Here is a Bob Lucas slide on that confuses the issues of taxation and government transfers in a way that I think is common to many economists.


The point of this slide is to explain why Europe is poorer.

He says Europe is poorer because of taxes. Then says that the cost of the welfare state is why Europe is poorer.

However, all of the analysis that I am aware of, suggests that its just having a large welfare state. Taxes are beside the point. Even if you financed it with economically efficient lump-sum taxation you would still have the smaller economy.

Now, I know that its almost impossible to get people to talk about taxes without talking implicitly talking about spending at the same time. However, they are different things. Borrowing for one thing can separate them temporally and that’s important.

Taxes to pay down debt should have different effects than taxes used to expand government services for example. Moreover, the economy wide loss comes when you buy the government service not when you pay the tax.

Now, some people ask me what the point of my making a big deal about this is. Am I saying we should have more taxes or less. Strangely the more I get into this the less I actually care about what actually happens. All of my emotional energy is sucked up just trying to get the point recognized.

My basic stance at this point is that the universe doesn’t have a point or a policy implication but nonetheless either it started in a Bing Bang or it didn’t.

Reality just is, it doesn’t have a point.