Remembering Milton Friedman

The most famous living economist turns 94 years old today (July 31st). Born in 1912, Milton Friedman, or Uncle Milton as many in the profession call him, is arguably the most influential economist of our lifetime. In addition to being one of the most influential macroeconomists of the 20th Century (right alongside Keynes and Lucas), Friedman also has contributed significantly in the area of tax policy.

When Friedman 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 Friedman moved away from Keynesianism, Friedman criticized Keynesian policies and the role 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 seek to smooth out consumption over a lifetime, any short-run increase in income from policies such as tax cuts would have little impact on current consumption. Friedman argued that tax cuts, if permanent (i.e. ignoring any Ricardian equivalence concerns), 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 viewed as somewhat resembling the negative income tax model. Friedman was also highly supportive of vouchers, like food stamps or education vouchers, as a substitute for programs in which the government had an explicit role in production.

Finally, Friedman often has many interesting takes on economic issues, including the issue of taxes. Below is a collection of Friedman quotes on taxes, whereby he puts forth his belief in low taxes, as well as his general support of the starve the beast phenomenon.

“I am favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.”

“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. “