Posted on 10/31/2002 8:49:30 AM PST by Tumbleweed_Connection
As Election Day approaches, serious discussion about economic policies is hamstrung by the devotion of both parties to reducing taxes. The big reason, of course, is that President Bush emphasizes tax cuts, including elimination of the estate tax, to the exclusion of almost everything else. The Democrats, in turn, hesitate to propose an economic plan that does not include long-term reductions for middle-income workers, and most refuse to talk about rescinding the Bush tax cuts for the wealthy.
But the degree of misleading information emanating from both Washington and the media about how taxes affect the economy is disturbing. As I listen to the radio, watch TV news and read a variety of newspapers, it seems that quite a few Americans, including economics writers and media hosts, think that low-tax countries unquestionably grow faster than high-tax economies. Right and left, they seem to attribute more rapid growth in America to lower taxes.
What may surprise them is that there is no evidence for that. "You can make a theoretical case that high taxes impede economic growth, but it is just not supported by the evidence in the U.S. or across countries," said William Easterly, a former World Bank economist soon to join the faculty of New York University.
One of the most interesting research papers on the subject was done a few years ago by two economists from institutions that are hardly hotbeds of liberal protax views, the University of Chicago and the University of Rochester. Nancy L. Stokey of Chicago and Sergio Rebelo, then at Rochester but now at Northwestern, noted that income tax revenue in the United States rose to 15 percent of gross domestic product in 1942, from about 2 percent in 1913, when the tax was introduced — providing a useful natural experiment about the economic effects of taxes.
But, they concluded, "This large rise in income tax rates produced no noticeable effect on the average growth rate of the economy."
Comparing other nations' experiences adds considerable weight to the argument that the level of taxes has had little long-term effect on growth. Joel Slemrod of the University of Michigan has written with Jon Bakija an excellent book on the subject, "Taxing Ourselves" (MIT Press). The authors compared the G.D.P. per capita with the level of taxes in the two dozen member nations of the Organization for Economic Cooperation and Development.
Relatively low-tax nations like the United States and Japan did well, they found, but so did high-tax nations in Scandinavia and elsewhere. More important, the authors contradict earlier findings that purported to show that high taxes reduced growth rates. There is no such relationship, they found; many economists now agree.
"The earlier studies were not very robust," said Mr. Easterly, who with others reviewed much of Mr. Slemrod's work.
In the short run, tax cuts, like President John F. Kennedy's in the 1960's, can be stimulative. But why has tax policy had no clear influence over growth in the long run? It would seem that if taxes were lowered, people would work harder. But Mr. Slemrod and others have found little evidence that workers put in more hours when tax rates fall or fewer when they rise.
Others assert that high marginal tax rates erode the entrepreneurial spirit. After President Bill Clinton early in his first term engineered an increase in the highest bracket to 39.6 percent from 31 percent, economists like Martin Feldstein of Harvard argued that the wealthy would now earn less because they had less incentive to work and invest.
Incomes of this group did go down in 1993, but only because so many shifted income to 1992 to avoid the tax increase. But by 1994, the income of the wealthy was rising rapidly, despite the higher marginal rates.
American economic history since World War II also provides a natural experiment about taxation. The rate of economic growth slowed markedly in the early 1970's from its rapid pace the previous 25 years. But taxes did not rise in this period. To the contrary, the federal government has been collecting about the same proportion of G.D.P. in taxes for 50 years.
On the other hand, the composition of taxes changed. Marginal rates fell for the rich much more than they did for the middle and poor over this period. In the early 1980's, tax cuts by President Ronald Reagan plus increases in payroll taxes made the American system considerably less progressive than it was in the 1950's and 1960's.
If lower taxes for the rich do indeed raise incentives to entrepreneurialism, the United States should have grown faster, not more slowly.
Arguing along those same discredited lines, some economic analysts assert that the capital gains tax cut of 1997 produced the economic boom of the late 1990's. But not one serious study, Mr. Slemrod said, suggests that it did.
These questions remain open to new research. At least one new study suggests that lower marginal rates may encourage people to work harder, but the preponderance of evidence still argues against it. Other economists have done studies to show that segments of the economy may be stimulated by tax cuts, like small business, but other economists counter that this does not mean the economy over all will benefit. You more or less take from Peter to pay Paul.
Then why do many high-tax countries do so well? "Looking at taxes only is only one-half of the story," Mr. Slemrod said. "If government raised taxes but then spent the money poorly, the economy would grow more slowly."
Could it be that some governments spend tax revenue more effectively than others and may even promote growth in the process? Now there's a good question for Americans to ponder as they go to the polls next week.
what a joke.
What a crock. The selection of 1942 (a time when econcomic growth was inflated by the transition from the Great Depression to the WWII war economy) as the "high-tax" data point is an painfully obvious attempt to produce the desired answer. Other examples of this trick are the selection of the early 1970s (economy screwed up by OPEC) and the early 1990s (damage caused by 1993 Clowntoon tax hike offset by the conservative Congress elected in 1994).
Because our taxes are so high, the materials remained unbought, the businesses on our vacation route remained unpatronized, and the potential workers went unhired. Anyone who thinks higher taxes benefits anything other than government, which is based on confiscated wealth that belonged to others, is an economic illiterate.
Replacing the graduated income tax with a NRST would set off a chain reaction of benefits.
Replacing the graduated income tax with a NRST is not an end all be all. It's but one of five key factors for collapsing a corrupt government while allowing a fair and honest government to rise in its place.
And those that repeat this nonsense are socialists and propagandists. This writer for the NYT is nothing more than a useful idiot.
Bull. Many of them have indicated a desire to rescind tax cuts for the wealthy. They are re-distributionists (socialists). The problem with that is if they continue to zonk the "wealthy", this tends to stifle our entrepreneurs' and employers' willingness to take risk, which is the cornerstone of economic growth!
And when Congress and the executive branch talk about the needed stimulus to the economy of tax cuts, what they're implying is "Taxes are impeding the economy now"!
I heard the story recently of a guy who owned a pool company that had employed 10 people. The cost to him of record-keeping, withholdings, unemployment insurance, workmen's comp, filing IRS forms, etc., was such a drain that he ended up letting everyone go and just continuing the company as a one-man outfit. After that he found he made MORE money.
The advantage of a national sales tax would be to have imports pay a portion of indirect taxation and make domestic industries more competitive. The Mexican example of collecting 10% on any transaction entering or leaving Mexico is probably the best way to handle trade matters.
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