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Yes, tax increases can be part of ‘real austerity’

Despite recent claims from libertarian think-tank the Mercatus Center.
/ Source: ED Show

Despite recent claims from libertarian think-tank the Mercatus Center.

If you thought the United Kingdom’s recent economic woes would diminish the American right’s enthusiasm for massive spending cuts, you were wrong. Instead, the libertarian-leaning Mercatus Center has put out a statement explaining that Great Britain’s negative GDP growth and subsequent credit downgrade don’t make the case against austerity, because the governing Tory-Lib Dem coalition hasn’t tried real austerity.

“Mercatus Center senior research fellow Veronique de Rugy says that the U.K. hasn’t actually undertaken true austerity measures, and in fact has raised taxes multiple times,” reads the statement.

This points to a common misconception on this side of the pond: The mistaken belief that austerity consists only in spending cuts. In fact, the whole point of fiscal austerity is not just to cut spending, but to shrink deficits. Austerity programs often try attempt to do this through a combination of spending cuts and tax increases.

To be fair to de Rugy, who has a PhD in economics, it is likely that the Mercatus Center distorted her meaning in paraphrasing her. In a May 2012 , she uses the correct definition of austerity, though she also suggests—incorrectly, for reasons the Washington Post’s Brad Plumer explains here—that European countries have enacted very modest cuts. Nonetheless, the Mercatus press release is noteworthy for the way in which it contributes to ongoing American confusion regarding the meaning of austerity.

Both liberals and conservatives have stretched the definition of “austerity” to fit their political objectives. While the right pretends that Europe’s prolonged crisis stems from the EU’s failure to enact “real” austerity, Democrats have tried to paint the GOP as the sole “austerity party“—as if the Democrats’ “balanced approach” of combining spending cuts and tax increases is not, itself, a form of austerity. In fact, coupling tax increases to spending cuts results in a more consistent austerity policy than simply cutting taxes and spending.

That is not to say that there is no liberal case for raising certain taxes; only that averting austerity is not among the good reasons for doing so. A good reason to raise, say, taxes on capital gains is that it would reduce inequality and is unlikely to effect economic growth. But the idea that there is a way to “fix the debt” in the medium term without enacting any form is austerity is a mirage.