This would have unforeseen consequences. As people would know they would have a lower tax rate in recessions they may try to move most of their income to those times. It could result in strange fluctuations in the business cycle by causing a new variable that markets and planners had to take into account which in turn could bring about recessions and booms even faster or perhaps slower. These are very complex systems - I think stability is better. Taxes should be stable. I think the taxes prior to the Bush tax cuts was ok. Keeping it stable would have been smart. Cutting taxes for the rich don't seem to stimulate the economy either.
Part of the reason why the Bush tax cuts erased enormous surpluses during his admin was because the wealthy have a tendency to save more than people earning 75-90% less. So while they incrementally spent more (put some money into the economy and generated more sales taxes), their spending didn't offset the revenue loss from those tax cuts. The same rationale held after studying the results of Bush's first stimulus plan which was a lump sum rebate check that most people stashed away rather than spending it and recirculating the money back into the economy. The laffer curve, even when applied usefully, has its limits. I'd probably agree with you that a 50% taxation rate would have dramatic effects on spending and saving, but whatever Obama or the Democrats have been proposing has been around the 35% levels. It would definitely be a start in reducing the budget deficit.
This isn't true. I think both sides of the aisle (economists included) agree that tax cuts are stimulative - anything that puts more money into the hands of people is going to increase economic activity, and thus economic growth. The real questions and disagreements are just in terms of what is the most effective form of stimulus. That said, your consumption tax is also a viable alternative, but I would argue it has major problems: 1. There's really no way to make a consumption tax progressive, unless you put the exemption ridiculously high (millions of dollars). Otherwise, the rich are always going to pay the lowest tax rates as a portion of their income. That may not be a bad thing, but when shifting from the current system, if you want to generate the same revenue, the poor and middle class will pay more and the upper class will pay less. There's simply no viable way around that, no matter how you play with the numbers or exempt products unless you do crazy extreme things. 2. This is an added complex burden for small businesses, especially if you tax different products at different rates. We already do have a sales tax system that could be used to build it with, but if the federal product exemptions are different than a given state's exemptions, you create an accounting nightmare for businesses. And states aren't going to want to cede their rights to tax and exempt things on their own to just follow the federal system. 3. This system can exacerbate the economic cycle in downtimes, because it further discourages economic activity. When times are tough, there is now an added incentive to not spend on new products, which just exacerbates the difficulty of getting out of a recession. That is not the case with an income tax - in times of economic difficulty, you're still incentivized to work and make as much money as possible. 4. Stimulus through a reduction in the tax rate is also an accounting challenge that is likely to result in tons of mistakes, with businesses needing to change the rates they charge taxes on an ongoing basis. The income tax, being done once a year, is a much easier system to tweak. You also can't incentive behavioral decisions. While we've gone way to far with giving exceptions, things like encouraging education through the tax code has proven very beneficial. You eliminate the ability of the government to do such things with a pure consumption tax. Not saying it's an unworkable system, but there are significant drawbacks that, to some extent, can't be dealt with.
So what does tax rate have to do with GDP growth? I decided to a little investigation. I did analysis of the data from 1979-2007 because that is what I found. Effective tax rate is from here: http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=456 GDP growth rates are from here: http://databank.worldbank.org/ddp/home.do?Step=3&id=4 <style type="text/css"> table.tableizer-table {border: 1px solid #CCC; font-family: Arial, Helvetica, sans-serif; font-size: 12px;} .tableizer-table td {padding: 4px; margin: 3px; border: 1px solid #ccc;} .tableizer-table th {background-color: #104E8B; color: #FFF; font-weight: bold;} </style> <table class="tableizer-table"> <tr class="tableizer-firstrow"><th>Year</th><th>GDP growth (annual %)</th><th>Effective Tax Rate</th></tr> <tr><td>1979</td><td>3</td><td>22.2 </td></tr> <tr><td>1980</td><td>0</td><td>22.2 </td></tr> <tr><td>1981</td><td>3</td><td>22.4 </td></tr> <tr><td>1982</td><td>-2</td><td>20.7 </td></tr> <tr><td>1983</td><td>5</td><td>20.4 </td></tr> <tr><td>1984</td><td>7</td><td>21.0 </td></tr> <tr><td>1985</td><td>4</td><td>20.9 </td></tr> <tr><td>1986</td><td>3</td><td>20.9 </td></tr> <tr><td>1987</td><td>3</td><td>21.6 </td></tr> <tr><td>1988</td><td>4</td><td>21.8 </td></tr> <tr><td>1989</td><td>4</td><td>21.5 </td></tr> <tr><td>1990</td><td>2</td><td>21.5 </td></tr> <tr><td>1991</td><td>0</td><td>21.5 </td></tr> <tr><td>1992</td><td>3</td><td>21.5 </td></tr> <tr><td>1993</td><td>3</td><td>22.0 </td></tr> <tr><td>1994</td><td>4</td><td>22.3 </td></tr> <tr><td>1995</td><td>3</td><td>22.6 </td></tr> <tr><td>1996</td><td>4</td><td>22.7 </td></tr> <tr><td>1997</td><td>5</td><td>22.9 </td></tr> <tr><td>1998</td><td>4</td><td>22.6 </td></tr> <tr><td>1999</td><td>5</td><td>22.9 </td></tr> <tr><td>2000</td><td>4</td><td>23.0 </td></tr> <tr><td>2001</td><td>1</td><td>21.4 </td></tr> <tr><td>2002</td><td>2</td><td>20.7 </td></tr> <tr><td>2003</td><td>3</td><td>19.8 </td></tr> <tr><td>2004</td><td>3</td><td>20.1 </td></tr> <tr><td>2005</td><td>3</td><td>20.6 </td></tr> <tr><td>2006</td><td>3</td><td>20.7 </td></tr> <tr><td>2007</td><td>2</td><td>20.4 </td></tr></table> The correlation for that table is .215. Well you might think the tax rate this year affects next years growth well that correlation is -.138. So in both cases there just isn't that much correlation between tax rate and GDP growth.
Except that you'd hit the economy even harder since you'd basically help the rich save more. Middle class wouldn't save more as they would have to pay a greater burden since they spend a higher percentage of their income just to survive. You'd have to have a 50% tax on things like a TV or a computer in order to make up for the revenue loss from the rich. The result wouldn't be more savings, it would simply make certain items less desireable. People would simply be spending more on things that were cheaper and had a lower tax.
Bump!!! With all the crap happening in Washington right now, I really think a plan like this would work for both sides.
I missed this way back when. My point was that GDP growth is affected by all sorts of things. If you try to just fit it to tax policy alone, then you're not likely to get any sort of useful result - there's not going to be a very good correlation. If you had thousands of years to look at so everything else could sort of balance out, that would be one thing. But with 30 data points, that's way too simple a model.
loopholes are where Congress derives their power Thousands of pages of carrots and sticks to manipulate our behavior, reward favored constituencies, and punish others. No way they give that up.
Lowered tax rates have no relationship with economic growth. This is research that I did... https://docs.google.com/open?id=0B3E7IZf1pxPeMXpCY3JVakktTHM
http://coffeepartyblogger.blogspot.com/2011/02/isnt-it-time-for-consumption-tax.html The obligatory, what I would do instead... Isn't it time for a consumption tax? In a recent discussion, a tangent regarding tax policy developed in which I stated that I would support a consumption tax, much like the FAIR Tax, but with a couple of caveats, changes that I would make. This post will describe the tax I would implement to replace the income tax. Basic Structure: The Consumption Tax (CT) that I would create would not have a set percentage rate, but would have a "base rate" set each year (automatically, no ability for politicians to interfere) to generate the amount of money spent by the federal government plus five percent. This implementation has a couple of goals, the first of which being a balanced budget and the second being a plan to retire the debt over time. In addition, setting the tax rate based on last year's spending would create a completely transparent system of taxation as everyone would be completely aware of government spending because the base rate would rise with increased spending. Exemptions: I would give every adult a $5000 annual tax exemption and the parents of dependent children $2500 for each child. This exemption would be implemented using the same infrastructure that currently exists for food stamps and flex accounts. I would exempt food and medicine from the tax and, after the debt is paid off, would give a CT holiday every year at back to school time, much like Texas does already. Application: The CT would apply to new goods and would not be charged on used items. Refurbished goods would only be taxed on the value of the new parts used to refurbish the item. Applying the tax only to new goods would give people a market in which they could avoid the tax altogether if they wanted. This application would also encourage the production of more durable goods as such products would hold their resale value. It is likely that such a system would encourage more recycling of products rather than the production of disposable goods that are so prevalent today. Optional component: It is my opinion that some goods should have higher tax rates applied to them than other goods due to the potential for societal damages or costs that are higher. The prime examples would be tobacco products (which cause cancer, leading to higher healthcare costs for people who use these products). For such products, I would allow for a "tax multiplier" to be applied. If the tax multiplier were 1.5, then the base tax rate would be multiplied by 1.5 to calculate the total tax rate for that product. This kind of system would ensure that tax rates would be completely transparent if the product in question was taxed at a higher rate than the base rate.
This is effectively how the Fed sets monetary policy, so if you like this, endorse the Fed while you're at it. With that said, it's an interesting proposal, but one that carries some big flaws if properly examined. If one holds that Ricardian equivalence holds, this doesn't work at all. So consumers will hesitate to spend in recessions because they know (it's actually written in stone) that they will be taxed more heavily in the future. I don't personally believe that so strongly, but those who do will outright reject this. Secondly, tax decreases and increases have weak fiscal multipliers compared to expenditure increases and decreases. By linking one side as an automatic stabilizer, you leave the other side to hang precipitously. The way I envision it is in a recession, tax decreases will automatically kick in, which will leave little appetite for the actual expenditure increases that are most effective in these situations. A quick example; expanding food stamps actually has one of the largest fiscal multipliers in a recession---can you imagine a Congress that had just seen automatic cuts in taxes and a deficit from the recession hitting it in the face expanding food stamps? I doubt it. The proposal is incomplete without dealing with the expenditure side. Lastly, a variable tax rate is a disaster for planning horizons. Certain people won't know whether to save or spend, risk-averse agents will go nuts. You'll create a bonanza for accountants though, and people who can accurately predict economic growth to the tee (which last I checked was about zero people). All in all, it embraces counter-cyclical Keynesian proposals (which I like), it applies a framework for automatic counter-cyclical action (which I like). However, with nothing to hold expenditure, and the chaos it creates with planning horizons, it might not be worth it, and for people who say Ricardian equivalence fully holds, it simply does not work. You've taken a framework for monetary policy that has been etched in stone and fixed it to fiscal policy---there's reasons it hasn't been done before (namely the solid, fixed nature of fiscal policy vs. the fast-paced nature of monetary policy offering a good contrast). Still, it offers an innovative and promising look at some of the economic problems America faces. (though, in truth, this whole exercise can be avoided by electing Democrats en masse after recessions).
Not according to my research (posted). GDP growth does not increase with tax cuts, not at all, in fact if there is a relationship, it is in the opposite direction. Having more people working is far more stimulative than giving a relatively small amount to people who only pay income tax (which is the largest component of tax cuts over the last 30 years). As such, I would like to see more infrastructure spending, which would cause construction companies (private interests) to do more hiring, increasing the number of people working, spending their income, and paying taxes. Agreed, as do all forms of taxation. There are some products that we can exempt altogether (food, medicine, used goods are all addressed in my plan) and we can set the exemption level so that the poor pay no tax at all while the middle class might or might not, depending on their spending level and choices that year. It would be entirely possible for a family of four to avoid paying any taxes if their spending was limited to the aforementioned items, spending up to the exemption limit, and by purchasing used or refurbished items as much as possible. The majority of the exemptions I would create would mirror those already given by states. The personal or family exemptions could be implemented in the same way that sales tax exemptions are handled now, though I think it would be nice to give taxpayers an exemption card so that if a consumer wants to use their exemption, they swipe their card just like credit cards, EBT, or store rewards cards are used today. This is honestly the single biggest bug in my system. Perhaps an automatic sales tax cut could be implemented during recessions, the exact rate to be determined by the depth of the downturn. There are some other solutions with potential, but not if you want to cut out payroll taxes along with the income tax. I think you enhance it. Anything that you want to incentivize, cut or reduce the tax rate for that product/service. This also creates a very transparent system to give the people a clear picture of what is taxed at what rate and what products and services draw special treatment. I disagree about "can't be dealt with," I think it would be a far more workable system which would cost FAR less to implement and enforce.
This would cause a lot of issues, as well. Companies would have to invest even more resources in economic forecasting in order to forecast how much they'll be paying in taxes on a yearly basis. The best thing would be to set it at an appropriate level and leave it alone. Having a tax rate that jumps around based on economic indicators that are always changing would be a nightmare for both businesses and individuals in their efforts to plan ahead.
