Partially Right

India has decided that the way out of its current economic doldrum is to cut its tax rates.

Oh, and to raise its government spending, too.

On Saturday the government unveiled a long list of measures to energize consumption and investment. It lowered income taxes and some corporate taxes and pledged more investment in infrastructure, rural development, education and health care.
To accommodate the spending, India decided to miss its own budget-deficit target.

Cutting taxes almost always is good—only almost because a government does need a minimum level of revenue in order to accomplish the goals set for it by the citizens employing it. Cutting taxes—and even given that threshold, there’s room for major cuts in India—leaves more money in the hands of private citizens. Those citizens will more accurately spend their money because their spending is tailored to their needs and wants; it’s not spending on one-size-fits-all goals or government-determined goals.

On the flip side, India needs to cut spending to fit within the revenues generated from those lower taxes, not increase it. Deficit spending only increases overall national debt. That national debt always and everywhere represents higher taxes.  Those higher taxes either will come as explicit taxes designed to raise revenues for paying the debt or as inflation to devalue the debt.

Beyond that, government spending competes with the spending of those private citizens and their enterprises for goods and services and the resources needed to produce them. That only reduces the resources available to the private economy, and it drives up prices, not just for those resources, but for the competed-for goods and services, also.

Doing that will drive economic activity, which will yield a net increase in revenues to the government within those lowered tax rates. That increase revenue will enable the government to spend more on infrastructure, rural development, education, and health care—the goals the Indian government claims.

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