Higher Taxes, Less Prosperity?
If only it were true. Unfortunately, the reality of the matter is much more complex. There is tons to be said on this issue. For now, take a look at this chart, released today by the OECD, and reported in the New York Times:
Relative to the US, there are higher taxed countries that are poorer, and higher taxed countries that are richer. And this, of course, is because the relationship between taxes and income, and between taxes and income growth, is more complicated than many or most would like to think. Higher taxes (1) are not necessarily bad in and of themselves, and (2) can actually be positive if they result in the state being able to provide more and/or better quality services for its people. The recently proposed war tax indicates the potential for higher taxes to result in more prosperity, assuming the war effort results in more security and peace for the country, and therefore more economic activity and growth (this particular Afghan conflict will not remotely result in that kind of thing, but that’s another topic).
We can conclude that the real issue is not the amount of taxation, although that is important, but rather what the government does with that tax money. It can foster an environment of economic prosperity through strategic investment, improving infrastructure, etc, or it can squander and mismanage the money. The preoccupation with the tax rate stems from the fact that it constitutes a number that is (1) simple and straightforward (at least on the surface), (2) extremely easy-to-understand by everybody, (3) affects everybody in an important way to some degree, (4) easily concentrates the angst and vitriol of a large number of people. Very few other phenomena share these characteristics. And that’s probably a good thing.
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Here’s my way to look at the relationship between taxation and prosperity:
http://districtofcolumbiadispatches.blogspot.com/2009/02/taxation-without.html
Interesting graph, Philip. It certainly gives more weight to the argument that too much is made of taxes and their impact on economic activity. I would also be interested to see the evolution of changes in lower-level income tax rates, corporate tax rates, state sales taxes, and others during depressions or recessions. Typically, too much emphasis is placed on taxes in general, and on personal income taxes in particular.
Agreed. For conservatives, it all starts with the Laffer Curve, and if you’ve read on it you know that Laffer postulated that there is, indeed, an economic condition where in lowering taxes can have a stimulatory effect. Conservatives jumped on that decades ago, and argue from the position that we’re on that side of the curve, so tax cut away.
Problem is, Laffer never said wher eon the curve he thouhgt we were when he published it, and history seems ot suggest we’re actually on the otherside – where tax cuts have the opposite effect.
I think conservatives place the emphasis on individual tax cuts because theya re libertarian leaning economically. They want the individual to be able to enmass great wealth, and you can’t do that as easily if you keep having to pay taxes. Of course, they also want to end government regulation of economic enterprises, so eliminating persona l income taxes, and creating vast loop-holes for corporate income taxes will have that effect.