4 ms·

Debunking the claim that higher income-tax rates reduce GDP

17 points by darshan 17y ago

xmstr 17y ago
Nothing like debunking a political debate by writing an op-ed favoring your side of the argument.
mseebach 17y ago
One obvious issue with this argument: The claim that higher tax rates can reduce GDP is from Arthur Laffer and his Laffer curve -- and relates to the total tax burden, and not the marginal rate.
- ig1 17y ago
  Also there's a complete lack of a baseline, the GDP growth in 2000 vs 2008 is much more down to global economic conditions than US tax rates. What would make a more reasonable comparison is if you compared similar US States with different tax burdens in over the same time period.
- mattheww 17y ago
  One obvious issue with the Laffer curve: Nobody actually knows where the peak is.
  - mseebach 17y ago
    No, but that doesn't mean it isn't there. Most social sciences (including economics) can't very well be exact for the lack of experiments, much less controlled experiments.
    - mattheww 17y ago
      If you don't know where the peak is, you can't argue that raising taxes will reduce GDP because you don't know if you're going up the hill or down it.
      - mseebach 17y ago
        And that's fine, because that's not the purpose. The purpose is to argue that the relationship isn't linear (as might be intuitively expected), but curved (I don't know what the shape is called). It's impossible to accurately model the economy of a society, but theories like this can help politicians better judge the impact of their policies.
- halostatue 17y ago
  ...which, to me, would suggest that we need more progressive taxation (income, capital gains, etc.) and much less regressive taxation (sales, use fees, etc.). Of course, one can look at the GDP growth rate for the U.S., Canada, and Norway and see interesting results: http://www.google.com/publicdata?ds=wb-wdi&met=ny_gdp_mktp_kd_zg&idim=country:NOR:CAN:USA&tstart=-283996800000&tunit=Y&tlen=47 http://www.google.com/publicdata?ds=wb-wdi&met=ny_gdp_mk... It'd be nice to figure out what datasets are available in the Public Data. That's really useful.
JeffL 17y ago
I hate how they equate progressive taxation with justice. It only works if you think justice is when people get equal outcomes regardless of if they deserve it or not. It would be unjust to penalize Warren Buffet and the other titans that drive our economy with 91% marginal tax rates. They don't deserve that kind of treatment, and frankly, I trust them to do much better good with their excess cash than the government ever would.
- forinti 17y ago
  Shouldn't he at least pay as much as average joe? He himself conceded that his secretary pays a higher percentage of her income in taxes than he does.
  - gyardley 17y ago
    I strongly suspect Warren Buffet pays orders of magnitude more tax than his secretary. If you're arguing that he should pay the same percentage of his overall income in tax as his secretary, fine, but that's a different argument.
  - jbellis 17y ago
    > He himself conceded that his secretary pays a higher percentage of her income in taxes than he does Buffet is himself a redistributionist, and was comparing his capital gains tax rate (where essentially all his "income" comes from) with the earned-income tax rate his secretary pays. In other words, Buffet was indulging in a bit of FUD, to be blunt. Many economists believe that taxing capital gains lower than income is a Good Thing to encourage investment and savings, even if it results in strange outcomes like Buffet's in edge cases.
    - yummyfajitas 17y ago
      Further, capital gains is only part of the tax he pays. The businesses he owns also pay taxes, so the tax on his income is actually the combined tax on the business and the tax on his capital gains.
gyardley 17y ago
Considering the pace of chance in the last forty years, comparing the 1960s and 1970s to today doesn't seem like sound methodology. I suspect, for example, that it's now considerably easier to vote with your feet.
barrkel 17y ago
GDP growth in the US in particular can be misleading, owing to population growth. Growth in GDP per capita may be better.
three14 17y ago
I read somewhere [citation needed] that the reason that you don't see a real correlation is that the rich effectively tend to pay somewhere around a 40% tax rate. As tax rates go up, it starts to pay to look for tax shelters, and get non-taxable benefits from their company, and so on, and by the time all is said and done, they won't pay more with the higher rate. If true, raising the tax rate won't get any more money for the government, although it might be good PR for the rich and good income for their accountants.

17 points by darshan 17y ago

xmstr 17y ago

Nothing like debunking a political debate by writing an op-ed favoring your side of the argument.

One obvious issue with this argument: The claim that higher tax rates can reduce GDP is from Arthur Laffer and his Laffer curve -- and relates to the total tax burden, and not the marginal rate.

ig1 17y ago
Also there's a complete lack of a baseline, the GDP growth in 2000 vs 2008 is much more down to global economic conditions than US tax rates. What would make a more reasonable comparison is if you compared similar US States with different tax burdens in over the same time period.
mattheww 17y ago
One obvious issue with the Laffer curve: Nobody actually knows where the peak is.
- mseebach 17y ago
  No, but that doesn't mean it isn't there. Most social sciences (including economics) can't very well be exact for the lack of experiments, much less controlled experiments.
  - mattheww 17y ago
    If you don't know where the peak is, you can't argue that raising taxes will reduce GDP because you don't know if you're going up the hill or down it.
    - mseebach 17y ago
      And that's fine, because that's not the purpose. The purpose is to argue that the relationship isn't linear (as might be intuitively expected), but curved (I don't know what the shape is called). It's impossible to accurately model the economy of a society, but theories like this can help politicians better judge the impact of their policies.
halostatue 17y ago
...which, to me, would suggest that we need more progressive taxation (income, capital gains, etc.) and much less regressive taxation (sales, use fees, etc.). Of course, one can look at the GDP growth rate for the U.S., Canada, and Norway and see interesting results: http://www.google.com/publicdata?ds=wb-wdi&met=ny_gdp_mktp_kd_zg&idim=country:NOR:CAN:USA&tstart=-283996800000&tunit=Y&tlen=47 http://www.google.com/publicdata?ds=wb-wdi&met=ny_gdp_mk... It'd be nice to figure out what datasets are available in the Public Data. That's really useful.

JeffL 17y ago

I hate how they equate progressive taxation with justice. It only works if you think justice is when people get equal outcomes regardless of if they deserve it or not. It would be unjust to penalize Warren Buffet and the other titans that drive our economy with 91% marginal tax rates. They don't deserve that kind of treatment, and frankly, I trust them to do much better good with their excess cash than the government ever would.

forinti 17y ago
Shouldn't he at least pay as much as average joe? He himself conceded that his secretary pays a higher percentage of her income in taxes than he does.
- gyardley 17y ago
  I strongly suspect Warren Buffet pays orders of magnitude more tax than his secretary. If you're arguing that he should pay the same percentage of his overall income in tax as his secretary, fine, but that's a different argument.
- jbellis 17y ago
  > He himself conceded that his secretary pays a higher percentage of her income in taxes than he does Buffet is himself a redistributionist, and was comparing his capital gains tax rate (where essentially all his "income" comes from) with the earned-income tax rate his secretary pays. In other words, Buffet was indulging in a bit of FUD, to be blunt. Many economists believe that taxing capital gains lower than income is a Good Thing to encourage investment and savings, even if it results in strange outcomes like Buffet's in edge cases.
  - yummyfajitas 17y ago
    Further, capital gains is only part of the tax he pays. The businesses he owns also pay taxes, so the tax on his income is actually the combined tax on the business and the tax on his capital gains.

gyardley 17y ago

Considering the pace of chance in the last forty years, comparing the 1960s and 1970s to today doesn't seem like sound methodology. I suspect, for example, that it's now considerably easier to vote with your feet.

barrkel 17y ago

GDP growth in the US in particular can be misleading, owing to population growth. Growth in GDP per capita may be better.

three14 17y ago

I read somewhere [citation needed] that the reason that you don't see a real correlation is that the rich effectively tend to pay somewhere around a 40% tax rate. As tax rates go up, it starts to pay to look for tax shelters, and get non-taxable benefits from their company, and so on, and by the time all is said and done, they won't pay more with the higher rate. If true, raising the tax rate won't get any more money for the government, although it might be good PR for the rich and good income for their accountants.