5 reasons why the Tea Partiers are right on taxes
Apr 16, 2010 11:28 EDT
Here is the new Washington Consensus: American taxes must be raised dramatically to deal with exploding federal debt since spending can’t/shouldn’t be cut. Only the rubes and radicals of the Tea Party and their Contract from America movement think otherwise. And don’t worry, the economy will be just fine.
Don’t believe it. While you will never hear this in the MSM, there is plenty of academic research supporting the idea that cutting taxes and spending is the ideal economic recipe for growth, jobs incomes and fiscal soundness. (This all assumes that America’s amazing turnaround since 1980 isn’t proof enough.) Just take a look:
1) Tax cuts boost economic growth more than increased government spending. Cutting spending is a better way to reduce budget deficits than raising taxes. “Large Changes in Fiscal Policy: Taxes Versus Spending” Alberto Alesina and Silvia Ardagna, October 2009:
- We examine the evidence on episodes of large stances in fiscal
policy, both in cases of fiscal stimuli and in that of fiscal adjustments
in OECD countries from 1970 to 2007. Fiscal stimuli based upon tax cuts
are more likely to increase growth than those based upon spending
increases. As for fiscal adjustments, those based upon spending cuts and
no tax increases are more likely to reduce deficits and debt over GDP
ratios than those based upon tax increases. In addition, adjustments on
the spending side rather than on the tax side are less likely to create
recessions.
- In short, tax increases appear to have a very large, sustained, and
highly significant negative impact on output. Since most of our exogenous
tax changes are in fact reductions, the more intuitive way to express
this result is that tax cuts have very large and persistent positive
output effects. … The resulting estimates indicate that tax increases are
highly contractionary. The effects are strongly significant, highly
robust, and much larger than those obtained using broader measures of tax
changes. The large effect stems in considerable part from a powerful
negative effect of tax increases on investment. We also find that
legislated tax increases designed to reduce a persistent budget deficit
appear to have much smaller output costs than other tax
increases.
- We present new data on effective corporate income tax rates in 85
countries in 2004. The data come from a survey, conducted jointly with
PricewaterhouseCoopers, of all taxes imposed on “the same” standardized
mid-size domestic firm. In a cross-section of countries, our estimates of
the effective corporate tax rate have a large adverse impact on aggregate
investment, FDI, and entrepreneurial activity. For example, a 10 percent
increase in the effective corporate tax rate reduces aggregate investment
to GDP ratio by 2 percentage points. Corporate tax rates are also
negatively correlated with growth, and positively correlated with the
size of the informal economy.
- Following the supply-side debates of the early 1980s, much attention
has been focused on the revenue-maximizing tax rate. A top tax rate above
[X] is inefficient because decreasing the tax rate would both increase
the utility of the affected taxpayers with income above [Y] and increase
government revenue, which can in principle be used to benefit other
taxpayers. Using our previous example … the revenue maximizing tax rate
would be 55.6%, not much higher than the combined maximum federal, state,
Medicare, and typical sales tax rate in the United States of
2008.
- Corporate taxes are significantly related to wage rates across
countries. Our coefficient estimates are large, ranging from 0.83 to
almost 1-thus a 1 percent increase in corporate tax rates leads to an
almost equivalent decrease in wage rates (in percentage terms). … Higher
corporate taxes lead to lower wages. A 1 percent increase in corporate
tax rates is associated with nearly a 1 percent drop in wage
rates.
- When I started studying economics the US was much richer than Western
Europe and Japan, but was also growing more slowly than other developed
countries. They were still in the catch-up growth phase from the ravages
of WWII. But since Reagan took office the US has been growing faster than
most other big developed economies, and at least as fast in per capita
terms. They’ve plateaued at about 25% below US levels, when you adjust
for PPP. This is the steady state. … Why is per capita
GDP in Western Europe so much lower than in the US? Mankiw seems to imply
that high tax rates may be one of the reasons. … So I think Mankiw is
saying that if we adopt the European model, there really isn’t a lot of
evidence that we’d end up with any more revenue than we have right now. …
Of course the progressives’ great hope is that we’ll end up like France.
But Brazil also has high tax rates, how do they know we won’t end up like
Brazil?
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