Why the Economy Stubbornly Insists on Growing More Slowly When Taxes are Lower
by Mike Kimel
An Economic Theory That Uses Micro Forces to Explain Macro Outcomes: Why the Economy Stubbornly Insists on Growing More Slowly When Taxes are Lower
Cross-posted at the Presimetrics blog.
I’ve been writing for years about the fact that a basic piece of economic theory does not apply to real world US data: unless one engages in the sort of assumptions that can justify eating ceramic plates as a cure for leprosy, there is simply no evidence that lower taxes lead to the good stuff we’ve been led to believe over non-cherry picked data sets. Recent examples include this look at the effect top federal marginal rates on various measures of growth, this look at the effect of top federal marginal rates on tax revenues, a different look at federal marginal rates and growth, and this look using state tax levels. I’ve also shown that effective tax rates also have fail to cooperate with theory when looking over the length of presidential administrations – examples include myriad posts and Presimetrics, the book I wrote with Michael Kanell.
I think the reason a lot of people have trouble accepting this is that they see some sort of conflict between this macro fact and and what seems to be a self-evident micro truth – if tax rates get high enough, people will work less. Now, such micro-macro conflicts have existed in the past, and are certainly aren’t unique to economics. One obvious example we all live with is that to each of us, from where we’re standing, the Earth does a pretty good job of appearing to be flat, and yet we know that its actually round(ish). For most applications, from running a marathon to building a house to making toast, assuming that the earth is flat doesn’t hurt, and even simplifies matters. That is to say, for most applications facing critters roughly our physical size, a flat earth is a good model. On the other hand, we’d be much impoverished by sticking to that model at all times, as we’d lose out on satellites, our understanding of weather and geology, a great deal of transoceanic shipping, and Australia.
The same thing is true when it comes to the economy – failing to understand and account for the dichotomy between micro and macro truths is harmful. It has cost us, all 6.8 billion of us, economic growth and wealth, which is to say, it has cost us in quality and length of life. But nobody is trying to explain that dichotomy, in part because so few people see it. There is a profession that should be trying to explain this dichotomy, and that is the economic theorists. However, they seem to be pretending the data isn’t there, so waiting around them to explain it means more loss of quality and length of life. So let me take a crack at it.
In addition to explaining the real world reasonably well, a good theory, in my opinion, should not rely on crazy assumptions. After all, a theory that doesn’t make any sense simply isn’t going to get used even in the unlikely event that it works. So I came up with a theory that relies on only a few assumptions, all of which are sane and which hew pretty close to the real world. My assumptions are these:
1. Economic actors react to incentives more or less rationally. (Feel free to assume “rational expectations” if you have some attachment to the current state of affairs in macro, but it won’t change results much.)
1a. The probability that an economic agent will choose to do any work is inversely related the tax rate. At 100% tax on income, work drops, but not to zero – many of us do some charity work, after all, for which we aren’t compensated at all. On the other hand, not everyone is going to work even if tax rates drop to 0%.
2. Economic actors do not have perfect information about the economy, and are not homogeneous. They have different skillsets and different size, and that limits their opportunities at any given time. On the other hand, some economic actors are sufficiently similar to other economic actors that they could occupy similar economic niches, albeit they wouldn’t necessarily produce identical output.
3. Economic actors come in different sizes. Small players cannot compete with large players on economies of scale. (I get really irritated with the oft-repeated assumption that everyone is the same size, or that any unemployed person can walk into a bank and borrow $1.2 billion to build a chip fab.)
4. Economic actors are at least somewhat risk averse.
5. Many parts of the economy are characterized by economies of scale. At some point those economies of scale may reverse themselves, but economic actors rarely work at points where the diseconomies of scale have become strong.
6. Many parts of the economy are characterized by lumpiness. If an economic player is into hot dog stands, for instance, it can buy one hot dog stand, or two, or three, but it can’t buy 2.7183 hot dog stands.
7. Among the the pieces of the economy characterized by economies of scale and lumpiness are tax evasion/avoidance, which economic actors will engage in due to assumption number 1. That is to say, $1,000 spent on attorneys, accountants and economists in the course of a $100,000 project will gets you less tax evasion/avoidance than the same amount (or even a proportionately larger amount) spent in the course of a $100,000,0000 project.
8. There is a government that collects taxes. (Note – In a nod to the libertarian folks, we don’t even have to assume anything about what the government does with the taxes. Whether the government burns the money it collects in a bonfire, or uses it to fund road building and control epidemics more efficiently than the private sector can won’t change the basic conclusions of the model.)
I trust there aren’t any assumptions on this list that seem particularly heroic or which contradict the real world in any important way. Additionally, I don’t think there’s anything here that a conservative or libertarian would object to either. So I figure we’re good to go.
Let’s focus on one particular economic actor (or entity or firm or player), and let’s put some numbers down for simplicity of keeping track of going on. Say this one actor has $100 million (whether debt or equity is irrelevant to the model) which it can invest – and it can invest all, part, or none of that $100 million. To keep things really simple, say this actor must decide how to allocate its funds between a single $100 million investment and five $20 million investments, each of which has an expected return of X% a year before taxes.
Essentially, this player has four forces acting upon its decision making process.
1. Risk aversion. That makes the actor lean away from the one big project and toward some number of the smaller projects, both to avoid having all its eggs in one basket, and because by avoiding the one big project it doesn’t have to invest the full $100 million. Instead of investing in five small projects, for instance, it can invest in four at a cost of $80 million, and keep $20 million cash.
2. Economies of scale. That makes the actor lean toward the one big project over the five smaller projects.
3. The marginal tax rate. If its too high, that actor will simply sit on its hands. If not, it will invest some amount of its $100 million.
4. Economies of scale in tax avoidance/evasion. That tends to lead toward the one big project over the five smaller projects, since the net benefits of tax avoidance from one big project exceed the net benefits of tax avoidance from several small projects.
Now, forces 1 and 2 push in opposite directions. Force 3 is orthogonal to 1 and 2, and force 4 is parallel to force 2. All of which means it is easy for a player who chooses to invest rather than sit on his hands, and who otherwise is evenly balanced between one large and multiple small projects (or even tilting slightly toward multiple small projects) by forces 1 and 2 to be pushed toward the one big project by force 4. Let me restate – under some circumstances, marginal tax rates are low enough not to preclude investment altogether, but are high enough that due to scale economies, the gains of tax avoidance/evasion from large projects so exceed the gains to tax avoidance/evasion from small projects to make a single large project more desirable than a group of small projects, even though the latter would have been more desirable in the absence of taxes. Furthermore, there is some positive probability that shrinking marginal tax rates reduces force 4 enough to keep this story from being true.
This follows in a straightforward way from the assumptions, and looks a lot like real world situations. I assume its not objectionable even if you’re fortunate not to have ever worked for a Big 4 accounting firm. But, it has important implications. See, by taking the single big project rather than the multiple small projects, our player increases economic growth several ways. These include:
1. Because of project lumpiness, by going the big project route, it has to invest the full $100 million. Had it gone the small project route, there is a positive probability that risk aversion would have led it to invest $80 million (or $60 million) instead, meaning $20 million (or $40 million) would not have been put to work in the economy.
2. It spends less on tax avoidance/evasion services with the single large project than with multiple small projects. Since these services produce a private gain but don’t actually generate output, that reduces the drag on the economy.
3. As noted previously, small players are reluctant to take on big players – sure, it happens, but in general, small players prefer to go up against other small players than against big players. (Think Walmart and the centipede game.) But small players are priced out of the big projects. So if small players find bigger guys entering their potential space, they are more likely to sit on their hands (or focus on what amounts to the smaller, more wasteful projects among options available to them, potentially forcing out the even smaller guys, etc.).
But that is one single player. In a big enough economy, there can be many, many companies and/or individuals of many different sizes in just such a situation. With 310 million people and who knows how many companies in the economy, probabilities add up. (I note that the second benefit of biasing companies toward their largest available projects goes away when you consider the whole economy. After all, while company X saves on accountants/attorneys and economists by picking the larger projects, by leaving the smaller projects to smaller players, those players will be hiring accountants/attorneys and economists as well.)
Note that relaxing a few assumptions makes it even easier to understand why US macro data shows a positive correlation between marginal tax rates and real economic growth. For instance, it isn’t difficult to imagine that the government actually does something useful (i.e., growth generating) with the some of the tax money it collects. Additionally, smaller firms are often more innovative than larger firms, even within the same space (one has to compete somehow). Our little story is one where under many circumstances, smaller firms are more likely to enter the market when tax rates rise than when tax rates fall.
Thus, this little story, while requiring only a few realistic assumptions, does something that as far as I know is unique in the field of economics: it explains why US macro data shows a positive correlation between the top marginal tax rates and economic growth for all but the most cherry picked data sets, and it does it by sticking to micro foundations. I’m sure it could be improved, but but I think its a good start. Your thoughts?
5. Many parts of the economy are characterized by economies of scale. At some point those economies of scale may reverse themselves, but economic actors rarely work
or that any unemployed person can walk into a bank and borrow $1.2 billion to build a chip fab.)
Hi Mike; is this a typo, or am I just being dense…?
Occam’s razor, Mike.
A much simple explanation is that lower taxes are indeed an incentive for employed people to work more hours. However, there is not a direct relationship between hours worked and output. It is possible for an increase in hours worked to result in a decrease in output. In short, the microeconomic incentive is pecuniary but the macroeconomic result counts real production, not aspirations and opportunity costs.
Occam’s razor, Mike.
A simpler explanation is that lower taxes do act as an incentive for employed people to work more hours but that there is not a direct relationship between hours worked and output. In fact, longer hours can lead to reduced output. In short, the microeconomic incentives are pecuniary but the macroeconomic results are measured in real output, not in aspirations or opportunity costs.
A simpler explanation is that lower taxes do act as an incentive for employed people to work more hours
Couple of points…
Salaried individuals are exposed to an effective 100% tax on overtime hours, yet plenty of salaried people work overtime.
And poor people typically don’t work to minimize their tax burden but rather to keep body and soul together, so It’s conceivable that someone with $100m in cash whose living expenses ran $10m/yr may feel compelled to actively deploy their capital with minimal regard for their tax treatment since they would otherwise be broke in fairly short order.
I have an issue with assumption 1A that “The probability that an economic agent will choose to do any work is inversely related the tax rate.” You refer to the two extremes (100% and 0%) as demonstrating this relationship but that does nothing to explain what happens in between the extremes. The extremes tell us little about behavior in the normal range.
Assumtpion 1A folllowed Assumption 1 “Economic actors react to incentives more or less rationally”. A thought exercise about an economic agent facing the incentives of a changing tax rate suggests there is actually a direct relationship between the rate and work, not an inverse one.
Assume the tax rate has been x% (with x not too close to the extremes). Now change it to x+1%. What is the new incentive? His net income for the work he was doing will go down. How might the economic actor rationally react to a drop in net income? If given the option, it is rational for him to try to work a little more to bring net income back to where it was in order to support the lifestyle he was accustomed to. It does not seem rational to me to assume the economic agent would decide to work less as a result of the drop in net income, as this would likely drop net income even further. Suppose instead the rate changed to x-1%. Now his net income would go up. If given the option, it is rational for the actor to work a little less, in order to have more time to enjoy non-work activity, while bringing in the same pre-change net income on which his lifestyle was supported.
My one concern, is that even if the one with the $100m is sitting on that money, I doubt that it is actual cash or gold sitting in their personal vault at home. It’s invested somewhere.
Evern with all the companies sitting on all that cash right now, it’s in a bank and I doubt the bank has it all sitting in greenbacks in their vault.
However, there is one thng our government does not do with it’s money. It does not leave any of it in cash in a vault. Actually, there are 2 things it does not do. The second is that it does not take a piece of the action and put those greenbacks in a vault until the time is “right”.
The meme of high taxes removes will to work/invest is a throw back to the days when we had a government inwhich it could skim a piece of the action (kings/queens, dictators).
The reason the higher taxes in our government worked was because of the progressiveness. As the world appears flat when standing on it, so is there a scale to what appears large as a take of the action as the action gets larger. And, as I noted in past posting on taxation, there appears to be a point at which those who have only money left for motivation, will so be motivated right up to not recieving 90% of the action (past high point of taxation for those few to be so luck in income).
Changes made to assumptions 3, 4, 5 for typos.
i thought prescott had some decent evidence of macro effects from taxes…
Its the velocity of money. Poor people and government money is fast since they spend it as fast as they get it. In fact they spend money than they have. This fast money generates lots of economical activity which causes the economy to growth. Rich people money is slow since they then to spend far less than they have or they spend it to exchange luxury items like paintings with each other. Their money causes less economical activity. The result of this is that the larger the percent of the wealth the rich have the less the economy grows an in fact once the percentage goes past a certain amount you end up in a downward spiral.
I’ll try to make that change tonight. Thanks.
A lot of people have found decent evidence of macro effects from taxes. Please reread the first sentence of the post.
Tax avoidance/minimization. The Holy Grail of economic growth? Your argument is quite good.
“Since these services produce a private gain but don’t actually generate output, that reduces the drag on the economy.”
Huh? A private gain with no actual output generated seems more or less the definition of tax avoidance. However, there is neither an explicit assumption in your model nor a demonstration in the exposition that tax avoidance “reduces the drag on the economy”. Unless there are some pretty powerful secondary effects, undertaking activity which produces no output is a waste, so there is an increased drag. I think you need to rewrite this bit.
As to the assumption, and subsequent critiques, that involve relating hours worked to tax rates, two things to keep in mind. One is that, as 89whatchamacallit5 points out, our labor market includes a number of structural elements which militate against short workweeks, others which encougage long workweeks. Between say zero and 40 hours, there is very little room for a response to changes in marginal rates. The other is that hours and results and a number of other observable behaviors can serve to reduce risk to employees. Looking good means keeping a paycheck or advancing at some future date, but does nothing for today’s paycheck. Since taxes work on today’s paycheck, by worker behavior can be aimed at maintaining employment, there is a structural disconnect between hours and tax rates. In a model prefaced with the claim that those other guys ignore important stuff, it’s a good idea not to ignore important stuff.
So, let me see if I understand the argument. This is an industrial organization model. It says that tax rates influence the size of project that large firms will undertake. Tax avoidance costs don’t scale well, so the tax avoidance cost of undertaking small projects is high. If taxes are low, then firms may choose not to pay for tax avoidance, so large firms can better afford to take on small projects. Small firm can’t compete with large firms, so work on projects that big firms don’t want – they pick up the high-cost scraps. Is that the idea, in a nutshell? If so, do you need the assumption that labor responds (strongly) to marginal tax rates? I understand that is the theory at the micro level and that you are trying to bridge the gap between micro theory and macro results. However, if the micro-theory you are trying to work with makes a claim for a strong labor response to marginal tax rates, it may not be worth bridging that gap. A micro-theory that takes into account structural elements of the demand for labor might be a better place to start, and would mean a narrower gap to bridge, to boot.
Oh, one more thing. Why do we think that having small entrants to the market will produce faster growth? The aim is to explain why higher tax rates may produce faster growth, but the model explains why high tax rates may lead to a rise in small business activity, at the expense of large business activity. There is a missing piece. Why does more small business activity at the expense of large business activity lead to faster growth? Are small businesses more efficient than large businesses in all (or many) regards other than tax avoidance?
Separate question – If tax avoidance is a link in the causal chain between tax rates and growth, then tax simplification would lead to faster growth, yes?
KH, new small businesses are the creators of the highest percentage of new jobs. So, if the case is that tax policy increasing taxes create more of them, then it is the causal chain for growth.
My problem is that Mike’s analysis, other than being anecdotal, does not show anything other than coincidental correlation.
just wanted to say… before i read what everyone else has said… that if taxes go up i do not work less. if anything i work more so i have enough for me after the tax man has taken his bite.
i understand that there are folks for whom this is not true… but i suspect those are mostly folks who have “enough” and the effort of making a little bit more (after taxes) is not worth it, though it might be worth it for a “lot more” if there were no taxes. in general i don’t have much sympathy with these people. better they should take a week off and let someone else make the money they don’t think is worth the effort.
now i read em all. have to say a really good post and really good comments. but i would add, just in case, don’t get carried away with your “model.” reality is even more complex than that.
as to the relative prouctivity of large business vs small, i know people who work for large business. they are no more efficient than government. small business owners tend to work their hearts out.
so it it’s productivity or efficiency you are looking for, bet on the little guy.
on the other hand… large enough business, like the government, can afford the “waste” of duplicate systems and cross checking and leisurely thinking, and if they are smart enough to take advantage of that they can get more production with everyone “working less” than that poor guy working like a dog who can’t keep up with everything that hits him.
“post hoc ergo propter hoc “
‘post hoc ergo propter hoc’
Reagan; voodoo economics, Laffer did this with a cocktail napkin.
Is more modern monetarists’ tea party and Fox News than Kimel.
In particular, Mike gets the regression working. A step further than Laffer supporters.
Small business is also the greatest destroyer of jobs. High job turn-over among small firms is largely a reflection of the fact that small firms come into existence and go out of existence at a more rapid pace than larger firms. High turn-over is not, in an of itself, growth.
As to the anecdotal-coincidental-correlational objection, well, no. First, the concatenation of coincidental with correlational is way too slippery. Correlation does not, as is famously objected, imply causation. Less noted but equally true is that correlation does not imply a lack of causation. In one sense, sticking coincidence and correlation together makes the sentence redundant, and in any other sense, the sentence is at great risk of being untrue.
Behond that, though, the problem is that you have dragged out your standard objection to Kimel’s entire book and launched it against this model – and screwed up in the process. You have apparently been so eager to keep drumming on this “anecdotal-correlational” theme that you didn’t bother to check whether it applies here. It doesn’t. An anecdote is a story about a particular case. Mike has told us a story about a general case – that’s what a model is. No anecdotes here. Not one.
Mike refers to data that he has presented elsewhere and tried to relate it to theory here. This is not an exposition of the data. This is a theoretical exercise. The either-redundant-or-probably-untrue point you made about correlation cannot apply to the issue at hand today, which suggests you are still doing the same old push-back against the data. The data are what they are. Your reservation about causation will just have to remain your own. Mike has moved on to exploring causation – which is what you have been calling for all along, but somehow seem unable to grasp now. Your problem with Mike’s analysis is that the whole subject is objectionable to you. All the more reason to keep analyzing.
Fruitful area for further consideration. There is the whole income effect vs substitution effect issue to consider. Taxes reduce our effective income. Lower income means we can afford less leisure. Lower return to hours at work relative to hours at leisure at a higher tax rate means that you have a stronger incentive to substitute leisure in place of work. The way to determine which effect is stronger is by looking at actual behavior. Goolsbee has done that, and found that the only large behavioral change is to cash in on stock options before higher tax rates come into effect. He finds no evidence of an reduction in actual effort among those affected by an increase in the marginal rate.
Also, I think you have to take into consideration that all actors must make a certain level of income regardless in order to stay ‘in existence’, whether as a business entity or as an individual. If there is a minimum requirement for an entity, that entity will work as long as it takes to reach that level, regardless of the tax rate (except at 100% tax rate). IF an entity requires $100,000 after tax to keep itself in existence, then that entity will do what it can to attain that level. Now, for every dollar above the ‘existential’ level, there will be a trade-off. That is, what is the opportunity cost of working for an additional dollar vs. not working. I contend that the opportunity cost of not working is very high the closer one is to the existential level, but decreases gradually the further one moves from that level. Thus, the entity requiring $100,000 after tax will continue to work in the face of high taxes until it reaches a point of satiation. That is, the opportunity cost of working exceeds the opportunity cost of not working. At higher tax levels, this ‘satiation’ point occurs further away from the ‘existential’ level than at lower tax levels. I am more apt to go on vacation and not work if both my existential needs and my wants and desires are satisfied than if they are not, regardless of the tax level (unless we are at 100% tax level).
I’ve always been partial to the argument that high taxation causes people to leave money in their business, and low taxation causes them to take money out of the business. The former, money in the business, causes the business to grow. The latter, money out of the business, is spent on hookers and whiskey. That’s good for some businesses, the oldest ones in history, I suppose, but not so good for the economy overall.
I don’t know how one would gather data in support of this, though.
Ned, I think you are exactly right and at least anecdotally would fit my career to a T–not so much because of tax rates, but changing income levels. One of the big factors is that I unfortumnately work less hard the more money I make because the fear factor of being out on the street scrounging for nickels diminishes and further with a bit more disposable income available, the opportunity cost of spending more hours at the office goes up significantly.
Please, gentlemen explain sonething to me. The discussion centers around the effect of a variable, taxes, on an extremely diverse and complex system, an economy. How does one justify focusing on one variable as a determinant to the growth of that system? How does that one variable have the strength of effect to be thought to be able to move that system in one direction or another? And more significantly, how does one think it plausible to isolate that one variable sufficiently to measure its effect upon the system?
updated. Thanks Movie Guy.
Agree that velocity is very important. But, I’m trying to throw in a detail that seems to be considered vital to folks of a certain persuasion, namely that raising taxes causes changes to their behavior.
Your summation of my argument is accurate, and your other points are correct, bar one. I’m trying to account for the “raise my taxes and I will work less” meme. Call this a first pass. I will give some more thought to it, and maybe I’ll have something a bit simpler next time.
I don’t argue with this. But… the CoRevs of this world will not accept the evidence until the day there is an explanation that is simple and intuitive and that comes straight from “tax me more and I will work less.” Even if that’s not the biggest effect, that explanation is necessary for a large chunk of the electorate to conclude that the data may actually be correct. Until then they will prefer a fantasy world.
Although statistics is known as a tool for lying, it also is able to produce valid results to determine whether a variable has a significant effect on a system. Mike has previously shown that his data is statistacally significant. The caveat is that the real driving variable may be something else, which also somehow drives taxes.
A model that says periods of low growth are always followed by periods of high growth and are also enablers of tax raises???
“1a. The probability that an economic agent will choose to do any work is inversely related the tax rate. At 100% tax on income, work drops, but not to zero – many of us do some charity work, after all, for which we aren’t compensated at all. On the other hand, not everyone is going to work even if tax rates drop to 0%.”
That doesn’t make any sense. As long one’s return is positive, it pays to take the extra hours. Other than the taxes on relatively poor people who lose benefits when they cross an income threshhold, additional hours mean additional income in just about every tax system I’ve heard of. Even in Japan during its high growth, high tax era, people would earn the additional money, even if they simply threw it out in an empty lot as happened in one case. Yes, when the income actually zeroes out, or goes negative, that’s another story, but otherwise it is hard to justify this.
Two thoughts – 1) Higher tax rates do affect business decision making and progressive tax rates do affect personal investment decisions. The incentive is tax avoidance and it does result in increased spending by business and direct investment by individuals (not secondary markets) in a positive healthy way. The question is what are the breaking points – 35%, 50%, 70%? Mike is right to dispel the myth that lower taxes create growth and the Reagan tax cuts are proof. That is politics not economics and the recent tax actions are proof too many believe the myth and may well be making things worse than they already are.
2) Have you considered globalization in your models and if so would an increase in tax rates result in more direct investment in this country to avoid taxation?
Thank you Mike for writing this. We need more to get on the band wagon.
There is very little effort involved in collecting rents. Look into who will collect less rent if the tax rate is higher.
I have not hit the point where I consider turning down XXX bucks an hour with or without (a consulting gig) benefits and holidays.
And do you place the high marginal rate on the rents (interest dividends, rental income and gains) or on laboring income?
More likely when I find something better to do I will working marginal taxes on my “laboring”.
It is a meme, the serfs are expected to worry that the lords will leave the manor and they will have to compete with the ‘other’ folk.
I would gladly help load the planes to Honduras……..
i wonder if its the electorate that prefers the fantasy world. I know they live in a fantasy world… but i am not sure they give a damn about the fantasies of the economists and pundits. These latter talk to politicians who probably don’t give a damn either, but they know what gets votes…
have i just contradicted myself? don’t think so. elections are complex enough so you don’t have to worry only about the fantasies of the electorate, but also, a lot, the fantasies of the folks who give you money. it is these people who need to hear the politician telling stories about the poor over burdened rich man… brings tears to their eyes.
could be… though that “always” is “in the long run” and we know what Keynes said about the long run.
I think there is great danger… huge… in getting drunk on a statistical model that maximizes, it says, one dependent variable while the rest of the world goes to hell.
good a place as any:
the senate just voted to cut taxes.. by among other things “cutting the payroll tax on the poor”. but it turns out this actually makes a much bigger cut in the payroll taxes of the relatively affluent, while among the very poor it replaces another tax cut (“making work pay”) and actually leaves the poor worse off even as a matter of their monthly tax bite.
not to mention that by starving Social Security of its funding, it will most likely make those poor infinitely worse off when they want to retire.
this is not just coberly riding his favorite horse here… this is coberly trying to point out the dangers of concentrating on one (dubious) result while ignoring the collateral damage.
Mike, Great post and great comments by others. The simple cause-effect layouts put forward by you and some of the other readers for why you might have higher marginal tax rates leading to higher growth is the best I’ve seen. My dad has always pointed out that the Laffer Curve has a bell shape to it. So his question is “which side of the curve are you on?”
A specific question – do you have or have you seen a multi-national analysis of tax rate vs economic growth? US data over the past 80 years is a unique time in history.
can’t help myself, and i hate metaphors as “explanations”:
it’s like a carburettor. you can have not enough gas in the gas air mix and the car won’t run, or you can have too much gas in the gas air mix and the car won’t run. most of our politicians and the people who vote for them figure that it’s gas that makes the car run, so their answer is to put more and more gas in the gas air mix, and when the car don’t run good, they say it needs more gas.
of course, just to make things interesting, there are times when the mix does need more gas… like during cold start ups.
Great one, Mike. I just want to take issue with one of the items that you take to be unexceptionable.
“3. The marginal tax rate. If its too high, that actor will simply sit on its hands. If not, it will invest some amount of its $100 million. “
Reply got too long so I posted it here:
I am quite familiar with the potential predictive validity of statistics having completed the course of study for a PhD in Experimental Psychology. I’m not a statistician by any means, but one elementary concept stuck with me. With each introduction of uncertainty into any statistical study the validity of one’s predictions based upon the statistical analysis from such a study recedes exponentially. Think of it this way. Assumption squared yields uncertainty to the third power.