Repeat After Me: Low Taxes (on Rich People) and Economic Growth Are Not Correlated
Jared Bernstein tells us yet again what the data has been telling us forever (my bold):
I agree with Chye-Ching Huang, who agrees with the Congressional Research Service, Len Burman, and me: over the long, historical record of special tax treatment for investment incomes and tax cuts to the top marginal tax rates, one simply doesn’t find significant correlations with greater investment, savings, productivity, or income growth.
Everything he cites here is about U.S. tax and growth rates — a single sample point though a long-term one — all of which is subject to the big secular thing: growth was faster pre-Reagan, and Dems were in power pre-Reagan, so the numbers just represent that secular decline (the great innovation stagnation?), not the effect of policies. It’s amazing that Republicans never make this argument, which is pretty tough to counter. But that’s mainly because they don’t even know, much less acknowledge, that growth has declined since Reagan took office. This argument ignores the boom and surplus under Clinton, of course (of course that boom was attributable to New Gingrich), but besides that it’s a tough argument to disprove.
The far more convincing demonstration, in my opinion, is this: comparing the U.S. to Europe over forty years.
Roughly the same population.
Roughly the same level of prosperity.
One taxing 40% of GDP, the other taxing <30%.
Difference in growth rates: nonexistent.
Cross-posted at Asymptosis.
Taxes do not work in a vacuum. Taxes regulate aggregate demand, and create demand for the currency, and do not fund government. Yes you read that last part correctly. And ad I delve more into MMT (Chartalism) the more sense it makes.
Read pages 11-20 of this PDF
http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf
It is deficits relative to the population that drive the growth.
From the PDF Galbraith intro:
Public deficits increase financial private savings – as a
matter of accounting, dollar for dollar. Imports are a benefit,
exports a cost. We do not borrow from China to finance our
consumption: the borrowing that finances an import from
China is done by a U.S. consumer at a U.S. bank. Social
Security privatization would just reshuffle the ownership of
stocks and bonds in the economy – transferring risky assets
to seniors and safer ones to the wealthy – without having any
other economic effects.
James K. Galbraith
Here is an alternate take on the boom and bust from Clinton to Bush
http://www.huffingtonpost.com/l-randall-wray/the-perfect-fiscal-storm-_b_843642.html
The far more convincing demonstration, in my opinion, is this: comparing the U.S. to Europe over forty years.
Roughly the same population.
Roughly the same level of prosperity.
One taxing 40% of GDP, the other taxing <30%.
Difference in growth rates: nonexistent.
Excellent. Now include this in hte analysis. The deadweight costs of the specific taxes being imposed. As we all know, these go from property taxes with the lowest such costs, through consumption taxes, income, then capital and corporate having the highest.
So, you could raise the total tax burden by shifting taxation from capital and corporations to, say, consumer expenditure. This would, if total collection remained the same increase growth. Or, increase revenue while leaving growth the same, either way.
Do not that the EU countries all have a heavy consumption tax called VAT….
Worstall
I get very tired of “economic reasoning.” It is specious and self serving and without value.
For one thing, as the corps will tell you … taxes on corporations are passed through to the customers.
We currently have far more money than we know how to invest. Taxing it might put it into the hands of people who spend it… and that of course might lead to some opportunities for investment. But that is perilously close to an “economic” argument. I think I’d just try it and see what happens.
re the great innovation stagnation.
nonsense. people are still inventing, and still wanting new ways to do things.
what has gone to hell is that the people who have the money think they can “invest” it better in pure gambling schemes, and of course they own the government, so one of the biggest sources of innovation has been shut down.
what you see is not a failure of innovation… you see the natural result of the triumph of “money.”
@Tim Worstall:
Yes, tax composition is far more important. There is a very small but convincing (to me) body of literature (don’t have time to assemble links right now) suggesting that as tax burdens increase, politicians are forced by high deadweight losses as a percent of GDP to institute more efficient tax regimes. IOW, for instance, the reason we have double-taxation of corp profits (assuming that is a bad thing…), and the reason Europeans have managed to shift to VATs, is *because* we have such a low overall tax burden, and they have a higher one.
@Coberly: “I think I’d just try it and see what happens.”
I find that to be a less-than-useful dictum for those writing tax legislation.
It is self evident that “… taxes on corporations are passed through to the customers.” But this is a tautology. Taxes ultimately are paid (in work, abstracted or shifted in time, as currency) only and always by workers.
A desert island where all 100 inhabitants had a million dollars would have no economy unless some or all of them worked.
True, in a normal economy many people are not working at any moment in time (children, elderly, etc) and some people have arranged things so they receive the benefit of others’ efforts while doing very little themselves.
But without the workers there’s no economy.
coberly: “It is self evident that “… taxes on corporations are passed through to the customers.”
Noni Mausa: “But this is a tautology. Taxes ultimately are paid (in work, abstracted or shifted in time, as currency) only and always by workers.”
I don’t think that it is a tautology if corporations are already collecting rents. Then they may not necessarily be able to pass on tax increases to workers or consumers. (For instance, if they are already screwing the workers and consumers as much as they can. ;)) Then they may be forced to pay the tax increase from rents.
Min
thanks. I think Noni missed my point entirely. and i don’t know where she got the idea of “no workers” from.
Steve
also missed my point. i don’t know what kind of dictum tax writers need. FDR relied on “try it and see” and probably did more good than an army of economists, even in the days when they had two arms.
it might make some difference where taxes are collected. my personal opinion after watching the tax wars of the last thirty years is that we would do a lot better just to find an easy place to collect the taxes we need. write an extremely simple and transparent tax code, and let the market sort it out.
this is not “end taxes and the market will do everything” right wing nonsense. it’s just an observation that all the tax-engineering brings us is special interest pleading and an inability to run the country.
so the numbers just represent that secular decline (the great innovation stagnation?), not the effect of policies.
Steve –
I am utterly baffled by this comment. Are you suggesting that secular trends just happen, or are controlled by an outside agency, like phases of the moon?
I believe that policy matters – I’ve been using that phrase here for a long time.
How can you divorce secular trends from policy changes when the policy and the trends changed at the same time?
Please help me understand this.
Cheers!
JzB
JZ
i suspect you can’t separate them because they both occur… mutually influencing each other… in response to something like the statistical sum of a very large number of events… also mutually interacting… that we call “the times.”
i am pretty sick of “politics” because i can’t influence it in any way… but then apparently neither can anyone else. politicians ride the wave, they do not direct it, however much they think they are.
i imagine there are “great men” who can focus some of the “trends” and influence their direction… but not beyond the “willingness” of the millions of little monads to move in that direction.
I don’t believe in the great man theory of history either. But I do believe that decisions matter. Frex, there is no way in hell President Gore would have invaded Iraq, and thus the last decade would have been profoundly different.
Financial deregulation culminating in the 1999-2000 laws to undo Glass-Steagall and “reform” commodity future trading took us back to a 1929 system, and there was a 1929 melt-down.
In all due respect, your response sounds like you’re hand waving, while simultaneously throwing them up in despair.
The stagnation of the middle class, growing corporate profits, capture of profits by the non-productive finance sector, specualtion driving up commodity prices, and low taxation all intertwine. That is your mutual interaction.
I don’t call it “the times.” I call it the effect of deliberate policy decisions.
JzB
@Jazz: “Are you suggesting that secular trends just happen”
What I was doing there was pointing out what I consider to be the key weakness of the single-country correlation analysis. A decline in innovation — perhaps the low-hanging fruit had already been picked — *could* explain the slower economic growth since 1980. (As opposed to the rise of Reganomics.) The old post hoc is not ergo propter hoc thing.
The cross-country analysis (especially with large, long, and otherwise widely comparable samples — US vs Europe over forty years, for instance) goes a long way to overcoming this objection.
You know very well, of course, that I think Reaganomics has contributed massively to and quite likely even caused the three-decade stagnation. (And it obviously has infected Europe as well — from Thatcher to the ECB.) But I can’t prove it with U.S.-only correlations cause I can’t control for everything (i.e. innovation).
Comparing us to Europe — which has followed a *systematically* and consistently different path over many decades — gives us that control. It allows me to at least demonstrate conclusively that Reaganomics has not succeed in leaving its larger-government alternative in the dust, as its proponents promised it would.
@Jazz:
Or to put it another way: Cowen’s Great Stagnation argument is the strongest one possible in face of the stark facts of lesser economic growth post-Reagan.
But it also acknowledges its own inherent weakness, because basically it comes down to “Reaganomics *woulda* worked, except this other thing just happened, coincidentally, to happen at exactly the same time. Think how bad things would be if we *hadn’t* done Reaganomics!”
Not the strongest position to be cornered into by the inconvenient facts, it seems to me…