Zero Taxes

A lot of economists believe that we’re in a demand-side recession and that a good idea to do fix that would be to do fiscal stimulus. Stimulus spending has some problems, however: for various regulatory reasons it’s hard to do quickly, which is important for stimulus (see e.g. Megan McArdle here on the Obama jobs plan), hard to do effectively (i.e. in a way that will get people to spend money, and preferably with a high multiplier), and some people fear there’s a risk the spending could become a permanent baseline instead of a temporary increase.

So here’s a modest proposal: why not abolish all taxes, for a year?

To be sure, this isn’t something, say, Argentina can do, but it’s certainly something the United States can do, because it holds the world’s reserve currency and so can fund any level of deficit indefinitely. So why not 100% deficit?

I think it’s hard to argue this wouldn’t be stimulative. A lot of people would bring a lot of taxable things forward so as not to get them taxed the year after but I view this as a feature, not a bug. It might cause some inflation, but again, in the current predicament — feature, not bug. It would get US companies to repatriate their cash.

Obviously this would increase the debt, but would it increase it by really that much? I haven’t run the math, but if this stimulus succeeds in kick-starting growth (and if it doesn’t, nothing will), there’s a plausible scenario in which the long run the US would accumulate less debt than in a lost decade scenario.