Economics Community Mourns the Loss of Milton Friedman

November 21, 2006

Milton Friedman, history’s most famous free market economist and 1976 Nobel laureate, passed away last week at the age of 94. The Tax Foundation and its staff mourn the loss of one of the most brilliant economic minds the field has ever seen. Friedman’s ability to teach people across the globe the benefits of a society built on the framework of individual liberty made him one of the most influential individuals of the past 50 years.

His impact on tax policy has also been tremendous. When he was a Keynesian and employed in the Treasury Department in the early 1940s, it was largely his innovation to have income taxes withheld each payroll period. But soon thereafter, when he moved away from Keynesianism, Friedman criticized Keynesian policies and the use of taxing and spending policy to “control” the ups and downs of the short-run macroeconomy. Friedman’s permanent income hypothesis argued that because individuals base their spending habits on their expected long-term income, any short-run increase in income resulting from tax cuts would have little impact on current consumption. Friedman argued that tax cuts, if permanent, would increase lifetime consumption by the amount of the tax, yet only increase consumption in each period by a relatively small amount.

Friedman was also instrumental in developing policy proposals using the theory of the negative income tax. The Earned Income Tax Credit, which Friedman actually opposed in its implementation, is thought to resemble the negative income tax model to a certain extent. Friedman was also highly supportive of vouchers, such as food stamps or education vouchers, as a substitute for programs in which the government had an explicit role in production.

Friedman had many interesting takes on economic issues, including tax policy. Below are some of his quotes on taxes. They illustrate his belief in low taxes, as well as his general support of the “starve the beast” phenomenon.

“Inflation is taxation without legislation.”

“The most important ways in which I think the Internet will affect the big issue is that it will make it more difficult for government to collect taxes.”

“Workers paying taxes today can derive no assurance from trust funds that they will receive benefits when they retire. Any assurance derives solely from the willingness of future taxpayers to impose taxes on themselves to pay for benefits that present taxpayers are promising themselves.”

“The widespread enthusiasm for reducing government taxes and other impositions is not matched by a comparable enthusiasm for eliminating government programs–except programs that benefit other people.”

On the Bush tax cuts: “I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible. The reason I am is because I believe the big problem is not taxes, the big problem is spending. The question is, ‘How do you hold down government spending?’ Government spending now amounts to close to 40% of national income not counting indirect spending through regulation and the like. If you include that, you get up to roughly half. The real danger we face is that number will creep up and up and up. The only effective way I think to hold it down, is to hold down the amount of income the government has. The way to do that is to cut taxes. “

Gerald Prante is an economist at the Tax Foundation in Washington, D.C.


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