ChooseTax Cuts to Encourage Economic Growth
It’s April 15, and you’ve finished the arduous task of assembling your papers and filing your taxes. Although the economy is in a recession and times are tough, you scraped together the dollars to pay Uncle Sam his share.
Yet, even though the unemployment rate stands at 8.5%, the highest in 25 years, Congress is planning to turn its attention to raising your taxes when it returns from recess.
President Obama’s budget includes income tax hikes for upper income Americans and increases in prices of energy-intensive products for everyone. These tax increases would prolong the recession and discourage employers from hiring.
Obama is planning on allowing income tax rates to rise from 33% to 36%, and from 35% to 40% in 2011. This will affect singles making more than $172,000 and couples making more than $209,000, including many small businesses. In addition, these taxpayers would face limits on their deductions—for charitable gifts and mortgage interest—that can be used to offset income subject to taxation.
Obama has also proposed new limits on carbon emissions, known as “cap-and-trade.” Manufacturers would receive a certain allocation of permits to emit carbon (the “cap”), and would have to purchase additional permits from other firms or the government if their emissions exceeded their permits (the “trade”). This is expected to raise $646 billion in revenue over the next 10 years, one of the largest tax increases in history.
Raising taxes, whether now or in 2011, is exactly the wrong remedy to help America recover from the recession, because higher taxes reduce economic growth.
Arizona State University Nobel Prize-winning economics professor Edward Prescott has shown that the higher the levels of taxes in major industrialized countries, the lower are the hours of work. In highly-taxed France, for example, people on average worked only three-fourths of the American workweek.
Professors Jonathan Gruber of MIT and Emmanuel Saez of the University of California (Berkeley) have found that people at the upper end of the income distribution are highly responsive to changes in tax rates. Their research shows that lowering top tax rates would encourage upper-income earners to work more.
And Professors William Gentry of Williams College and Glenn Hubbard of Columbia University found that higher marginal tax rates discourage entrepreneurship. Entrepreneurship involves risk-taking, and people are less willing to take risks when the rewards will be taxed away. The increase in taxes in America in 1993, they found, lowered the probability of people becoming self-employed by 20%.
Rather than raising taxes, Rep. Paul Ryan of Wisconsin, ranking Republican on the House Budget Committee, has proposed a tax system that cuts all taxes and reforms the complex tax code, together with spending cuts that halve the 2019 deficits of Mr. Obama’s budget.
People would be able to pay their taxes on a postcard with only two rates. If they chose the card, couples would pay 10% of their first $100,000 of taxable income, and then 25% on any earnings above that, with fewer deductions. They would pay a 15% tax on capital gains and dividends.
The system would be progressive due to standard deductions and personal exemptions, so that a family of four would start paying tax only after earning $39,000.
Under Ryan’s system, those who prefer the current system, with the 2003 tax rates and relatively complex system of deductions, could continue to file as they do now. So there would be two parallel systems of taxation in place, to minimize the opposition of abandoning one and changing to another.
Our primary objective should be to put our economy back on track. That’s why Congress should be debating how to lower taxes and government spending, rather than how to raise them.
This piece originally appeared in Washington Examiner
This piece originally appeared in Washington Examiner