Are taxes a form of austerity?

Matthew Yglesias writes:

In fact the general trend over the past several years among people on the left to start using “austerity” as a meaningless signifier for “policies I don’t like” has had an unfortunate negative impact on the quality of discourse. When state governments cut back social services in the face of falling tax revenue and rising employee health care and pension costs, that is a kind of austerity. But the available alternative of raising taxes is also a form of austerity.

I have been using ‘austerity’ to refer to ‘cutbacks in government spending,’ especially acute among the states, which typically have to balance their budgets. In the face of recession-triggered reductions in revenues, they have chosen to reduce expenditures on public services rather than raise taxes, a politically difficult choice.

But I have to wonder how raising taxes is necessarily a form of austerity. Yglesias seems to be suggesting that austerity can imply economic contraction. If so, then the answer depends.

If governments raise taxes on the wealthy, say the top one percent, would that in itself retard economic growth? It could if the dollars the rich pay in taxes were otherwise spent on productive activities. Yet the rich spend a disproportionately lower percentage of their income than the Rest of Us, who can use every penny we make. Here’s Joseph Stiglitz, writing for Vanity Fair:

The relationship is straightforward and ironclad: as more money becomes concentrated at the top, aggregate demand goes into a decline. Unless something else happens by way of intervention, total demand in the economy will be less than what the economy is capable of supplying—and that means that there will be growing unemployment, which will dampen demand even further. In the 1990s that “something else” was the tech bubble. In the first dec­ade of the 21st century, it was the housing bubble. Today, the only recourse, amid deep recession, is government spending—which is exactly what those at the top are now hoping to curb.

Also, we know that during the 50s and 60s the marginal tax rate at the federal level was much, much higher than it is today. Nevertheless, the economy grew at a far faster clip than it does currently when tax rates are low.

change in real gdp and marginal tax rate

So, I would argue that increasing taxes on the wealthy, either by raising the marginal rate or by instituting Robert Frank’s consumption tax, could actually spur economic growth by stopping the flow of dollars from the spending bottom to the hoarding top. Here’a s chart I’ve used before from the Federal Reserve showing the Gini index and the velocity of money, the latter decreasing over time with increased wealth concentration.

money velocity and gini


During the relative halcyon days of the post-war era, the federal government balanced its budgets, collecting sufficient revenues to meet expenses, which continued to grow. With the fall in tax rates on both personal and corporate income, revenues have declined but federal spending has not, leaving us with a series of deficits and higher debt.

federal receipts and expenditures from the FED

One thought on “Are taxes a form of austerity?

  1. The definition I would use is that austerity is the shrinking of the deficit either through the form of spending cuts or tax increases with the implication that it harms the poor. Its hard to describe taxes on the 1% as austerity in this sense, regardless of its budgetary effects.

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