and trade. We don't have that base now China does. We can't export waitress services or financial services or educational services etc very easily. Therefore, we aren't going to recover as quickly from inflation with productivity gains. Meanwhile the government still has the entitlements Weber points out.

The Cupboard Is Bare writes:

"No, the government didn't actually increase taxes; it just raised the withholding."

When the government raises withholding, the taxpayer loses access to money that they would normally have and is basically prevented from using that money to take advantage of financial opportunities that may arise. So, I see it as a tax.

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