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April 04, 2005
She Blinded Me With Science
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, especially as April 15 nears?
There's just one problem, though. Despite the widespread notion that taxes harm the economy, no one has actually been able to back that up. It's not that taxes have no effect; they are a major part of the American economic system and affect planning and behavior in many ways. Taxes influence who wins and who loses in a competitive society. But over all, there is surprisingly little evidence that tax rates are an important factor in determining the nation's economic prosperity.
The article cites several studies showing higher tax rates aren't responsible for hurting the economy:
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.
A rising tax burden means rising prosperity. So much for the "getting to keep more of your own money" meme actually standing for something.
Why does it work this way? Productivity. Higher taxes push productivity higher. Studies show that stronger productivity taxes place in a progressive tax structure when taxes are higher.
Another effect of higher taxes is government spending. When taxes are higher it allows the government to invest in people and infrastructure. Education, public services, roads and other public works projects yield jobs. More jobs means more money in people's pockets.
These studies also make sense in context with this PK piece posted by Kevin in November, comparing taxation rates in various nations. Countries with the higher taxation rates tended toward the wealthier, stronger economies.
So next time you hear the rightwing echo chamber sound machine railing against the evils of taxation...you'll know better.
Posted by Carla at April 4, 2005 12:33 PM