More Evidence Obama Should be Proposing Tax Cuts … Right Now
With the U.S. economy slowing — along with pretty much the rest of the planet — the last thing Washington should be doing right now is going on hiatus.
At the very least, the White House and Congress should have a peek at this interesting analysis from Karel Mertens of Cornell University and Morten Ravn of University College. The economists look at the impact of different sorts of tax cuts, particularly individual income taxes vs. corporate taxes. Their carefully worded findings:
We find that changes in either type of taxes have large effects on output. However, the impact on tax revenues and other macroeconomic aggregates differ a lot across the taxes. We find that:
Cuts in average personal income taxes stimulate the labour market, private consumption, and investment but also lead to a drop in tax revenues.
Cuts in corporate income taxes instead have little impact on tax revenues but also fail to stimulate the labour market and private sector consumption while they do stimulate investment.
This indicates that care needs to be taken in the design of tax policies. Increases in corporate taxes may not generate much tax revenue but will lower aggregate activity. Increases in personal income taxes can generate tax revenues but this has to be evaluated against the impact on aggregate activity and the labour market.
Let me translate: Cutting corporate tax boosts investment, while income tax cuts boost working, investment and consumption. But the economic gains — and thus tax revenue — are likely to be greater with corporate tax cuts than with individual income tax cuts. The former are more likely to pay for themselves, the latter less so.
Lucky us. As it so happens, the U.S. has a sky-high corporate tax rate in desperate need of being lowered. Actually, it should be eliminated. Imagine the impact on the market (and confidence) if Barack Obama, John Boehner and Harry Reid announced the U.S. would be eliminating its corporate income tax. Capital would flood back into America. Finally, a Recovery Summer.
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Comments:
Re: More Evidence Obama Should be Proposing Tax Cuts … Right Now
Wow. This is not only fascinating, Jim, but very, very powerful. With personal income tax rates already relatively low, at least by historical standards, the best our side can even hope to accomplish is to preserve the Bush tax cuts. Or so I figure.
But a deep cut in the corporate rate?
As of reading your post, I now know that there's plenty of room for such a cut, if not for an outright elimination of the corporate income tax, and that that is precisely what would do the most good.
As you put it, "Lucky us."
Mar '11
Re: More Evidence Obama Should be Proposing Tax Cuts … Right Now
Mr Obama is about as likely to cut corporate tax as he is to eat a dog - less likely, actually. Unless he sees it improving his re-election prospects.
I'm afraid the American economy will have to wait until Jan 20, next year (if we are lucky).
May '11
Re: More Evidence Obama Should be Proposing Tax Cuts … Right Now
James, I would be interested in your opinion of replacing corporate income taxes with an 8 per cent consumption tax.
Dec '11
Re: More Evidence Obama Should be Proposing Tax Cuts … Right Now
And just in case someone in Washington should decide that more stimulus spending is needed, James Hamilton at Econbrowser reports on a new paper showing that when government spending increases, private spending decreases by more than the increase in government spending.
The interesting thing about this paper is that is uses a relatively simple predictive model, and asks "If you know that the government decides to increases spending by X, how should your forecast for future GDP change?"