April 3, 2008
The Goose That Lays the Golden Eggs
Once the Democrats select a Presidential candidate and focus on running against the Republican candidate, we are going to hear a great deal about tax cuts and the efficacy of "supply side" or "trickle down" economics. The argument will focus on the effect of higher tax rates on the behavior of the wealthiest one percent of the population. Democrats will argue that a higher tax on the wealthy will raise more revenue needed to balance the budget. Republicans will argue that a higher tax on the wealthy will reduce revenue; the wealthy who are productive will invest less effort and money in American business and there will be fewer jobs (and total income to tax) as a result. Some of the productive wealthy will put the money they have in tax havens abroad (or find tax favored methods to invest at home) and reduce their efforts in American business (competitive energy will find outlets in bridge or golf). We will hear about the age old parable of the goose that lays the golden eggs. Will higher taxes on the goose kill it? or will the goose continue to lay the eggs? Democrats assume higher taxes will not kill the goose; Republicans assume that it will. There will be fights over past data on the effects of the tax cuts of Bush in 2000 and Reagan in 1986 and the Clinton tax increase in 1993, events with much noise in the data. Politicians will spin the data and people will believe who they want to believe. Both sides could be right -- it depends where on the trade-off curve (between rates and revenue) we are at the time of any given tax cut and which type of tax is in issue (investment, sales or income taxes) and haw the tax is levied (corporate versus individual). Me? I would eliminate the double tax on business earnings (with an individual tax credit for corporate taxes paid on earnings that attaches to any dividends actually paid investors) and increase the progressive tax rate on individuals in the upper brackets. Never happen.
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