Tax Rates and Economic Success

Discussion in 'Economics' started by ShoeshineBoy, Sep 17, 2007.

  1. I don't understand this about taxes. If you look at our tax rates in the US, we have very high corporate taxes but low-to-mid personal income taxes with a very low VAT:

    As I compare countries, especially the new and rising economic stars (Ireland, China, India, etc.) and compare their tax rates with those of the US, I see no pattern. It almost seems that tax rates do not matter. Some solid economies have higher tax rates, some lower.

    So then I'll ask the obvious: what's the incentive for governments to lower tax rates if it seems to make no difference to the economic bottom line?
  2. I once ran a regression of a shedload of variables on GDP. Most of it was what you woul expect with private ownership (in conjunction with strong antitrust policy), low tariffs and strong property rights the determinants of high GDP. However, I kept finding that there was actually no relationship between the highest rate of marginal taxation and GDP.

    Of course this could be that richer countries attain their wealth under a low tax system and then switch to a high tax system once they've attained it but it is a sobering thought.

    This is not completely illogical from an economic viewpoint. Most research suggests that income taxes only have a disincentive effect after 50% and the Laffer curve doesn't kick in until 60%.
  3. Mins


    Simple answer is that lowering taxes will get them votes regardless of economic implications. :D

    To Governments - vote lobbying is everything, i doubt they have the economies intentions at heart.
  4. maxpi


    The total expenditures by all the governments in the US is close to half the GNP. That is not reflected in the data from the Wikipedia entry. It has been said that a tax rate of 50% will kill an economy and we just had a business expansion that left out the blue collar worker. That is the first occurance of that in US history that I know of.
  5. timbo


    It's pretty ridiculous that a tax system is needed with a fiat currency.
  6. Dubai is the way to go if AND ONLY IF you do not like alcohol.
  7. Wikipedia is showing the theoretical tax rates for corporations, but we know tax collections from corporations have been steeply declining. Robert Reich noted in 2004, "Over the past four decades, the share of federal revenues coming from corporations has dropped by two-thirds, from 21 percent of government revenues in 1962 to only 7 percent last year. Who’s made up the difference? You and me, of course."

    That's the problem with current tax policy: we, the individual payers, perceive taxes as still being high and we don't understand why Washington continues to run up deficits. It's because we've let corporate taxation run too low. With all the record earnings the tax coffers should be in surplus.

    In the long run low taxation is harmful because it hinders the government's ability to invest in public works, infrastructure, etc. Businesses can't grow and thrive if there's no fresh water on tap, the sewage isn't treated and the roads are closed.
  8. You've got an underlying assumption here: that the federal government actually "invests in public works, infrastructure, etc." I'm not trying to be difficult here, but I don't see Washington as doing much of those kinds of idealistic things. Yes, we have a good military. And, yes, we've got some good interstates.

    But Social Security, most State Department activities, pork in the tax bills and interest paid on the debt are just a few gross examples of the federal government pissing my hard earned dollars down the toilet to the tune of hundreds of billions of dollars.

    To be honest if corporations get a tax break, then I'm glad for them. I wish I could join them...

    But I'm getting off my own topic: I still don't see a correlation between either corporate or private tax rates and economic success. Some of the best economies have low tax rates - I guess there's somewhat of a tendency there - but not enough to really come to a conclusion.

    If I'm missing something, someone let me know!
  9. Interesting.
  10. Well, in France that worked, but in America it is quite the opposite right now!
    #10     Sep 18, 2007