http://taxesandgrowth.ncpa.org/news/do-taxes-affect-economic-growth
Beyond a certain point, however, when taxes begin being used as transfer payments, incentives to work, save and invest are reduced, which affects the nation's economic progress. High marginal tax rates cause people to work fewer hours, take longer vacations, and shelter their income to evade tax collection. High taxes encourage individuals to divert resources from their most productive uses to those uses which will lower their tax burden. In any economy, there is an optimal tax rate (the percentage of GDP that comes from taxes) which will ensure maximum economic growth; if the tax burden exceeds that level, economic growth will slow. A study that examined data from 1950 to 1995 found that:1 -The estimated growth-maximizing tax rate for the U.S. during that time period was 21 percent of GDP. -The corresponding rate of economic growth would be 4.6 percent. -In reality, taxes were 24.2 percent of GDP in 1950 and rose thereafter; the actual economic growth rate during that period was 3.4 percent. -Actual GDP in 1995 (measured in 1992 dollars) was $6.67 trillion, but if the optimal tax rate had been effect, GDP would have been $13.48 billion. -Under the optimal tax rate, workers would have been producing $107,900 in per capita output in 1995, much more than the actual figure of $54,100. Historic Tax Cuts: JFK and Reagan The 1960s and 1980s were periods of record sustained high growth, mainly due to the tax cuts and reforms enacted at the beginning of each decade by Kennedy and Reagan, respectively. The JFK administration, against the advice of many economic advisers, began cutting taxes in 1962, starting with businesses. An investment tax credit encouraged investment and changes in depreciation costs lowered the cost of capital for businesses. The top corporate rate fell from 52 to 48 percent, and the top individual marginal tax rate fell from 90 to 70 percent. The empirical evidence shows that these tax cuts stimulated growth:2 Between 1962 and 1969, investment grew at an annual rate of 6.1 percent, far higher than the 3 percent annual rate for 1959-1962 and the 2.3 percent rate for 1969-1972, after the JFK tax reforms had been repealed. Real GNP grew 4.5 percent during the 1960s, higher than the 2.4 percent growth rate seen from 1952-1960. The JFK tax cuts also provided proof of a counter-intuitive idea, that cutting taxes will not raise deficits:3 >From 1962-1969, government revenue increased 6.4 percent a year, compared with 1.2 percent a year between 1952-1959. Indeed, after the '62 and '64 tax cuts, the deficit actually fell from $7.1 billion to $1.4 billion. The 1980s was another decade marked by sustained economic growth, which was especially remarkable given the stagflation that was strangling the economy by the end of President Carter's term. From the trough of the recession in 1982 to the peak in 1990, it was the longest peacetime expansion in history. Reagan's tax cuts spurred an investment boom, just like in the 1960s after the JFK tax cuts. The Economic Recovery Tax Act of 1981 featured a 25 percent across-the-board tax cut. The tax reforms increased incentives to save, work and invest, which increased the productive output of the economy to match the increase in demand:4 Real economic growth averaged 3.2 percent during the Reagan years, compared with 2.8 percent during the Fort-Carter years and 2.1 percent during the Bush-Clinton years. Real median family income grew by $4,000 during the Reagan period after experiencing no growth in the pre-Reagan years; it experienced a loss of almost $1,500 in the post-Reagan years. The amount of time the median worker stayed unemployed fell drastically. The first law of government policy should be "first do no harm." The government should encourage long-term economic growth through low taxes, stable currency, and enforcing contracts. High taxes drain resources that would be most productive in the private sector. The experiences of the JFK and Reagan tax cuts show that a hands-off fiscal policy works best to stimulate economic growth. On Nov 17, 3:17 am, "mike [move on] 532" <[EMAIL PROTECTED]> wrote: > Why the Economy Grows Like Crazy Amid High > Taxeshttp://www.alternet.org/workplace/106979/ > The raw truth is that the economy has grown faster when taxes were > higher, but how can we explain that phenomenon? The real- > world effects of tax policy are counterintuitive. > > They run exactly opposite the conventional wisdom. They defy what the > Heritage Foundation calls common sense and what the American > Enterprise Institute calls logic. > > Reality laughs at the Laffer curve, calls Ronald Reagan wrong and > says > George W. Bush is a loon. > > High marginal tax rates correlate with economic growth. > > Examples include World War II and the Truman-Eisenhower years, when > it > was around 90 percent, and the Clinton years, when it was high > relative to the preceding and following administrations. > > Tax rate increases are followed by real economic growth. > > Examples include Hoover in 1932, Roosevelt in 1936 and 1940, Bush the > Elder in 1991 and Clinton in1993. > > Moderate tax cuts are followed by a flat economy. > > This is a generalization from one example: Johnson in 1964. > > Large tax cuts are followed by a boom, a bubble and a crash. > > 1929, 1987 and 2008 are examples. > > These are covered in more detail in the first part of the article > "Tax > Cuts: The B.S. and the Facts." > > Why do high taxes create a stronger economy? > > I used to run a small business -- a commercial film production > company. > > Every time we took a dollar out as personal income, it instantly > turned into 50 cents. > > If we didn't really need the money, that was an incentive to keep it > in the company and to find ways to spend it that took it out of the > taxable profit column but increased the value of the company. > > High taxes create an incentive to reinvest profits into long-term > growth. > > With high taxes, the only way to retain the bulk of the wealth > created > by a business is by reinvesting it in the business -- in plants, > equipment, staff, research and development, new products and all the > rest. > > The higher taxes are (and from 1940 to 1964 the top rates were around > 90 percent), the more this is true. > > This creates a bias toward long-term planning. > > If a business is planning for the long term, it wants a happy, stable > work force. It becomes worthwhile to pay good wages and offer decent > benefits. > > Low taxes create an incentive for profit taking. > > It is easy to confuse profitability with wealth creation. > > They are not the same --~--~---------~--~----~------------~-------~--~----~ Thanks for being part of "PoliticalForum" at Google Groups. For options & help see http://groups.google.com/group/PoliticalForum * Visit our other community at http://www.PoliticalForum.com/ * It's active and moderated. Register and vote in our polls. * Read the latest breaking news, and more. -~----------~----~----~----~------~----~------~--~---
