Over the past few years, I've posted many times on an unpleasant reality: despite the fact that so many people believe otherwise, in general, lower taxes do not result in faster economic growth. It is really too bad, because we could all be better off if only lower tax rates led to faster economic growth. However, the association between slower econoimc growth and lower tax rates is something we can see in data from the US, whether we use national level data, state and local data, or anything in between.Read it at Angry Bear
Here's a post I wrote not that long ago noting that when top marginal tax rates are below about 65% or so, cutting taxes is associated with slower economic growth and raising taxes is associated with faster economic growth. Here's something a bit more academic showing the same thing.
As I've noted before, there's a logical reason why lowering top marginal rates slows economic growth (except when top marginal rates are very high), and it should be obvious to anyone who has ever run a business: the easiest way to avoid, or at least postpone paying taxes for is not to show taxable income. If your business looks like it will show a profit, reinvest the revenues, pushing up costs and voila, you don't have any profits for the IRS to tax. But, by doing so, you are also strengthening the company, which means setting the stage for faster growth in later years. And you're more likely to follow this strategy, rather than consume your profits, the higher the tax rate.
Notice that this little story depends entirely on the self-interest of people in the economy. Money collected in taxes could be put in a big hole and burned, and the story would still work.
Taxes and Economic Growth: Real World & Simulations
by Mike Kimel
Michael Hudson makes a similar argument for high marginal tax rates. They spur investment and more equitable distribution of profit, as well as increase charitable giving in order to avoid having to send money to the government, while decreasing economic rent and rent-seeking.
4 comments:
Kimel's theory makes a lot of sense from a micro point of view, but how do we reconcile it with the MMT macro view that higher taxes revenues dampen the economy ?
Also, are businesses going to invest more if there is no demand for their product ?
And if they do invest, will they invest in the US, or in China, Mexico, etc. ?
The problem with attempting to correlate 2 economic variables is that correlation does not prove causation.
Sure tax rates on the rich were high in the 1950's. But we had a trade surplus and were near full employment. And FICA and local sales taxes were lower back then.
Sure Clinton raised taxes and yet the economy did OK. Thanks to an unsustainable private debt bubble.
I suggest we combine the Kimel theory with MMT theory by raising taxes on the rich while simultaneously lowering taxes on the poor, so that the overall effect is revenue neutral or revenue negative.
"I suggest we combine the Kimel theory with MMT theory by raising taxes on the rich while simultaneously lowering taxes on the poor, so that the overall effect is revenue neutral or revenue negative."
That's what progressive taxation means. Now the middle class is paying a higher effective tax rate than the wealthy, as Warren Buffet and others have been complaining.
Oh, and FICA is not considered an income tax. The 2012 ceiling on FICA is $110K.
President Obama plans to let the Bush tax cuts expire for the rich and make them permanent for everyone else. So, I guess the problem will be solved.
Hey there. I came across your thought "lower taxes do not result in faster economic growth" and something came up to my mind. I am playing economic simulator/game called Virtonomics and there i could do politics as well as economy. So we did small analysis to answer on question: is low taxes helping economy in general, or not? In this game i was governor of one region Argentina and i raised provincial tax from 10 to 20%. We expected that many players would leave this region to avoid this tax but we v seem many interesting things:
-High tax leads to lower competition. Therefore for those who choose to work in a place with high tax there are less competitors and they can sell goods for higher prices. Such high prices compensate losses from high tax.
-High tax means more income to regional budget. Additional income can be used to support other areas such as hi-tech industry or medicine. So for people it is also fine.
After all we made a conclusion that high tax is not always a bad thing. This is example of how the same simulation (Virtonomics) can give some interesting lessons to us, even if players are not professional economists.
Also in this game we tried to show that "Laffer curve" is not as simple as it can appear in theory
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