Real vs. Virtual Austerity

At the Heritage Foundation a pair of scholars discussed Europe’s current problems with austerity and how the Left demonizes fiscal responsibility and restraint.

Veronique de Rugy, a senior research fellow at George Mason University’s Mercatus Center, said that the reason that European countries have not completely pulled out of their recessions is that their entitlement reforms “are a failure,” because “politicians rarely take the path of spending cuts.” Instead, “they take…a path that leans heavily toward tax increases.” De Rugy acknowledged her supply-side economic beliefs and averred that “tax cuts are more stimulative than tax increases or spending increases” because with tax increases, “you’re going to see a depressed economy.”

She took a hard look at her native country of France and found that “it was the only country that didn’t pretend it was going to cut spending.” She found it “painful” to read about the truth behind French austerity: tax increases. In the American and French media, this news was underreported and hard to find.

Reporters often glossed over the fact that France’s initial economic stimulus package was slated to cost about 26 billion euros, but actually cost 47 billion euros. Under Nicolas Sarkozy, the French government continued to push economic stimulus plans, including a bailout of French banks and a 900 million euro plan to induce car-buying.

Socialist candidate Francois Hollande won the presidency from Sarkozy while promising “lots of taxes,” and “it was very clear” from his campaign that this would be the case. De Rugy found that under Sarkozy, there were “205 different instances of tax increases” ranging from sugar taxes to television taxes, in addition to increasing taxes on the top marginal rate for income. Although  Hollande  had “less tax increases than Sarkozy,”  he “doubled down” and they were bolder and more expensive.

Hollande brought up the idea of “raising a 75% marginal rate of 1 million euros” on the French upper class, which was summarily struck down by the French equivalent of the U.S. Supreme Court. To counter the court’s objection, Hollande “went back to the drawing board” and circumvented it through a variety of policies. As a result, De Rugy said that, “France’s tax revenue has actually gone up by 55 billion euros in the last four years.” She noted, interestingly enough, that since the French economy has not performed well in recent years, Hollande was “pretty powerful to extract more revenue when their revenue is down. And half of that amount came from business taxes.” In France, there have been “84 different tax increases” since 2009, De Rugy said. Thus,  there is now a 35% average tax rate for businesses.

Alberto Alesina, a Harvard professor of political economy, in his research, found that targeting the tax base through tax increases (what he defined “tax base adjustments) was worse for an economy than tackling spending through spending cuts (or in his terminology, “expenditure base adjustments.”) For example, he found that tackling spending caused a smaller recession than increasing taxes would. Although consumption, or the purchase and use of goods, declines in both instances, private investments increase during periods of spending cuts and decrease during periods of tax increases. And, inflation is worse when taxes are raised.

He gave several examples of how Canada has recovered from the recession by attacking spending, while Italy, Portugal, Spain and Greece continued to increase taxes. He called Italy’s tax policies “draconian” and he admitted Greece “is out of my radar screen,” because of its extreme fiscal policy.

 

Spencer Irvine is a staff writer at Accuracy in Academia.
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