Economists generally frown upon raising taxes in times of an economic downturn. Historians point to President Herbert Hoover’s Revenue Act of 1932 as an example – “the largest – and most poorly timed – peacetime tax increase in American history.”
However, Steven Pearlstein, a Pulitzer Prize-winning business columnist for The Washington Post, told MSNBC’s “The Politics of Money” co-host Melissa Francis that tax increases in times of economic duress aren’t necessarily bad. His reasoning: the government could spend the money better than the people.
“That there’s something wrong with raising taxes in the middle of a recession – that it’s always a bad idea – not true,” Pearlstein said. “It depends on what the government does with that money and what people would have done with the money if they already – if they had it and it wasn’t taxed.”
In Pearlstein’s world wealth should be taken from individuals through tax hikes and used by the government to be “invested” in the economy.
“And it’s quite possible that if you raised taxes on people who otherwise would have saved the money and you, and you invest it wisely – the economy can be better off,” Pearlstein said. “So it’s not always the case raising taxes in a recession is a bad idea. It matters on whom and how you use the money.”
Even Democratic President-elect Barack Obama said tax increases could be detrimental to the overall economy. And as Murray Rothbard pointed out for the Ludwig von Mises Institute – raising taxes in this environment is a bad idea – under any school of economics.
“Every school: Austrian, Keynesian, monetarist, or classical, would react in horror to such a plan, which obviously worsens a recession by lowering saving and investment, and productive (as opposed to parasitic and wasteful government) consumption. Raising taxes does nothing to help the inflation, and does a lot to make the recession more severe; and it aggravates the deadweight burden of government on the economy.”