The focus of US economic policy discussion at present is almost entirely on fiscal deficits and the level of taxes. My view is that these are second or even third order issues. What matters far more is the capacity of the economy to offer satisfactory lives for the citizenry. This depends on far more fundamental forces than deficits and taxes, such as innovation, jobs and incomes. Evidently, I am arguing that taxes and deficits do not determine these outcomes. I am suggesting this because they do not.
So I want to address two widely held, but mistaken, views. The first is that lower taxes are the principal route to better economic performance. The second is that the financial crisis is a crisis of western welfare states.
How does one measure economic performance? The most important measure is incomes per head. Employment and the distribution of income matter, too. But incomes per head are the place to start. In the long run, income per head determines the standard of living. So an obvious question is how far tax levels explain growth of income per head. Read more