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April 3, 2005


-- by Dave Johnson

From today's NY Times, Do Taxes Thwart Growth? Prove It:

In theory, the issue seems simple enough. According to basic economic principles, a tax can have a negative effect on behavior by reducing the incentive to do whatever is taxed. Impose a tax on wages, and people may decide to work less.

That's the theory, anyway. In practice, how many Americans will work less if their taxes rise? With mortgage bills, college tuition and car payments looming, who can afford to work less? Relatively few have the option of cutting back without risking the loss of their jobs.

Nice theory, huh? Yet all the data shows the opposite happens. In this example it's kind of obvious to me that raising taxes would make people work harder so they can pay their bills, or otherwise end up with the same amount of money.

Interestingly, it is the times of highest taxes when we have been most prosperous.

And then there's the evidence. Over the last 30 years, economists have undertaken hundreds of studies to determine whether taxes hurt the economy. So far, they've turned up little to convict taxes of the charge. After reviewing the literature on the topic in 1993, two economists, William Easterly of New York University and Sergio Rebelo of Northwestern, concluded in a joint paper that "the evidence that tax rates matter for growth is disturbingly fragile."

A leading tax specialist today, Joel B. Slemrod of the University of Michigan, would agree. He notes that in the 20th century, a rising tax burden in the United States and other developed countries went hand in hand with rising prosperity.

Maybe that is because we have a consumer economy, and higher taxes usually really means higher taxes on the rich - which means a lower share of the tax burden is on the great masses of non-rich. In a consumer economy obviously more people having more money to spend is good for the economy. In other words, redistributing the income down from the top is good for everyone, even the rich. And higher taxes would mean the government would not be borrowing, which is bad for the economy in the long term.

Higher taxes also enable the government to spend more, which is obviously good for the economy. Government spending means more jobs, and more money circulating in that consumer economy of ours. That's what spending is. Also the government usually spends money on things that are good for the economy in the longer term, like education, science, infrastructure (the internet, roads, etc.) Investment.

When I learned about science, I learned that science is supposed to DEscribe what happens. But a lot of this kind of economics seems to be about, "If only people did so-and-so, so-and-so would happen." That does not describe, it prescribes. And it's also wrong.

Posted by Dave Johnson at April 3, 2005 4:28 PM

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» On Taxes and Growth from The Green Knight
the Green Knight is reminded of a quotation by John Ruskin, in his 1862 book Unto This Last: I neither impugn nor doubt the conclusion of the science [of laissez-faire economics] if its terms are accepted. I am simply uninterested in them, as ... [Read More]

Tracked on April 3, 2005 8:26 PM

» http://www.preemptivekarma.com/archives/2005/04/yesterday_at_se.html from Preemptive Karma
Yesterday at Seeing the Forest, Dave posted an interesting New York Times Business Section piece entitled Do Taxes Thwart Growth? Prove It: At the heart of such antitax sentiment is this belief: Taxes are bad for the economy. And who would disagree, es... [Read More]

Tracked on April 4, 2005 11:52 AM

» She Blinded Me With Science from Preemptive Karma
And hit me with technology Yesterday at Seeing the Forest, Dave posted an interesting New York Times Business Section piece entitled Do Taxes Thwart Growth? Prove It: At the heart of such antitax sentiment is this belief: Taxes are bad for the economy.... [Read More]

Tracked on April 4, 2005 11:55 AM


Fascinating piece. Thanks for posting it.

Posted by: carla at April 3, 2005 6:39 PM

Wow, what hypocrisy, a leftist citing "science" (nevermind the bad science you use to scare the public over "man-made global warming") But yes, there is a point where if you raise the tax percentage high enough you will create a shrinking of the economy, it was proven empirically in Britain post-WWII where they raised the top rate to 95% and England began falling apart. But I understand you prefer sweet ideology to hard facts, facts which are rarely on your side...

Posted by: Pericles at April 3, 2005 8:15 PM


Posted by: Pericles at April 3, 2005 8:15 PM

If high taxes had _no effect_ on prosperity, then one would expect about half the time prosperity to decrease when taxes increased. So producing one instance (talking to you, Right Wing Science Boy) of an economy collapsing when taxes were high means nothing. (Plus, you present your pig ignorance of history along with that of mathematics, logic, science, and, well, just about everything, by neglecting to mention that the top rate in the US during the same period was 90% -- at a time when the greatest period of mass prosperity in the history of the world commenced!)

Post hoc ergo propter hoc. Look that up, and then stuff it.

Posted by: richard at April 3, 2005 10:19 PM

Dave, looks like another soldier of the army of darkness has been dispatched to our little paradise. Can him.

Posted by: richard at April 3, 2005 10:21 PM


I cry Bullshit. The greatest era of mass prosperity was in the '90's. The 60's were OK, but only after the Kennedy tax cuts. But the rates were still high and there was still mass poverty, why else would Johnson go on to declare the "War on Poverty"?

Again, facts don't matter when you have an ideological agenda (i.e. mass redistribution of wealth)

Posted by: Pericles at April 3, 2005 11:04 PM

Oh, and no one "dispatched" me to this blog. You see, we on the right think for ourselves and so are difficult to organize into an "Amry". Unlike you on the left of course.

Posted by: Pericles at April 3, 2005 11:10 PM

Sorry for the double trackback (cringe). Feel free to delete the first one. My bad. :(

Posted by: carla at April 4, 2005 11:58 AM

The history of colonialism teaches us a lot about this, how to convert their society into a cash economy or divert it into a captured one. There are variations depending on just what the status quo ante was, but here are some common themes.

Institute a broad based "tax", on individuals or communities, payable in a new currency being introduced OR in forced labour (paid, but at a low rate, and typically working on roads and infrastructure).

Do NOT make the tax high in cash terms, make the labour obligation harsh - high taxing in real not nominal terms.

This allows you to get a colonial economy with a very good rate of exchange with the home economy, so peaceful penetration gets investment in easier. You aren't aiming to get much cash out, you are aiming to build up assets and have cheap resource flows to the home economy.

In a neocolonialist situation, raising taxes in nominal terms doesn't get more work out of people, it creates a depression in which fewer can work.

Posted by: P.M.Lawrence at April 9, 2005 9:55 PM

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