Tuesday, October 4, 2011

Taxes and growth/incentives

The central tenet of supply-side economics has been the argument that higher taxes disincentivizes human effort and therefore a reduction in taxes will increase effort and total tax revenues. Paul Samuelson called this "snake oil economics" and it has been repeatedly exposed as being based on questionable assumptions.

Here are two latest examples that contradict this claim. One, Antonio Fatas (in response to Robert Lucas's claim that higher marginal tax rates in Europe discourage married women from working) posts a chart of marginal tax rates and female employment to population ratio for the 25-54 age range for 2010. It shows that countries with high taxes show higher level of efforts as measured by employment to population ratios, whereas the US, with its low taxes, also has low levels of effort.

Second, the CBPP blog points to the respective impacts on output and employment of the Clinton tax increases in the nineties and the Bush tax cuts in the last decade. Both job creation and economic growth were significantly stronger in the recovery following the Clinton tax increase than they were following the 2001 Bush tax cut.

Update 1 (7/10/2011)

Matt Yglesias
points to the fact that the late Steve Jobs, despite being a more successful businessman than Bill Gates or Larry Page, has a modest share of Apple's massive market capitalization. He writes,

"It’s worth thinking about this kind of thing when trying to consider the impact of financial incentives at the margin for high-achievers. Greg Mankiw and others, I think, want us to believe that the ups-and-downs of the estate tax were an important driver of the quantity and quality of entrepreneurial effort undertaken by these guys. That doesn’t seem even remotely right to me."

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