Re: Economic Growth and Tax Rates
- From: "The Trucker" <mikcob@xxxxxxxxxxx>
- Date: Tue, 29 Aug 2006 16:11:46 -0700
<royls@xxxxxxxxx> wrote in message news:44ef507f.24367883@xxxxxxxxxxxxxxxxx
On 25 Aug 2006 11:39:48 -0700, "Steve R" <saroman0414@xxxxxxxxx>
wrote:
Many economists believe that tax cuts stimulate economic growth.
Name three. In fact, most genuine economists understand full well
that _what_ is taxed and _how_ are much more important in determining
economic growth than the tax _rate_.
In fact, that belief is one of the main drivers of the Bush administration
economic agenda.
It is unlikely that anyone very high in the Bush administration
actually believes that notion, as it is easily shown to be false. The
driver of the Bush economic agenda is rather that the wealthy
interests that control the USA and fund the Republican Party prefer
that other (i.e., more productive but less powerful) people be forced
to pay for the government spending on services, infrastructure, etc.
that primarily benefits wealthy interests.
I am not an economist, but I am a trained scientist
with significant experience analyzing data.
Welcome to sci.econ. Someone with your sort of background is often
much more educable in economics than the large number of armchair
economists here who have acquired their knowledge of the field, such
as it is, from the mainstream media, business-oriented schooling, and
corporate/Austrian School/libertarian sources like the Cato Institute
and mises.org.
If you have a liking for economic data analysis, I highly recommend a
site called Nationmaster that provides an enormous array of economic
and social data on different countries, including many correlations.
Being a born skeptic as
well, I thought I would examine some data that might confirm or deny
the validity of the lower taxes/higher economic growth rate assertion.
I am hoping someone with more expertise could shed some light on the
result.
Glad to oblige.
First, I obtained data on the real GDP per capita in the US by year
from 1913 to 2003, available at http://eh.net/hmit/gdp/. From this
data I calculated the annual % change. Second, I obtained data on the
top marginal tax rate for married couples filing jointly, also from
1913 to 2003, available at
http://www.truthandpolitics.org/top-rates.php. Next, using MS Excel, I
plotted the % change in annual real GDP per capita against the annual
tax rate and, not surprisingly, generated a plot with enormous scatter,
the r-squared value being 0.02. This suggests essentially no
correlation between the annual % change in real GDP per capita and tax
rate. However, the linear trend line generated from the data
dramatically shows that a greater increase in % change of real GDP per
capita is consistent with higher tax rates. The trend line is
distinctly in the direction of lower tax rates/lower % change in real
GDP per capita to higher tax rates/higher % change in real GDP per
capita. The slope of the line indicates an annual increase of 0.03% in
real GDP per capita for each 1% increase in tax rate.
At the same time, a plot of the real GDP by year over the same time
frame affords a virtually linear plot with an r-squared value of 0.98.
The linearity of real GDP growth over time further suggests that the
growth is independent of tax rate. Population growth between 1913 and
2003 is also linear (r-squared = 0.98) but with a slope about one-half
that of real GDP per capita growth. The faster increase in real GDP
per capita relative to an increase in population may be due to
increased productivity, but the point is that all of the data together
not only contradict the view that lower tax rates increase economic
growth, but that the opposite may be true.
This result will not be surprising to anyone who is acquainted with
taxation economics or GDP correlates. Indeed, Nationmaster's data
show a fairly strong correlation between GDP growth rate and the
fraction of government revenue that is obtained by taxation of
personal income.
To understand the economic mechanism underlying this relationship it
may help to first define a few technical terms:
"Excess burden" is the economic cost of a tax over and above the
amount of revenue it raises -- i.e., the extent to which it makes not
just the taxpayer poorer, but society as a whole. E.g., if retail
sales are taxed, people will buy less, and this reduction of economic
activity (production as well as consumption) is an excess burden of
sales taxes that reduces the total amount of wealth in society.
Similarly, if income is taxed, people will work less, and the
resulting foregone production of goods and services is an excess
burden of income taxes. Most commonly used taxes have a significant
excess burden, and in some cases the excess burden of a tax may even
exceed the revenue it raises.
"Rent" was classically the portion of production that went to the
landowner (the other portions are wages, which go to the suppliers of
labor, and interest, which goes to the suppliers of capital -- the
tools, buildings, etc. used for production). More generally in the
modern context, economic rent is the return obtained through control
of production opportunities, including natural resources, intellectual
properties, agricultural quotas, utility monopolies, etc. Note that
economic rent denotes a technical concept quite different from the
vernacular meaning of rent, the latter being merely a periodic payment
for use of another's property.
"Elasticity" is the relative change in supply or demand with a change
in price. It is elasticity that determines both the extent of a tax's
excess burden and the degree to which the burden of paying the tax
will be shifted from the nominal taxpayer to others.
One of the most well-established results in economics is that the
excess burden of a tax is directly related to the elasticity of supply
for the taxed item. Consequently, it is best to tax things that are
in inelastic supply. Ownership and control of production
opportunities typically has zero or near-zero elasticity of supply,
and the rent income obtained thereby can consequently be taxed at high
rates without imposing any significant excess burden on society. So
cet. par., the rate of GDP growth will be positively correlated with
the fraction of government revenue that is obtained by taxing
_ownership_ and _control_ of production opportunities rather than
their _utilization_ for productive purposes. In addition, the low or
zero elasticity of supply for such rent collection privileges means
that the burden of any tax on them cannot be shifted elsewhere: those
who pay such taxes cannot shift their burdens onto productive
activities, which keeps the excess burden low or non-existent.
The way this relates to rates of personal income taxation is through
progressivity. Almost all personal income taxes are progressive, and
the top marginal rate (which you examined) is normally applied only to
very high incomes. It is frequently the case that the great majority
of all income tax is paid by the top 10% of income recipients.
It might be thought that high and progressive income taxation
discourages remunerative effort by the most productive members of
society, thus reducing GDP. However, in actual fact, the people who
receive very high personal incomes are typically either not working
for them, or are working in a capacity that allows them to capture and
retain significant economic rents (lawyers, doctors, unionized
workers, professional athletes and entertainers, etc. are all
privileged to collect large quantities of economic rent through
restrictions on competition and other privileges).
In addition, the high unearned incomes of the very rich usually
consist largely of economic rent derived from their assets, whether in
the form of land and natural resource rents, capital gains arising
from increased expectations of future rents, dividends from
corporations reliant on the rent of utility or intellectual property
monopolies, etc. Even their interest income is mainly derived from
land rent-based mortgage securities.
So because high and progressive personal income tax rates _tend_ to be
paid primarily by people whose income consists mainly of economic
rents, those taxes do not have the negative effect on production that
one would expect with a tax on income obtained strictly according to
one's contribution to production.
I hope that is clear. Feel free to ask for details on any part you
don't understand.
The Bush administration and Republicans in general seem to want us
to believe that it is the pursuit of rent that occasions new technological
innovation and real capital development -- both of which are essential
to the continued success of the species when success is measured in
productivity or more leisure and less toil and discomfort. But this is
incorrect in that most seekers of rent are seeking power over others
as opposed to any real benefit from increased productivity. I would
maintain that technological advance occurs due to the dreamers and
perhaps the seekers of fame as opposed to the stuffed suits in pursuit
of another corporate jet. Most "discoveries" are made by people who
_LIKE_ science and love to do it and will do it so long as there is
a very good expectation of being supported by the community WHILE
and AFTER they do it. The "fame" part is gravy. It is the work itself
that is the reward. Using taxes on economic rent or simply redistributing
econimic rent as a means of supporting science will result in increasing
productivity whether or not it results in increasing per capita GDP. A
war on science is a war in pursuit of power in the hands of the rentiers
of the society; and a war in pursuit of a more labor intensive society
where there is no time for dreams or research.
--
"I know no safe depository of the ultimate powers
of society but the people themselves; and
if we think them not enlightened enough to
exercise their control with a wholesome
discretion, the remedy is not to take it from
them, but to inform their discretion by
education." - Thomas Jefferson
http://GreaterVoice.org
.
- References:
- Economic Growth and Tax Rates
- From: Steve R
- Re: Economic Growth and Tax Rates
- From: royls
- Economic Growth and Tax Rates
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