Wednesday, November 29, 2006

Bush Praises Estonian Tax Policy-While Being Silent On Spending Policy

I see via Greg Mankiw that Bush have praised Estonia's tax policy. Ironically though, he mainly praised it for being simple rather than the fact that it is low. That is ironic because Bush have during his presidency lowered current taxation, while some of the cuts (such as the child tax credit) have if anything made it more complicated.

And more importantly, Bush leaves out the fact that the key to Estonia's success is that its tax cuts have been accompanied by spending cuts. According to statistics Estonia's database, government consumption fell from 19.9% of GDP in 2000 to 17.4% in 2005. And during 2006 the downward trend have continued. In America by contrast, government spending have risen during Bush.

This is important, because as Mankiw have pointed out before, tax cuts will only raise growth if they are matched by spending cuts.


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