Good Tax Policy for the Long Run
August 10, 2005
On the occasion of his 60th birthday, economist John Llewellyn—chief economist at Lehman Brothers—recently shared ten lessons for economic policymakers, derived from his 35 years of professional experience as an economic analyst.
They’re all excellent. But one in particular struck me as a guiding principle that undergirds much of what we do here at the Tax Foundation:
3) It is structural, not demand-side, policies that most influence economic performance over the long term. The experience of reforming economies as diverse as Australia, New Zealand, the Netherlands, and Poland is testimony to that. But structural policies take ages to produce effects. The initial consequence is usually a reduction in expenditure, which slows economic activity. It typically takes five years or more for positive effects to start to outweigh the negative. No surprise that politicians so seldom undertake reform. They know that the negative consequences will occur on their watch, while the benefits will accrue to their successors. Look at how Labour has benefited from the policies of Mrs Thatcher.
When thinking about tax policy, many Washington analysts take an ad hoc approach. The short-term pressures of the legislative process on Capitol Hill make it tempting to focus on the near-term effects of individual tax changes in isolation from the total tax system.
One of the goals of the Tax Foundation’s scholarship is to re-orient policymakers from a short-term focus on the distributional and behavioral effects of taxes, to one that focuses on long-run structural efficiency of the entire system of tax from both an economic and political (that is, public choice) perspective.
It’s easy to lose the tax system forest for the short-term-tax-change trees. But Llewellyn’s advice helps remind us of an essential principle of economic policy: in the long-run, the only thing that really matters is the long-run.