MIAMI – President Barack Obama said Thursday that he's amused by the Tea Party tax protests that took place around Tax Day and that contrary to claims of demonstrators, he has cut taxes.Setting aside any debate about the impact of the administration's policy until now, the president does not seem to be as farsighted as members of the Tea Party who realize that tax rates must rise to pay for a sustained increase in government expenditures.
"You would think they'd be saying thank you," he said at a fundraiser in Miami.
In 1974, Robert Barro published the "Ricardian Equivalence Hypothesis" which states that interest rates and aggregate demand do not change based on funding of government expenditures by taxes or debt. A tax cut today will create a deficit that must be paid in the future and tax payers respond to cuts in taxes with an equivalent increase in savings.
Today's economic outlook differs from the conditions in the hypothesis. We have not replaced tax funding of government expenditures with debt funding. Instead, the administration and the Congress have dramatically raised government spending and expanded healthcare entitlements creating what appears to be a permanent increase in government expenditures. Under these conditions, a permanent increase in government expenditures would increase interest rates and not increase aggregate demand. Tea Party members rationally conclude that their taxes will increase in the future.