Wednesday, April 20, 2011

Taxes and Growth

I think that this is the most insightful post I have read in ages:

Think about it this way: Grant to the tax skeptic all he wants about the idea that high taxes reduce the level of economic output. There’s an easy story to tell here. The quantity of economic output is, in part, a function of how much time and effort people want to put into doing market production. And the amount of time and effort any given person wants to put into market production is in part a feature of how much purchasing power extra time and effort put into market production will get him. Higher taxes—either on his labor or on his consumption of goods and services—reduces the purchasing power of extra time and effort on market production, and thus tend to reduce the amount of time and effort people put into it. You can tell a different, more leftwing story about this, but the point I want to make here is simply that this rightwing story about taxes and output is a story about levels not growth rates. If Americans started working the number of hours per year that South Koreans work, our per capita GDP would go way up.

But that’d be a onetime adjustment. Countries don’t grow over time by steadily increasing their number of hours worked. They grow, roughly speaking, because people think up better ways to do things and then businessmen either adopt those new better methods or else they get put out of business by those who did.

Taxes suppressing growth was a vicious argument because it suggested that it could (via compounding effects) lead to relative impoverishment over time. While it is true that less work could suppress some innovation at the margins, the story of changing absolute wealth actually seems more credible to me.

It focus the argument on what trade-offs are we willing to make between things like personal security and affluence. It also removes the idea that low taxes might spur growth levels and allow us to grow faster than thus reduce debt (as a proportion of GDP) via economic growth. But it is notable that more socialist and high tax countries (Sweden, Canada, The Netherlands) have not have a fall into relative poverty compared with the lower tax United States.

That is worth considering in these discussions.

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