Read His Lips: No New Taxes!

I have bad news for the president. He says that we can’t raise taxes to help pay for the recovery effort from Katrina because that would lower output and hurt those that were affected by the hurricane and its aftermath. Instead, we have to reduce government spending. But here’s the problem. A dollar reduction in government spending reduces output at least as much as a dollar increase in taxes, though with an MPC near one currently they aren’t much different (remember the balanced budget multiplier?). They could, I suppose, make some argument that it will increase growth in the long-run, but that doesn’t help much with the short-run problem in New Orleans. When it comes to helping those affected by the hurricane, a dollar increase in government spending to help rebuild matched by a dollar increase in taxes to pay for it has just as large an impact on output as reducing government spending by a dollar elsewhere. The effect on output is not a reason to choose a reduction in government spending over an increase in taxes.  Furthermore, it has the same effect on the budget. So I’m not buying the argument that spending will need to be cut to help with the disaster:

Bush Rules Out Tax Increases to Pay for Hurricane Recovery, By David Stout, NY Times:  President Bush ruled out tax increases to pay for hurricane and flood recovery today, saying instead that federal spending would have to be cut to help the Gulf Coast recover. "We got to maintain economic growth, and therefore we should not raise taxes," Mr. Bush said. ... The president did not go into detail ... on what programs he sees as likely candidates for spending cuts. He said the White House Office of Management and Budget would work with Congress to see not only where to cut but "to maintain economic growth and vitality" as well as help in the long recovery along the Gulf of Mexico. ... Heated discussions between the White House and Congressional leaders, including some Republicans, over how to pay for the recovery effort now seem inevitable. Some Republicans were worrying publicly about the rising federal deficits even before Mr. Bush pledged a huge federal role in the recovery ... and before his "no new taxes" pledge today. The ranks of Republicans include more than a few "deficit hawks" who expressed fears - well before the military campaign in Iraq, let alone the natural disaster in the Gulf Coast region - that spiraling deficits might have to be paid for far into the future...

[Update:  Vox Baby also comments.]