Low Taxes-->Robust Economy?

[Big Ol' Smitty 0]

Do Taxes Thwart Growth? Prove It

By ANNA BERNASEK

 

Published: April 3, 2005

 

 

TAX reform, like a second marriage, is the triumph of hope over experience. The United States has just gone through the most sweeping tax cuts since the 1980's, but hardly anybody is satisfied. President Bush contends that we need still-lower taxes in order to prosper. Alan Greenspan, the Federal Reserve chairman, is suggesting a radical shift to a consumption tax. And the Republican Party has taken aim at the entire tax system.

 

At the heart of such antitax sentiment is this belief: Taxes are bad for the economy. And who would disagree, especially as April 15 nears?

 

There's just one problem, though. Despite the widespread notion that taxes harm the economy, no one has actually been able to back that up. It's not that taxes have no effect; they are a major part of the American economic system and affect planning and behavior in many ways. Taxes influence who wins and who loses in a competitive society. But over all, there is surprisingly little evidence that tax rates are an important factor in determining the nation's economic prosperity.

 

In theory, the issue seems simple enough. According to basic economic principles, a tax can have a negative effect on behavior by reducing the incentive to do whatever is taxed. Impose a tax on wages, and people may decide to work less.

 

That's the theory, anyway. In practice, how many Americans will work less if their taxes rise? With mortgage bills, college tuition and car payments looming, who can afford to work less? Relatively few have the option of cutting back without risking the loss of their jobs.

 

So just because taxes can discourage productive behavior doesn't mean that they do. Too many other factors are involved - like social pressures, financial needs and a job market that isn't entirely flexible.

 

And then there's the evidence. Over the last 30 years, economists have undertaken hundreds of studies to determine whether taxes hurt the economy. So far, they've turned up little to convict taxes of the charge. After reviewing the literature on the topic in 1993, two economists, William Easterly of New York University and Sergio Rebelo of Northwestern, concluded in a joint paper that "the evidence that tax rates matter for growth is disturbingly fragile."

 

A leading tax specialist today, Joel B. Slemrod of the University of Michigan, would agree. He notes that in the 20th century, a rising tax burden in the United States and other developed countries went hand in hand with rising prosperity.

 

In the book "Taxing Ourselves: A Citizen's Guide to the Debate Over Taxes," Professor Slemrod and Jon Bakija examine the relationship between the marginal income tax rate - the rate imposed on additional income in a progressive tax system - and productivity. After all, if you reduce the rate of taxation on income, people should work harder. But the opposite turned out to be true. Looking at the data from 1950 to 2002, the authors found that periods of strong productivity growth actually occurred when the top tax rates were the highest. And they showed that, on average, high-tax countries are the most affluent countries.

 

That is not to suggest that high tax rates lead to growth. No economist will make that case, although many will say that some things financed by taxes, like education, research, health and infrastructure projects, can contribute to growth. But it does call into question why, if taxes are so bad for growth, their effect doesn't show up more prominently.

 

Researchers have tried different approaches to answer this question. Instead of taking a macro view, they have examined the impact of individual taxes on the labor supply, saving and investment. But even in isolated cases, the evidence that taxes discourage growth can be thin.

 

One important area of economic activity that does seem fairly responsive to tax rates is business investment. Some of that responsiveness may have more to do with changes in the timing of decisions than in shifts in the level of investment over the long haul. Consider the recent accelerated depreciation allowance. Economists noted a short-term uptick in spending in affected categories, but companies will ultimately need to see an increase in customer demand to continue investing.

 

In the case of individual savings and work, economists are closer to a consensus. After study of the tax cuts of the Reagan years, most economists agree that taxes don't play a big part in how hard Americans work. While the study of savings is less precise, large effects from tax incentives haven't been measured.

 

That's worth recalling when considering proposals like a flat tax or a consumption tax. With so much energy focused on minimizing rates, it's important to keep in mind that taxes are not antithetical to prosperity. None of this should suggest that change is unnecessary. Current tax laws have real problems, including unreasonable complexity.

 

But reform based on a notion that taxes are bad for the economy is just that: a notion not backed by strong evidence. And the costs of ignoring experience in favor of hope can be high: mounting deficits, decaying infrastructure, inadequate investment in public education and research.

 

So the next time that some proponent of tax reform promises king-size economic benefits, there's reason to be skeptical. Like a second marriage, a new tax system can't work miracles.

 

From New York Times Business

 

Also:

 

5 highest tax countries:

Country..........Tax Revenue as % of GDP

1. Sweden.......50.8%

2. Denmark.....49.0%

3. Belgium.......45.8%

4. Finland.........44.9%

5. France..........44.2%

 

Here are the 5 lowest tax countries:

Country..........Tax Revenue as % of GDP

1. Mexico............19.5%

2. U.S.................25.4%

3. Korea.............25.5%

4. Switzerland...29.8%

5. Ireland...........30.0%

 

Source: Organization for Economic Cooperation & Development

 

 

And:

 

World Economic Forum "Global Competitiveness Report"

Country Rankings 2004-2005

 

1. Finland

2. USA

3. Sweden

4. Taiwan

5. Denmark

6. Norway

7. Singapore

8. Switzerland

9.Japan

10.Iceland

11.United Kingdom

12.Netherlands

13.Germany

14.Australia

15.Canada

16. UAE

[Big Ol' Smitty 0]

BTW, I am trying to point out that different systems can work equally well economically, and that the GOP "low taxes=PARADISE ON EARTH" formula doesn't necessarily always hold true. See Mexico.

[kkktookmybabyaway 0]

Finland, Sweeden and Denmark are all tiny hippie countries. Let them try that socialist shit with a population as big as the United States...

[Big Ol' Smitty 0]

Finland, Sweeden and Denmark are all tiny hippie countries. Let them try that socialist shit with a population as big as the United States...

Okay, what about the the tremendous American economic growth in the post-WWII era, when taxes were higher than they'd ever been before or have been since?

 

Or during the 90's, after the Clinton tax hikes?

 

I know you can come up with excuses for these, but higher taxes in these instances did not have a crippling effect on economic growth.

[Rob E Dangerously 0]

Finland, Sweeden and Denmark are all tiny hippie countries. Let them try that socialist shit with a population as big as the United States...

Denmark - 5,432,335

Finland - 5,223,442

Sweden - 9,001,774

 

(smaller than I really expected)

 

If Sweden were a state, it would be 9th in population, behind Michigan, in front of New Jersey

 

Finland would be 20th (behind Maryland, in front of Arizona)

 

Denmark would be 18th (behind Missouri, in front of Wisconsin)

[Big Ol' Smitty 0]

If Sweden were a state, it would be 9th in population, behind Michigan, in front of New Jersey

 

But it would have about 80 times as many hot girls as New Jersey.

[Vyce 0]

BTW, I am trying to point out that different systems can work equally well economically, and that the GOP "low taxes=PARADISE ON EARTH" formula doesn't necessarily always hold true. See Mexico.

Mexico's a poor example. That country would be a shithole no matter HOW many taxes they collect.

[Jingus 0]

Here are the 5 lowest tax countries:

Country..........Tax Revenue as % of GDP

1. Mexico............19.5%

2. U.S.................25.4%

3. Korea.............25.5%

4. Switzerland...29.8%

5. Ireland...........30.0%

Uh... which Korea?

[Big Ol' Smitty 0]

Here are the 5 lowest tax countries:

Country..........Tax Revenue as % of GDP

1. Mexico............19.5%

2. U.S.................25.4%

3. Korea.............25.5%

4. Switzerland...29.8%

5. Ireland...........30.0%

Uh... which Korea?

I guess South.

[LessonInMachismo 0]

And do we really give a flying fuck whether or not the economy is "robust?" I just want to keep as much of my money as I can. You know, so I can enjoy what I earn? Paying less makes (sane) people happy. That article smells of incense. It's like saying, "Well, shit, eating a little less doesn't make you starve! So eat less, even if you really want to eat more!"

 

It's a rationalization for getting the funding for hippie programs.

[Big Ol' Smitty 0]

And do we really give a flying fuck whether or not the economy is "robust?" 

 

Remind me not to vote for you for public office.

 

 

I just want to keep as much of my money as I can.  You know, so I can enjoy what I earn? 

 

Here's a deal: you don't have to pay taxes anymore. Just don't use the public highways. In case of fire, don't call the Fire Department to save your home. In case of home invasion, armed robbery or other criminal threats, don't call the police for help. Don't sue for damages in court. Don't purchase prescription drugs (certified safe and effective by the FDA). Don't purchase meat and dairy products that have been inspected by the Dept. Of Agriculture. Don't visit the National Parks or National Forests. Don't purchase airline tickets (since that industry is regulated by the FAA). Your bank account may no longer be protected by the Federal Deposit Insurance Corporation. For that matter, don't use US currency, since it is guaranteed by the Federal Government. Instead, conduct all transactions by barter.

 

Of course, it will be impossible to deprive you of all government services – in some cases you will, of necessity, be a free rider. For example, the air that you breathe will be cleaner due to the enforcement of clean air standards, paid for by other citizens. Similarly, you will be safer from foreign invasion thanks to a military paid for by others.

 

Now you can keep all of "your" money! Deal?

 

Paying less makes (sane) people happy.

 

Then direct your anger at tax evaders, tax loopholes for the rich, corporate welfare, & sweetheart government contracts.

 

Besides, if I was in charge, I wouldn't even raise taxes on schmucks like you.

[Stephen Joseph 0]

Sigh...Not again. Okay. Taxes affect the rate of growth of the economy, not the size and scope of the economy. You'll find the fastest growing countries are the developing countries.

 

Economic growth matters, not the size of your current economic system. Growth creates wealth.

 

I'm pulling from the CIA Factbook for these stats.

 

% change in GDP is my proxy for growth rate

 

United States 3.10% #105

Denmark 0.00% #191

Finland 1.48% #148

Sweden 1.70% #154

Mexico 1.30% #166

 

So, would I rather be in a country whose growth rate means I'm able to outpace inflation, or in a country that's not growing?

 

Countries with better growth rates that are both a major player in the world and industrialized are Russia (but, economically speaking, they're abysmal) and China.

 

Remember Kiddos: Statistics can be made to support any argument. The true value of an economy involves its size, scope, and potential yield.

 

Also Remember Kiddos: Taxes cannot be generalized. Some taxes help growth, others inhibit. What's important is how they're used.

 

=)

Edited April 12, 2005 by Stephen Joseph

[Jobber of the Week 0]

It's a rationalization for getting the funding for hippie programs.

I guess we had this discussion before, but while there are some inefficient uses of money, some in more regions than others, in general FEDERAL tax (which is what we're talking about) tax is not for "hippie" programs, which are predominately local or state.

 

Federal tax goes into the Feds' funds, and if you look at their spending, military, defense, and homeland security outweighs almost everything by a margin that's somewhere between absurd and ludicrious. So if you want to sit around and bitch about how you'd rather buy another plasma TV than pay taxes, you'd be be able to cope with a reduced military budget.

 

In the meantime, while Dubya gives you your money back, he isn't spending any less of it than he did before. Instead, he's spending money that isn't there and blowing up our deficit. That's bad economics, plain and simple.

[Stephen Joseph 0]

It's a rationalization for getting the funding for hippie programs.

I guess we had this discussion before, but while there are some inefficient uses of money, some in more regions than others, in general FEDERAL tax (which is what we're talking about) tax is not for "hippie" programs, which are predominately local or state.

 

Federal tax goes into the Feds' funds, and if you look at their spending, military, defense, and homeland security outweighs almost everything by a margin that's somewhere between absurd and ludicrious. So if you want to sit around and bitch about how you'd rather buy another plasma TV than pay taxes, you'd be be able to cope with a reduced military budget.

 

In the meantime, while Dubya gives you your money back, he isn't spending any less of it than he did before. Instead, he's spending money that isn't there and blowing up our deficit. That's bad economics, plain and simple.

Once a month, I agree with Jobber. Today is such a day. It's bad economics what the government is doing now.

 

However, to correct, the amount spent on military programs is dwarfed by spending social programs. However, relative to other nations, our miliary budget as a share of our total budget swards theirs. So 6 of 1 ...

[Guest MikeSC]

It's a rationalization for getting the funding for hippie programs.

I guess we had this discussion before, but while there are some inefficient uses of money, some in more regions than others, in general FEDERAL tax (which is what we're talking about) tax is not for "hippie" programs, which are predominately local or state.

 

Federal tax goes into the Feds' funds, and if you look at their spending, military, defense, and homeland security outweighs almost everything by a margin that's somewhere between absurd and ludicrious. So if you want to sit around and bitch about how you'd rather buy another plasma TV than pay taxes, you'd be be able to cope with a reduced military budget.

 

In the meantime, while Dubya gives you your money back, he isn't spending any less of it than he did before. Instead, he's spending money that isn't there and blowing up our deficit. That's bad economics, plain and simple.

In the defense of spending on military and homeland security:

 

Unlike every social program on the books, those are specifically mentioned in the Constitution as government requirements.

-=Mike

[Dr. Tyler; Captain America 0]

Well, people could justify it by using that pesky "To promote the general welfare" line.

 

Nonetheless, the gross amount of waste we have in the defense department isn't helping.

[Guest MikeSC]

Well, people could justify it by using that pesky "To promote the general welfare" line.

 

Nonetheless, the gross amount of waste we have in the defense department isn't helping.

The DOD doesn't have a tiny fraction of the waste that, say, DHS has. Or compared to utter pork attached to most bills in Congress.

 

And, yes, the GOP is just as bad about that as the Dems.

-=Mike

[kkktookmybabyaway 0]

If Sweden... Finland... Denmark were a state...

Another couple hundred million to go...

[kkktookmybabyaway 0]

I know you can come up with excuses for these...

The 1950s featured RACISM and segregation.

 

The Clinton era had ... uh ... the OJ Simpson trial.

 

Good enough?...

[SuperJerk 0]

Finland, Sweeden and Denmark are all tiny hippie countries. Let them try that socialist shit with a population as big as the United States...

Okay, what about the the tremendous American economic growth in the post-WWII era, when taxes were higher than they'd ever been before or have been since?

 

Or during the 90's, after the Clinton tax hikes?

 

I know you can come up with excuses for these, but higher taxes in these instances did not have a crippling effect on economic growth.

Took the words out of my mouth.

 

And do we really give a flying fuck whether or not the economy is "robust?" I just want to keep as much of my money as I can.

 

Someone obviously doesn't understand where their money comes from.

[kkktookmybabyaway 0]

Well he better put the words back in.

 

Personally, I think socialism can work if the country isn't too big (like Denmark, Finland, etc.) but in a country like the U.S., there's no way...

[SuperJerk 0]

Well he better put the words back in.

**fakes laughter**

 

At times I've thought you were one of the more clever and funny psoters on this board.

 

This isn't one of those times.

[Stephen Joseph 0]

Finland, Sweeden and Denmark are all tiny hippie countries. Let them try that socialist shit with a population as big as the United States...

Okay, what about the the tremendous American economic growth in the post-WWII era, when taxes were higher than they'd ever been before or have been since?

 

Or during the 90's, after the Clinton tax hikes?

 

I know you can come up with excuses for these, but higher taxes in these instances did not have a crippling effect on economic growth.

Took the words out of my mouth.

 

And do we really give a flying fuck whether or not the economy is "robust?" I just want to keep as much of my money as I can.

 

Someone obviously doesn't understand where their money comes from.

The Clinton tax hikes did not push taxes to the level that European countries have endured for decades.

 

According to JOHN MAYNARD KEYNES (OMG LIBERAL ECONOMIST!!!) here's how you work taxes.

 

In good times (Clinton) you raise taxes to slow down growth to manageable levels and collect revenue and RUN A SURPLUS.

 

In bad times (Bush I, last year) you lower taxes to speed up growth and use the SURPLUS to fund your DEFICIT.

 

It's Budget Management 101, which makes perfect economic sense. Economically speaking, theory predicts the results we see given the constraints.

 

However, all that I've seen in this thread has been worked based on correlation between variables, not causation.

 

Correlation

A and B are related

 

Causation

A affects B or B affects A.

 

Raising tax rates lowers growth rates. True or False? Ans: True, there is causation. (Again, look at the CIA Factbook, which is right handy reference.

 

If you want to analyze something in economic terms it must be done in three ways

1) Ceteris Paribus

2) Opportunity cost of next best use

3) Relative Changes at the margin.

 

Your much Lurrrved Economist!

[LessonInMachismo 0]

Someone obviously doesn't understand where their money comes from.

I think the problem is that "robust economy" is defined in the eye of the beholder.

[kkktookmybabyaway 0]

At times I've thought you were one of the more clever and funny psoters on this board.

 

This isn't one of those times.

 

Why did the Wal-Mart chicken cross the road?

 

To get out of Maryland and be free of its tax policies...

[Guest MikeSC]

Finland, Sweeden and Denmark are all tiny hippie countries. Let them try that socialist shit with a population as big as the United States...

Okay, what about the the tremendous American economic growth in the post-WWII era, when taxes were higher than they'd ever been before or have been since?

 

Or during the 90's, after the Clinton tax hikes?

 

I know you can come up with excuses for these, but higher taxes in these instances did not have a crippling effect on economic growth.

Took the words out of my mouth.

Except that the growth of the 90's was largely powered by overpriced internet stocks --- and the internet was very much not taxed.

 

Odd that the ONE area that was not taxed was, easily, the one that grew the most.

-=Mike

[Stephen Joseph 0]

Finland, Sweeden and Denmark are all tiny hippie countries. Let them try that socialist shit with a population as big as the United States...

Okay, what about the the tremendous American economic growth in the post-WWII era, when taxes were higher than they'd ever been before or have been since?

 

Or during the 90's, after the Clinton tax hikes?

 

I know you can come up with excuses for these, but higher taxes in these instances did not have a crippling effect on economic growth.

Took the words out of my mouth.

Except that the growth of the 90's was largely powered by overpriced internet stocks --- and the internet was very much not taxed.

 

Odd that the ONE area that was not taxed was, easily, the one that grew the most.

-=Mike

Dammit Mike, don't make their brains hurt with simple logic.

 

You know and I know that taxes affect growth. So does every economist with a bachelors (It's called the Solow Growth Model or newly endogenous growth theory).

 

But such logic can't possibly work, you know.

[Dr. Tyler; Captain America 0]

The thing is, it's called a Laffer curve.

 

Not a Laffer line.

[Guest MikeSC]

The thing is, it's called a Laffer curve.

 

Not a Laffer line.

Yes. And it's fundamentally brilliant, but has nothing to do with the economy as a whole, just with government revenues.

-=Mike

[Big Ol' Smitty 0]

The GCI’s main goal is to analyze the potential for the

world’s economies to attain sustained economic growth

over the medium and long term.The index is based on

economists’ current understanding of the determinants of

the complex process of economic growth and development.

 

The Global Competitiveness Index is what I cited.

 

Economic growth matters, not the size of your current economic system. Growth creates wealth.

 

Man, I GOTS to get myself to Turkmenistan then. 23.1% GDP growth! I would be sittin' pretty there.

 

Raising tax rates lowers growth rates. True or False? Ans: True, there is causation.

 

Over the last 30 years, economists have undertaken hundreds of studies to determine whether taxes hurt the economy. So far, they've turned up little to convict taxes of the charge. After reviewing the literature on the topic in 1993, two economists, William Easterly of New York University and Sergio Rebelo of Northwestern, concluded in a joint paper that "the evidence that tax rates matter for growth is disturbingly fragile."

 

Looking at the data from 1950 to 2002, the authors found that periods of strong productivity growth actually occurred when the top tax rates were the highest. And they showed that, on average, high-tax countries are the most affluent countries.

 

That is not to suggest that high tax rates lead to growth. No economist will make that case, although many will say that some things financed by taxes, like education, research, health and infrastructure projects, can contribute to growth. But it does call into question why, if taxes are so bad for growth, their effect doesn't show up more prominently.

 

Researchers have tried different approaches to answer this question. Instead of taking a macro view, they have examined the impact of individual taxes on the labor supply, saving and investment. But even in isolated cases, the evidence that taxes discourage growth can be thin.