Saturday, July 25, 2009

California: A Spending or Revenue Problem?

Unions make the argument that taxes are too low and higher taxes are required to pay for ever increasing salaries, benefits and their underfunded pensions (as a result of increased benefits during good years). The alternative to see the budget crisis as a spending problem and that government has grown significantly faster than the economy. What's happening in California is a scenario that may be played out across the US. The case that it's a spending problem (Philip Greenspun).

The good news, if you can call it that, is that while taxes and increased deficits may not crush the recovery, it will make it slower - at least according to Bill Conerly:

Tax hikes will have negative effects in the short run, but my reading of economic history is that they do not trash the economy in the short run. They will limit our growth by a bit, which will accumulate like compound interest (but with a negative effect rather than a positive effect) over time. I don't expect the deficit per se to have a big effect, except that it will trigger tax increases.

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