Keynesianism at One First Street?

April 4th, 2011

We know, all too well, that the theories of Keynes are practiced and preached at the legislative and executive branches. But what about the Courts? In Winn, there was some discussion about the role of government spending and taxing, and how that encourages productivity.

Justice Kennedy, in a somewhat Keynesian position, somewhat Free-Market position, writes.

When a government expends resources ordeclines to impose a tax, its budget does not necessarilysuffer. On the contrary, the purpose of many governmental expenditures and tax benefits is “to spur economic activity, which in turn increases government revenues.” . . . Because it encourages scholarships for attendance at private schools, the STO tax credit may not cause the State to incur any financial loss

Tax credits, in contrast to tax expenditures, lack  Keynsian spending binges. The Arizona Program, is much more free market oriented (putting aside all issues of First Amendment and tax payer standing).

Justice Kagan rejects this position in a footnote.

The majority observes that special tax benefits may in fact “increas[e] government revenues” by “spur[ring] economic activity.” Ante, at 8 (internal quotation marks omitted). That may be so in the longrun (although the only non-speculative effect is to immediately diminish funds in the public treasury). But as the majority acknowledges, ibid., this possibility holds just as true for appropriations; that is why we (optimistically) refer to some government outlays as “investments.”The insight therefore cannot help the majority distinguish between tax expenditures and appropriations.

A Laffer curve may help resolve what the short-term reactions to expenditures/credits are. I am not so optimistic to refer to government spending as an “investment,” but rather as a transfer of wealth.

In perhaps the most free market oriented position in Kenendy’s opinion was this missive about who owns money.

Like contributions that lead to charitable tax deductions, contributions yielding STO tax credits are not owed to the State and, in fact, pass directly from taxpayers to private organizations. Respondents’ contraryposition assumes that income should be treated as if itwere government property even if it has not come into the tax collector’s hands. That premise finds no basis in standing jurisprudence.

This is why I dislike the withholding tax. Prepaying taxes to the government, before an actual bill (in the form of a tax return) is assessed, creates the false illusion that the money is the government’s. It is not. Until the bill is assessed, it belongs to the taxpayer. Prepaying taxes merely gives the government and interest free loan until that date, not to mention, totally distorting normal conceptions of what is private property and what is government property.