Saturday, July 12, 2008

Raising Taxes Is Not a Good Idea

I've been meaning to comment on this op-ed from the Wall Street Journal by David Ranson but haven't been able to get around to it until now. He talks about the somewhat overlooked work of San Francisco economist Kurt Hauser who noticed something about the relationship between marginal income tax rates and tax revenues. No matter what the marginal tax rate is, revenues will track very closely to 19.5% of GDP with very little deviation. It should follow that if you want to increase tax revenues you want policies that encourage GDP growth.

It is pretty well accepted that raising taxes retards GDP growth and if GDP growth is already very low, as it is right now, then you could get negative growth, i.e. shrinkage. The definition of when the economy is in recession is two consecutive quarters of negative GDP growth. Raising tax rates at this time, as the Democrats want to do, could very well tip us into a recession. If the Democrats get into the White House and increase their majority in Congress, raising taxes is what they have promised to do, telling their voters that it will only affect "the rich", however they are defining that term today as they pander to wealth-envy and promise "free" goodies. To think that it won't affect them is demonstrably wrong, as the work of another economist, Nobel prize winner Ed Prescott has shown.
"Here is a somewhat startling fact: Based on labor market statistics from the Organisation for Economic Co-operation and Development (OECD), Americans aged 15-64, on a per person basis, work 50 percent more than do the French. Comparisons between Americans and Germans or Italians are similar. What’s going on here? What can possibly account for these large differences in labor supply? It turns out that the answer is not related to cultural differences or institutional factors like unemployment
benefits, but that marginal tax rates explain nearly all of this difference. " [my emphasis]

If the Democrats follow through on their promises then we will have a recession. That is definitely a change you can believe in.

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