From: The Desk of Brian M. Riedl
The debate on taxes and economic growth is also clouded with confusion. By asserting that tax cuts spur economic growth by “putting spending money in people’s pockets,” many tax cutters commit the same fallacy as do government spenders. Similar to government spending, the money for tax cuts does not fall from the sky. It comes out of investment and net exports if financed by budget deficits or government spending if offset by spending cuts.
However, the right tax cuts can add substantially to productivity. As stated above, economic growth requires that businesses produce increasing amounts of goods and services, and that requires consistent business investment and a growing, productive workforce. Yet high marginal tax rates- defined as the tax on the next dollar earned-create a disincentive to engage in those activities. Reducing marginal tax rates on businesses and workers will increase incentives to work, save, and invest. These incentives encourage more business investment, a more productive workforce by raising the after-tax returns to education, and more work effort, all of which add to the economy’s long-term capacity for growth.
Thus, not all tax cuts are created equal. The economic impact of a tax cut is measured by the extent to which it alters behavior to encourage productivity.
Tax rebates fail to increase economic growth because they are not associated with productivity or work effort. No new income is created because no one is required work, save, or invest more to receive a rebate. In that sense, rebates are economically indistinguishable from government spending programs that write each American a check. In fact, the federal government treats rebate checks as a “social benefit payment to persons.” They represent another feeble attempt to create new purchasing power out of thin air.
Consider the 2001 tax rebates. Washington borrowed billions from the capital markets, and then mailed it to Americans in the form of $600 checks. Rather than encourage income creation, Congress merely transferred existing income from investors to consumers. Predictably, the following quarter saw consumer spending surge from 1.4 percent to 7.0 percent, and gross private domestic investment spending drop correspondingly by 22.7 percent. The overall economy grew at a meager 1.6 percent that quarter, and remained stagnant through 2001 and much of 2002.
It was not until the 2003 tax cuts-which cut tax rates for workers and investors- that the economy finally and immediately began a robust recovery. In the previous 18 months, business investment had plummeted, the stock market had dropped 18 percent, and the economy had lost 616,000 jobs. In the 18 months following the 2003 tax rate reductions, business investment surged, the stock market leaped 32 percent, and Americans created 307,000 new jobs (followed by 5 million jobs in the next seven quarters). Overall economic growth rates doubled.
Marginal tax rates were reduced throughout the 1920s, 1960s, and 1980s. In all three decades, investment increased, and higher economic growth followed. Real GDP increased by 59 percent from 1921 to 1929, by 42 percent from 1961 to 1968, and by 31 percent from 1982 to 1989.
Yet in a triumph of hope over experience, lawmakers embraced tax rebates over rate reductions again in early 2008. While the economic data are still coming in, it is clear that once again the rebates failed to support economic growth. There is no reason to expect another round of tax rebates to be any more effective.
The story of this carol is that on Christmas Eve, 1818, the organ of Saint Nicholas Church in Oberndorf, Bavaria, was in need of repair. With no way to repair it before the midnight Mass, the priest of the church and the organist composed this beautiful hymn in just hours. It was sung in three-part arrangement with the accompaniment of a guitar.
“Statesmen … may plan and speculate for Liberty, but it is Religion and Morality alone, which can establish the Principles upon which Freedom can securely stand… The only foundation of a free Constitution, is pure Virtue, and if this cannot be inspired into our People, in a great Measure, than they have it now, They may change their Rulers, and the forms of Government, but they will not obtain a lasting Liberty. … Religion and virtue are the only foundations, not of republicanism and of all free government, but of social felicity under all government and in all the combinations of human society.”
Stanza 1:
