I have a column in today’s New York Post about Obama’s plan for higher taxes next year. My main point is that higher tax rates on the so-called rich have a very negative impact on the rest of us because even small reductions in economic growth have a big impact over time. This is a reason, I explain, why middle-income people in Europe have been losing ground compared to their counterparts in the United States. This is an argument I’m still trying to develop (this video is another example), so I’d welcome feedback.
The most important indirect costs are lost economic growth and reduced competitiveness. You don’t have to be a radical supply-sider to recognize that higher tax rates — particularly steeper penalties on investors and entrepreneurs — are likely to slow economic growth. Even if growth only slows a bit, perhaps from 2.7 percent to 2.5 percent, the long-term impact can be big. After 25 years, a worker making $50,000 will make about $5,000 more a year if economic growth is at the slightly higher rate. So if this worker gets hit next year with a $1,000 tax hike, he or she understandably will be upset. In the long run, however, that worker may be hurt even more by weaker growth. …The Obama administration’s approach is to look at tax policy mainly through the prism of class warfare. This means that some of the 2001 and 2003 tax cuts can be extended, but only if there is no direct benefit to anybody making more than $200,000 or $250,000 per year. That’s bad news for the so-called rich, but what about the rest of us? This is why the analysis about direct and indirect costs is so important. The folks at the White House presumably hope that we’ll be happy to have dodged a tax bullet because only upper-income taxpayers will face higher direct costs. But it’s the rest of us who are most likely to suffer indirect costs when higher tax rates on work, saving, investment and entrepreneurship slow economic growth. When the economy slows, that’s bad news for the middle class — and it can create genuine hardship for the working class and poor. Indeed, punitive taxation of the “rich” is one reason why middle-class people in high-tax European welfare states have lost ground in recent decades compared to Americans.
[…] focus on the impact of policies on long-run growth and competitiveness (which is what I did in my New York Post column from earlier this week and also why I’m reluctant to embrace Art Laffer’s warning of major economic problems in […]
[…] focus on the impact of policies on long-run growth and competitiveness (which is what I did in my New York Post column from earlier this week and also why I’m reluctant to embrace Art Laffer’s warning of major economic problems in […]
Hope springs eternal. So does the belief that:
“Sooner or later, someone smarter, or someone more competent, or someone harder working will be either convinced or coerced into working to increase my standard of living through government transfers which I will vote for in the next election”.
The vicious cycle at work, as every year compounds another 2-3% relative loss of American prosperity compared to the rest of the world. America grows by 2% the world by 4-5%.
Americans either remove the production dis-incentives and return to permanent and sustained 4% annual growth or they fade away into worldwide economic and (by extension political) averagedom.
Its just as simple as that.
Dan,
I think the video is very well done and makes your point nicely.
One question I haven’t heard the answer to is this: does the proposed Obama Tax increase on the upper income groups apply not only to income tax rates, but also cap. gains and dividend tax rates? In other words, will there now be an indexed cap. gains and dividend tax-rate schedule such that lower income brackets retain the current rate, but the rich get soaked with the higher rate? If not, then the tax increase, resulting from expiration of the 2001 and 2003 rate cuts, will affect many moderate-income pensioners whose income over and above social security relies on cap. gains and, especially, dividends.
Thanks