Sunday, July 08, 2007

Why Cutting Tax Works

Income taxes have to be lowered, in particular marginal income tax rates (the tax paid on the last $$ earned). Not so that the rich can get richer, and not so that health and education spending can be cut.

I believe in cutting taxes because
  • it incentivises people to work
  • it incentivises people to take risk
  • it increases freedom for individuals
  • it is fairer
  • it raises revenue for the government. That's not a typo.
You never ever read this final point anywhere in the press. But the evidence that cutting income tax actually raises revenue is overwhelming. Here it is;

Several economies that seemed on the verge of bankruptcy in the early eighties were suddenly revived once marginal tax rates were reduced.

i) In 1983, Turkey's marginal tax rates were slashed: the minimum rate dropped from 40% to 25%, the maximum from 75 to 50%. Real economic growth jumped to nearly 7% in the following four years and to 9% in 1990.

ii) South Korea was deep in debt to international banks in 1980, when real output fell 2%. Korea subsequently cut tax rates and expanded deductions three times, and economic growth averaged 9.3% a year from 1981 to 1989.

iii) In the early 1980s Mauritius faced an unemployment rate of 23% and massive emigration. Tax rates were cut from 60% to 35%, and the economy grew by 5.4% a year from 1981 through 1987.

The same pattern was repeated in most major industrial countries.

iv) Economic growth in Britain had averaged only 1.2% for a dozen years before tax rates were cut in 1984 and 1986. The British economy subsequently grew by 4% a year from 1985 to 1989.

v) Economic growth in Japan from 1983 to 1987 had slowed to 3.9%. Japan cut higher tax rates by 15 to 20% in 1988, and economic growth and investment subsequently boomed.

vi) In the 1980s economic growth had slipped to around 1.5% in Belgium, Austria, and the Netherlands before each country cut marginal tax rates. In the first year or two of tax reform, economic growth jumped to 4% in Austria, 4.1% in the Netherlands, and 4.3% in Belgium.

vii) The economies of Canada and West Germany likewise experienced brief booms when tax rates were reduced in 1988 and 1989 respectively, but Canada slipped into recession in early 1990 after reversing course with surtaxes and a new sales tax. Germany likewise added surtaxes and sales tax in mid-1991, with immediate adverse effects on the stock market and the value of its currency.

viii) In the United States it is commonly believed that the Reagan administration 'slashed taxes,' particularly for 'the rich.' Actually, real federal receipts increased by 33% from 1980 to 1990. Moreover, the most affluent 5% of all taxpayers paid 45.9% of all federal income taxes in 1988—up from 37.6% in 1979. Apparent "tax cuts"—from a top marginal rate of 70% to 33% — became actual tax increases, particularly for 'the rich.'

ix) In Ireland the highest marginal tax rate on personal income went from 65% in 1984 to 42 % today. The highest corporate rate went from 50% to 20%. The result? - employment soared, government spending fell, government revenues rose, the budget moved into surplus, and the public debt declined.

x) Thanks to reform in the tax code, and a lowering of rates, income from taxes has gone up three and a half times in Pridnestrovie in Moldova.

Conversely, when country's raise top tax rates productive activity ceases, moves abroad, or vanishes into inefficient little "underground" enterprises. The losers are the poorest and those most dependent on the State for help.

Why is there not one single party in the UK demanding lower taxes?

What is the point of David Cameron's Conservatives?