Morning Tax News
January 16th, 2008 by Peter SudermanCato’s Dan Mitchell points us to this IMF report indicating that, in a few instances, lowering taxes really can result in an increase in government revenues. Either way, as Mitchell has pointed out previously, there’s ample evidence worldwide that a simple, low flat tax can produce huge economic benefits.
Meanwhile, over at Heritage, Brian Reidl goes into detail on a topic I mentioned yesterday — why only tax cuts, and not tax rebates, stimulate the economy:
Economic growth requires four main factors: 1) a motivated, educated and trained workforce; 2) sufficient levels of capital equipment and technology; 3) a solid infrastructure and 4) a legal system and rule of law sufficient to enforce contracts.
High tax rates reduce economic growth because they make it less profitable to work, save and invest. This translates into less work, saving, investment and capital — and that results in fewer goods and services. Reducing marginal income tax rates has been shown to motivate workers to work more. Lower corporate and investment taxes encourage the savings and investment vital to producing more plants and equipment, as well as better technology.
By contrast, tax rebates fail because they don’t encourage productivity or wealth creation. No one has to work, save, invest or create any new wealth to receive a rebate.
January 16th, 2008 at 3:16 pm
The scientific link between taxes and the economy is so tenous that it is very hard to make any compelling case, or in other words is to easy to make a case for anything (lower or high).
An informed reader only has to wonder about US economic growth, pretty much sustained since the end of WWII (ultra high-marginal taxes) up to modern days (the lowest capital gain rate ever). I would dare to advance a very controversial hypotesis: Tax rates have little influence or none on a major economy like the US, even less in a global one.
The data is there. It seems the economy follow cycles pretty much oblivious to whatever is the tax rate or tax system in place.
One thing to wonder though, is how we have gone through 2 recessions (and believe we are in one right now) under the same president and with the same type of tax cuts in place. Recent history really makes it harder to believe that marginal rate have any effect on the economy at all.
January 16th, 2008 at 6:33 pm
You wouldn’t be alone in suggesting that, Leonardo, and your hypothesis is hardly controversial. There is very little evidence that tax rates have any impact on the economy. There is, however, quite a bit of evidence that income inequality (which is exacerbated by the tax system) has a very large impact on the economy.
January 17th, 2008 at 1:15 am
Tax revenues will always go up (regardless of whether you cut or increase taxes) as long as the economy grows. Our economy almost always grows (even during a recession, just not as fast) too. “Supply-side” economics has failed because it’s merely borrow and spend instead of tax and spend. The pay-as-you-go way of doing things at the federal level is obviously more responsible.
Look at the economic expansion that occured after the early tax increases of the 1990s. This, of course, flies in the face of your “high tax rates reduce economic growth” claim.
We have, unfortunately, trained our population in this country to live like the federal govt. does…borrow and spend…spend more than you take in. This wrong-headed thinking has gotten many, many consumers and businesses into a heck-of-a-lot of trouble. When are you guys going to wake up?!