The Fiscal Connection

A recent poll by Pew shows that the public (who wants to reduce deficits) are against both tax increases and against most spending cuts.

This does not surprise me. In the public finance literature, it has been known for a long time that the public by large does not make the “fiscal connection”. This means they do not seem to be fully aware that taxes, spending and deficits are virtually a zero sum game, unless you very clearly remind them. Most people are not trained economists.

Of course, it is also possible in this particular poll that there are other spending cuts not specified in the poll that people actually support (such as cuts in public employee benefits). Also tax collection can be made more efficient, through lower rates and a more broad tax base.

But more generally, the implication of the lack of a fiscal connection is that polls that only ask about one part of the fiscal equation cannot be trusted. The sum of people who want tax cuts, spending increases and deficit reduction is far above 100%!

Even in Sweden, support for tax cuts regularly poll above 60-70%. Some individuals interpret the question narrowly as ‘would you like your personal taxes to go down’? Since we have self-serving bias, most of us, including those who want a larger public sector, think we are over-taxed relative to others.

But naïve Economic Conservatives that run on this agenda lose, because the necessary implication of the tax cut is reduction in spending, or larger deficits, alternatives not stated in the poll.

Meanwhile, leftist groups can regularly show support for new programs by simply asking “do you support more money for X”?

One solution is to compare answers over time and across demographical groups, but giving little weight to the raw percentage itself. Another way around this is to force people to choose, such as the question “Generally speaking, would you say you favor smaller government with fewer services, or larger government with more services?”

When asked that way, when asked this way 58% of Americans currently choose smaller government and 38% more services. But even here deficit reduction is not offered as an alternative.

Don’t trust any poll results about taxes, spending and deficits that do not force people to make the fiscal connection.

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