taxes and the economy

[Red_Dave]

What evidence is there that high taxes seriously damage economys?

 

[Stinger]

What evidence is there that high taxes seriously damage economys?

Well what would happen if the government instituted a 100% tax rate?

 

[Bergslagstroll]

Well what would happen if the government instituted a 100% tax rate?

Well what would happen if the government instituted a 0% tax rate? But it have shown that countries can be pretty well of with a higher tax rate. Like for example my country Sweden.

 

[Stinger]

Well what would happen if the government instituted a 0% tax rate? But it have shown that countries can be pretty well of with a higher tax rate. Like for example my country Sweden.

Yes a 0% hurts government and 100% rate hurts the economy. You are familar with the Laffer curve I assume. Define "high" tax rate. But let's see, current unemployment, 6% Sweden versus 4.5% US, GDP growth 2.4% versus 3.5%, public debt 50.3% versus 64.7%, GDP per capita $29,600 versus $41,800.

http://www.cia.gov/cia/publications/factbook/geos/sw.html#Econ

 

[Ether]

Yes a 0% hurts government and 100% rate hurts the economy. You are familar with the Laffer curve I assume. Define "high" tax rate. But let's see, current unemployment, 6% Sweden versus 4.5% US, GDP growth 2.4% versus 3.5%, public debt 50.3% versus 64.7%, GDP per capita $29,600 versus $41,800.

http://www.cia.gov/cia/publications/factbook/geos/sw.html#Econ

Conservative economists often misinterpret the real meaning of the Laffer curve. It only states the obvious truism that tax rates of 100% and 0% will produce minimal revenue. The curve does not comment on which of the many rates in between are most optimal.

Sweden is simply not a good example. Though its tax rates are indeed relatively high compared to other OECD countries, Sweden has a long history of respecting property rights and freedom of contract. The outstanding rule of law makes for a positive business environment. More importantly, there is a disparity between the way domestic and export-oriented industries are taxed and regulated. The latter are relatively free and unfettered by government decrees. Free trade has been a key factor in Sweden's prosperity.

Plus, the success stories of the Scandinavian welfare states have been a bit overhyped. See the OECD statistics for more information.

To address the threadstarter, one must ask what metrics are used to measure a healthy economy. Remember that government spending is included as a variable in GDP calculations. Setting aside all the other fatal flaws with national income statistics, the particular problem that is relevant to our discussion is the boost that a rise in G (public expenditures) will give to GDP. Hence, the popular myth that World War II ended the American Depression is due to the way national income figures are arrived at.

But there are other methods that can be used to draw conclusions about the impact of taxation on social welfare. What effect would a high excess profits tax have on Corporate America? The threadstarter's question can only be answered by logic and theoretical analysis. Numbers just don't work here.

 

[Stinger]

Conservative economists often misinterpret the real meaning of the Laffer curve. It only states the obvious truism that tax rates of 100% and 0% will produce minimal revenue. The curve does not comment on which of the many rates in between are most optimal.

No they have it pretty much right, at some point increasing tax rates results in decreasing revenues. That has been shown historically in our tax rates. The Laffer curve itself, which was drawn on a napkin over a dinner, doesn't propose to state what that rate is as there are many factors involved. Right now tax revenues are high and growing, the rates are probably about where they should be or even a little high. If one thing has been shown economically you can't tax your way out of debt, it has to be a combination of growth of the tax base and spending restraint. AND if we went to a flat tax and ended the compliance cost the rate could even be lower or even the NST and get rid of the regulatory cost...............

Sweden is simply not a good example.

I agree for some of the reasons you bring up and others, the person I was responding to is from Sweden and offered it as the example.

Plus, the success stories of the Scandinavian welfare states have been a bit overhyped. See the OECD statistics for more information.

Look at just the few stats I posted, if you go to the web sit, CIA at that, it mentions that due to the liberal employment laws productivity is hampered (workers taking off a disporportinate amount of sick time compared to other countries) and look at the GDP per capita numbers.

 

[Ether]

No they have it pretty much right, at some point increasing tax rates results in decreasing revenues. That has been shown historically in our tax rates. The Laffer curve itself, which was drawn on a napkin over a dinner, doesn't propose to state what that rate is as there are many factors involved. Right now tax revenues are high and growing, the rates are probably about where they should be or even a little high. If one thing has been shown economically you can't tax your way out of debt, it has to be a combination of growth of the tax base and spending restraint. AND if we went to a flat tax and ended the compliance cost the rate could even be lower or even the NST and get rid of the regulatory cost...............

Nothing said here contradicts my post. By supporting just about every tax cut which is proposed by the Republican Party, the right-wing economists are implying that they know the location of the optimal point and that it exists at rate Y which is established after the tax reductions are implemented. The point is that there is no definite law of returns concerning tax rates and the Laffer Curve does not establish one.

You may understand this but many conservatives do not.

 

[jamesrage]

What evidence is there that high taxes seriously damage economys?

I would think less money in the tax payer's pocket would be a huge piece of evidence.Less money to buy things with might encourage a dependance on tax payer funded assistance and some else to pick up the tab for that tax payer funded assistance.

 

[Stinger]

Nothing said here contradicts my post. By supporting just about every tax cut which is proposed by the Republican Party, the right-wing economists are implying that they know the location of the optimal point and that it exists at rate Y which is established after the tax reductions are implemented.

I would challenge you to cite one that does. I no of none who claim to know the EXACT rate, but we do know that the capital gains cuts have caused an increase in tax revenues from capital gains, so we moved in the right direction.

The point is that there is no definite law of returns concerning tax rates and the Laffer Curve does not establish one.

Oh there would be but trying to establish them, and the factors affecting it being constantly in change, would require more super-computers and economist than exist. And the Laffer Curve has never been claimed to establish one, it just demonstrates the principle.

You may understand this but many conservatives do not.

I disagree, I think most do. AND most conservatives see the the current system itself is inefficient to the goal which is to raise the most money for government with the least impact on the economy. Liberals on the otherhand see the tax system as a way to institute social change and transfer wealth with little regard to the economic impact. That's why conservative support true tax reform while liberals do not.

 

[Bergslagstroll]

Yes a 0% hurts government and 100% rate hurts the economy. You are familar with the Laffer curve I assume. Define "high" tax rate. But let's see, current unemployment, 6% Sweden versus 4.5% US, GDP growth 2.4% versus 3.5%, public debt 50.3% versus 64.7%, GDP per capita $29,600 versus $41,800.

http://www.cia.gov/cia/publications/factbook/geos/sw.html#Econ

Well you can live a good live with a gdp per capita of 29,600 and the good thing for us sweds is that we live longer. Also I'm a bit proud that you compare Sweden to the worlds econimical superpower. But at the same time I think it's a bit unfair to compare Sweden with USA that have a market of 290 million people consumers. That also has other benefits like that the dollar is the most used currency. Also that USA compared to little Sweden have more power to form the international economy for it own needs.

What is interesting is that Sweden with the next highest taxe rate in the developed world are in the second group of richest countries in the world. That group lays between 28000 and 32000 GNP per capita and consist of countries like UK, Japan and Canada. That I'm calling doing pretty well...

http://www.oecd.org/topicstatsportal/0,2647,en_2825_495684_1_1_1_1_1,00.html
http://dx.doi.org/10.1787/444141640346 GNP per capita
http://dx.doi.org/10.1787/546114387831 Govermental spending

 

[Ether]

I would challenge you to cite one that does. I no of none who claim to know the EXACT rate

Let's take an example: Bush's tax relief package during his first term. By stating that a cut in tax rates from X to Y would bring in additional revenues A, conservatives were implicitly claiming that Y is closer to the optimal point than X. So no, nobody ever explicitly declares to know the exact rate... but if one supports tax cuts based on Laffer's concept he or she is indirectly proposing the location of the maximal revenue point on the curve.

but we do know that the capital gains cuts have caused an increase in tax revenues from capital gains

Do we know that? In the late 90's during the stock market bubble capital gains tax receipts were soaring, but once the unsustainable boom ended the revenue stream also collapsed. Seeing as there is currently a high degree of asset price inflation in the United States, it should be no surprise that revenues from capital gains taxes are increasing. We should also expect that when the housing bubble pops, this positive state of affairs will dissipate.

This is why I am always wary of empirically-based arguments when it comes to debating economic policy. There are just too many variables that can't be controlled or isolated...

 

[Stinger]

Well you can live a good live with a gdp per capita of 29,600

But better with almost 50,000, and that is the point.

and the good thing for us sweds is that we live longer.

Not so much when you compare similar demographics.

Also I'm a bit proud that you compare Sweden to the worlds econimical superpower.

YOU brought Sweden in not me.

But at the same time I think it's a bit unfair to compare Sweden with USA that have a market of 290 million people consumers.

Again YOU brought them in not me.

 

[Stinger]

Let's take an example: Bush's tax relief package during his first term. By stating that a cut in tax rates from X to Y would bring in additional revenues A, conservatives were implicitly claiming that Y is closer to the optimal point than X. So no, nobody ever explicitly declares to know the exact rate... but if one supports tax cuts based on Laffer's concept he or she is indirectly proposing the location of the maximal revenue point on the curve.

Yes along with the theory that if the economy is entering a recession, as it was before Bush was sworn into office, cutting taxes and increasing business investment is the correct course of action. It is and it was,

Do we know that? In the late 90's during the stock market bubble capital gains tax receipts were soaring, but once the unsustainable boom ended the revenue stream also collapsed.

Yes, in part due to the capital gains tax cut the Republican congress passed.

Seeing as there is currently a high degree of asset price inflation in the United States, it should be no surprise that revenues from capital gains taxes are increasing.

Actaully it is also due to the large increases in productivity and business incomes, the P/E ratio's have been falling back to more reasonable levels.


http://www.macrovestor.com/PE-Chart.html

We should also expect that when the housing bubble pops, this positive state of affairs will dissipate.

Don't count on, at least not a long term meaningful drop.

This is why I am always wary of empirically-based arguments when it comes to debating economic policy. There are just too many variables that can't be controlled or isolated...

But we do have historical context and in that context we can be assured that increasing taxes has a deletorious effect on business investment and economic growth and most important to this discussion government revenues. We are finding that once again revenues are reaching record levels, did you know we have had a few months of surplus lately. And that if we are to get out of deficits and debt the more prudient way to do it is to keep taxes low and grow the economy NOT as the left wants, raise taxes.

 

[Ether]

Yes along with the theory that if the economy is entering a recession, as it was before Bush was sworn into office, cutting taxes and increasing business investment is the correct course of action. It is and it was,

Uh, ok. So you agree with me that many conservatives claim to know the location of the optimal rate, even though the Laffer curve does not state one?

Yes, in part due to the capital gains tax cut the Republican congress passed.

And can you prove this?

Actaully it is also due to the large increases in productivity and business incomes, the P/E ratio's have been falling back to more reasonable levels.

Don't count on, at least not a long term meaningful drop.

To a certain extent, there is real growth occurring in the economy thanks to increasing capital formation and technological improvements. However, there is also artifical growth and this is most apparent when one looks at real estate.

Whenever a certain market is being overvalued, the treasury's coffers will reap the benefits. But as soon as prices are brought back in adjustment with the real money relation, the boon ends - tax cut or no tax cut.

Of course there will not be a long term meaningful drop if the Federal Reserve expands credit to end the recession as it always does. More inflationary bubbles will re-appear and this will have an effect on tax revenues. The question is always where in the economy will the overvaluations take place: In the 90's it was IT... right now it's housing.

But we do have historical context and in that context we can be assured that increasing taxes has a deletorious effect on business investment and economic growth and most important to this discussion government revenues. We are finding that once again revenues are reaching record levels, did you know we have had a few months of surplus lately. And that if we are to get out of deficits and debt the more prudient way to do it is to keep taxes low and grow the economy NOT as the left wants, raise taxes.

I do not disagree with the bolded text. However, the difference is that I do not attempt to substantiate such a claim with empirical evidence. To do so would be futile.... remember that the 1990's were a time of great prosperity, and yet Bill Clinton raised taxes in 1993. Clearly economic theory tells us that there can be no causal relationship between the two events. But if we relied on statistics, we might reach a different conclusion.

Revenues have indeed been soaring, but keep our discussion of capital gains in mind. There is also another factor which many overlook:

Corporate income tax receipts have risen by almost $60 billion, or 41 percent, through the first 10 months of fiscal year 2005. Following similar growth last year, those receipts are on track to be more than double their 2003 level, indicating strong growth in corporate profits over that period. The increase in receipts in 2005 reflects economic activity in calendar year 2004 and the first half of 2005. Tax law changes, primarily relating to the depreciation incentives enacted in 2002 and 2003, are contributing to the growth in receipts in 2005. Those incentives reduced taxable profits from 2002 through 2004 and have boosted them this year, following expiration of the incentives at the end of 2004.

 

[Bergslagstroll]

But better with almost 50,000, and that is the point.

Not so much when you compare similar demographics.

YOU brought Sweden in not me.

Again YOU brought them in not me.

Ok I will make it simple. It was you that broughtup the USA not me and not the thread starter. Also you only answered half my post. Because then you look at the statistical data of the richest countries in the world, you then see that USA and Luxembourg are abnormalities. That it's a gap between them and the countries that comes after them. It maybee can be explain by taxerate but it can maybee also be explaind through other reasons like the ones I mentioned.

But if you look lower down you can see a group of countries around 30000 dollar per capita. Those countries have a taxrate between 40% and 60%. But you can't see that the countries with 40% are doing much better then the countries with 60%.

So my point is that maybee USA is sucessfull through lower taxes. But the tax rate doesn't seem to be a important factor for most other developed countries.

 

[Stinger]

Ok I will make it simple. It was you that broughtup the USA not me and not the thread starter.

Well that is what we are discussing.

Also you only answered half my post.

Rebutted, a difference.

Because then you look at the statistical data of the richest countries in the world, you then see that USA and Luxembourg are abnormalities.

Actually it was Sweden.

But if you look lower down you can see a group of countries around 30000 dollar per capita. Those countries have a taxrate between 40% and 60%. But you can't see that the countries with 40% are doing much better then the countries with 60%.

The USA is around 50%, but as I noted we have the historical record for the USA alone which shows lower tax rates can, and in these historical cases did, incrases overall government revenues.

So now that we have made it simple, what is the purpose of the government taxation system, to raise the most revenues while casusing the least harm to the economy and the tax payers, or to use it as a means to create social change?

 

[Stinger]

Uh, ok. So you agree with me that many conservatives claim to know the location of the optimal rate, even though the Laffer curve does not state one?

I have made no such claim and clearly said quite the opposite, your trying to imply that I have is blantanly a phoney claim. Why do you make it?


My Quote:
Yes, in part due to the capital gains tax cut the Republican congress passed.

And can you prove this?

Are you denying it factual or you simply don't know?

To a certain extent, there is real growth occurring in the economy thanks to increasing capital formation and technological improvements.

To a "certain extent"? Curious qualifier, we have been experiencing a very solid growth, the economy is about a good as it gets due to what you cite, thanks to low capital gains rates, increasing producitivity (also require capital investment) and allowing the private sector to keep more of it's money.

However, there is also artifical growth and this is most apparent when one looks at real estate.

Define "artificial growth" in real estate versus "real growth"?

Whenever a certain market is being overvalued, the treasury's coffers will reap the benefits.

What determines the value? The market. The market has set the value of real estate for instance. However that is only a small part of government revenues you leave out taxes on earnings and incomes which have increased as we increase GDP. REAL growth.

But as soon as prices are brought back in adjustment with the real money relation, the boon ends - tax cut or no tax cut.

So can we assume you are shorting real estate?

I do not disagree with the bolded text. However, the difference is that I do not attempt to substantiate such a claim with empirical evidence. To do so would be futile.... remember that the 1990's were a time of great prosperity, and yet Bill Clinton raised taxes in 1993.

Yes when we were in weakened economy just coming out of a recession, his tax increase slow that recovery and we never really got back to expected growth until the Republican congress lower them again. Remember Clinton promised to cut taxes and never did, remember he admitted he rasied taxes too much too.

Revenues have indeed been soaring, but keep our discussion of capital gains in mind. There is also another factor which many overlook:

And as is often the case the simplies solution is ususally the case. Lower capital gains taxes increases economic activities and lower the risk of investing.

 

[Bergslagstroll]

Well that is what we are discussing.



Rebutted, a difference.



Actually it was Sweden.



The USA is around 50%, but as I noted we have the historical record for the USA alone which shows lower tax rates can, and in these historical cases did, incrases overall government revenues.

So now that we have made it simple, what is the purpose of the government taxation system, to raise the most revenues while casusing the least harm to the economy and the tax payers, or to use it as a means to create social change?

Well if you look at a group of country the next richest group. You have both counrtries like the UK with lover taxes and less welfare system. And on the other Sweden with higher taxes and more welfare system. But there still ends up on the same level.

So it just might be other factors that make USA economy be so much bigger. Like for example the strong position of the dollar and USA sens Bretton Woods. Like for example not many other countries would dare to have a rocket fuel economy. Both good GNP as you presented and a big deficit. Because the interest and also the cost of a drop in a currency are to much.

 

[LaMidRighter]

The most simple explanation is this. Individual consumers and suppliers of goods and services are the engine to drive the U.S. economy, raising taxes takes money out of both parties budgets, which gums up the engine and slows down the machine, this is why it befuddles me that some people think of liberals as the economic saviors in this country, as they are typically anti-business and pro tax increase. BTW, I am for budget reform and less taxation, budget reform will naturally require taking government down to a more constitution friendly size, which will fix a sub problem(but that's for another thread.)
- Also, there was a mention of the "housing bubble", I have not heard many esteemed economists who would agree that this is a concern, most of the people pushing this idea are media figures, leading me to believe it is a cute attempt at propaganda. Here are some reasons I don't think there is a "bubble" here to worry about as opposed to the dot.com pop:
1.) Dot com companies had no real assets, they had a copywrite on a name and projections(P/E ratios for these companies were through the roof BTW), houses on the other hand have a specific yet fluctuating value based on supply/demand, and property is a safe investment as there is a finite amount and demand must at some point increase, thus the reason that demand will not suddenly drop.
2) website browsing can change instantly, meaning that two or three bad months can bankrupt the page owner and make the stocks worthless(wish I'd bought into Google though), housing, however, will follow the job market, as long as unemployment stays low, people getting jobs will look for housing, meaning that as long as pricing and inflation do not surpass the price threshold on demand, the "product" will sell.

 

[LaMidRighter]

Well if you look at a group of country the next richest group. You have both counrtries like the UK with lover taxes and less welfare system. And on the other Sweden with higher taxes and more welfare system. But there still ends up on the same level.

So it just might be other factors that make USA economy be so much bigger. Like for example the strong position of the dollar and USA sens Bretton Woods. Like for example not many other countries would dare to have a rocket fuel economy. Both good GNP as you presented and a big deficit. Because the interest and also the cost of a drop in a currency are to much.

I think the fact that Sweeden is a smaller country is the reason that social spending is actually sustainable, in the U.S. and the U.K. the shear number of people would in my opinion collapse the economic system if we spent at the levels of smaller European populations, that said, I am of the opinion that as a country we spend too much and don't demand a return on current investment(government expenditures), I get disgusted when a failing program simply gets more money thrown at it, instead, we should develop strategies to streamline and improve problem areas. Finally, I think that Americans are over-taxed, I believe that our economy trucks along in spite of, and not because of social spending, I don't believe for a second that just because we have a strong economy it adds to itself, the very people demonized by certain activists and politicians are the one's creating jobs, investing, and developing new products who grow the GDP.

 

[Stinger]

Very good analysis.

 

[Stinger]

Well if you look at a group of country the next richest group. You have both counrtries like the UK with lover taxes and less welfare system. And on the other Sweden with higher taxes and more welfare system. But there still ends up on the same level.

I don't know that the UK has overall lower taxes but niether of the countries you mentioned have the low umemployment or as high a productivity.

So it just might be other factors that make USA economy be so much bigger.

It is bigger because we are bigger for one thing and we have the most "free" economy which allows for more capital formation.

Like for example the strong position of the dollar and USA sens Bretton Woods. Like for example not many other countries would dare to have a rocket fuel economy.

The dollar hasn't been that strong lately.

Both good GNP as you presented and a big deficit.

Actually our deficit is not that big when properly measured, as a percent of GDP, we don't use GNP anymore. Or DEBT is high but then we accumulated a lot of that debt fighting the Cold War and footing the bill for protecting Europe against the Soviets. Maybe they should help pay some of that down? Can you imagine had Sweden and France and Denmark and Norway and a host of other countries had supply thier fair share to the defense against the Soviets what thier economy and debt would be like today.

 

[Iriemon]

What evidence is there that high taxes seriously damage economys?

That is a vague question, because what do you mean by "high" taxes?

But looking at various tax rates that have been used in this country since 1970, the rate of tax empiracally has had little effect on real GDP growth. in the 70s, 80s and 90s, real GDP growth averaged around 3.1-3.3%, regardless of the tax rate. In fact, the highest period of growth was 92-2000 (average 3.7%, when we had higher tax rates. The rate of growth has been less than 3% since 2000.

We had higher real GDP growth in the 60s (about 4.5%) when the top marginal tax rate was 70%(!). The concept that a lower tax rate automatically results in higher economic growth is not empircally supported.