Friday, April 15, 2005

Lower Taxes = Growth, High Taxes = Stagnation

Larry Kudlow at the NRO has an excellent article called Evidence, Evidence and more Evidence. Far too many on the left fall into the knee jerk position that punishing people for earning money is *good*. From a moral point of view, expropriation is good why? The rational the left relies upon is that "its better for everyone", which really is a utilitarian argument to simply justify theft. What else can taking your money, without your consent and offering nothing of benifet to you in return be called other than theft?

Some on the left will claim that these projects are "social insurance" that everyone has the potential to benefit from. Okay, then tell me why everyone has to pay for projects that benifet solely minority groups? That's not helping the majority. Nor is health care spending structured into the form of insurance where one person is paying into his own ability to claim, he's paying into everyone's ability to claim in this specific instance and essentially relying on future generations to continue to do so.

Now for all their pet projects various leftists will assert that high taxes are good, and start wagging fingers at people whom have reduced taxes like Mike Harris as being irresponsible, reckless extra. You might want to notice that the statistics they never point to is that post-tax cut revenue in Harrisite Ontario was higher, than pre-tax cut revenue. might just say that the problem wasn't cutting taxes, it was that Harris continued to spend more money rather than showing restraint.

Nor does the left like to hear about this little thing called the Laffter curve, which illustrates that the higher levels of taxes result in decreasing revenues and lower taxes result in increasing revenues. Why? Compliance and increased private investment. If taxes are raised to an absurdly high level all sort of legal maneuvers can be attempted to skirt around high taxes. For example I might choose to run part of my company out of the Bahamas, or take up residency there to avoid paying taxes, or various rules apply to corporations, trusts and tax exemptions can be finegled to evade the long arm of Revenue Canada and the IRS. Seriously, who do you think is better at that game accounts and attornies billing at 800 dollars an hour or a 9-5 government employee whose waiting to retire.

Its rare for me to post an article in its entirity but I'll post the Kudlow argument below, it gives concrete examples of what is a simple economic truth - low taxes are good, high taxes are bad. IT IS NOT BETTER FOR EVERYONE TO HAVE A PUNITIVE TAXATION SCHEME, its STIFLES GROWTH, it makes EVERYONE POORER and LESS LIKELY TO BE EMPLOYED. Jack Layton if your out there, take a read of this - you might learn something.

Evidence, Evidence, and More EvidenceLower tax rates spur economic growth.

An opinion piece by reporter Anna Bernasek in last Sunday’s New York Times actually argues that there’s no real evidence that lower tax rates spur economic growth. Bernasek finds a couple of economists to back up her idea before concluding that tax “reform based on a notion that taxes are bad for the economy is just that: a notion not backed by strong evidence.”

Let me beg to differ in a very strong way.

Before making her strange assertions, Bernasek should have referenced the work of Harvard economists Martin Feldstein and Greg Mankiw, along with numerous articles published by the National Bureau of Economic Research. Then there’s the work of Columbia economist Glenn Hubbard and Princeton economist Harvey Rosen. These are no small thinkers when it comes to tax theory. Each has found a high correlation between lower tax rates and higher economic growth.

Then there’s the Nobel-prize-winning Edward Prescott of Arizona State and Robert Mundell of Columbia. Add two more sound minds to the lower-tax, higher-growth list. Sure, the above economists have been Republican advisors at one time or another, but Bernasek could have found a trove of data contrary to her thesis had she looked to the “non-partisan” OECD, IMF, or Congressional Budget Office.

Then there’s the real-world evidence. Let’s start overseas.

Margaret Thatcher’s tax cuts had made Britain the strongest European Union economy until Ireland passed it with even lower tax rates. Russia and almost all the former Soviet bloc countries in East Europe have moved to low flat-tax-rate systems. Western Europe, until recently, has not. Consequently, their economic growth rate has fallen 25 percent behind the pace set in the U.S. over the last decade.

A recent BusinessWeek article notes that only last year “Germany was among the ringleaders of an effort to force low-tax countries like Estonia to raise their rates.” Now Germany is joining the race to cut taxes by slashing their corporate income tax. BusinessWeek continues, “Chances for just such economy-boosting tax cuts are looking better.” (My italics.)

Back at home, real-world evidence throughout the 20th century shows a stark contrast between high- and low-tax policies. In the 1920s, the Harding-Coolidge-Mellon tax cuts produced the Roaring Twenties. But repeated tax increases by Herbert Hoover and Franklin D. Roosevelt produced and prolonged the Great Depression.

John F. Kennedy vowed to get the economy moving again after the sluggish growth of the high-tax Truman-Eisenhower years. JFK made good on his promise when he lowered the top income-tax rate from 91 percent to 70 percent. The result was the 1960’s boom. Twenty years later, Ronald Reagan turned stagflation into the 1980’s boom by slashing the top personal tax rate from 70 percent to 28 percent.

President Clinton, you might recall, raised taxes in his first term, but lowered them in his second term, contributing to a burst of investment and growth. Note the difference. In his first four years, the economy increased at a 3.2 percent annual rate. But his next four years produced a 4.2 percent economic pace.

Are we to throw out all this overwhelming historical evidence? Hardly. More likely, former-Sen. Connie Mack, the head of President Bush’s tax-reform commission, will recommend a new tax plan for the U.S. that will borrow heavily from the path-breaking flat-tax-reform work of Steve Forbes, Dick Armey, and Art Laffer. No amount of academic-style econometric finagling can take away from the historical evidence that flatter and simpler taxes are the best way to maximize our economy’s potential to grow.

To think otherwise only defies the laws of common sense. Higher after-tax returns to work, investment, and entrepreneurial risk-taking will promote more employment, more capital formation, and more wealth. If it pays more to produce then people will produce more. As Dr. Laffer put it three decades ago, when you tax something more you get less of it. When you tax something less you get more of it. Higher after-tax rewards always generate a greater supply of work effort and investment capital.

In our capitalist free-market system, strengthening the link between effort and reward has proven to work time and again. I respectfully disagree with Anna Bernasek and the New York Times. More tax freedom will always fuel our free economy.

— Larry Kudlow, NRO’s Economics Editor, is host of CNBC’s Kudlow & Company and author of the daily web blog, Kudlow’s Money Politic$.

Thanks Larry for telling it like it is.


At 3:50 a.m., Anonymous Anonymous said...

Lower taxes dont always equal high growth. In some cases, with higher taxes the government can leverage itself to exponentially grow the economy through government spending. As a result, high private investment will be realized because the Government can use its ability to leverage its investments. In some cases, with countries that have high debt and high defence costs, such as the USA, this austrian economic school of thought has proven not to work. Average tax rates mixed with restrained fiscal policy and high productivity in some cases can be more effective for growth then simply low taxes. But you are correct in aknowledging the law of diminishing returns for government revenues as tax rates increase beyond optimal levels.

-M.K. Braaten


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