There is no free lunch when the government

is spending. Taxes have to rise. Beginning January

1, 2011 the sizeable tax reductions enacted in 2001

and 2002 will expire. The administration projects that

household taxes will rise by a cumulative $1.1 trillion

over the ensuing ten year period, while business taxes

will rise by $400 billion. This calculation was prior to

any taxes enacted in the healthcare bill, and does not

account for other taxes such as the recently mentioned

value added tax suggested by administration policy

advisors. Dr. Barro estimates that the tax multiplier

is minus 1.1, meaning that a $1 increase in taxes will

reduce GDP by $1.10. However, Christina Romer,

Chair of the Council of Economic Advisors and her

husband David in an exhaustive study published in

March 2007 found the tax multiplier to be –3.

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Quarterly Review and Outlook First Quarter 2010

If we apply these two multiplier estimates to

the repeal of the 2001 and 2003 tax cuts, the drag on

economic activity will be between $1.65 trillion and

$4.5 trillion. Bottom line, if the spending multiplier

is .6 and the tax multiplier is at least 1.1 or higher,

then mathematically this country cannot spend its

way to prosperity.

The multiplier analysis is also confirmed by

numerous experiences in U.S. economic history. On

the positive side, the major tax reductions initiated

by President Kennedy in the early 1960s gave

economic activity a major boost, just as did the

similar reductions by President Reagan in the 1980s.

To deal with the depression that arose after World

War I, President Harding cut taxes and government

spending, keeping the federal budget in balance.

The 1920 depression ended quickly and prosperity

returned. Tax increases by Presidents Hoover and

Roosevelt in the 1930s had a negative impact on

growth.