There is a debate raging in some circles on tax cuts and growth. The reason is that in January of 2013, America will see the largest tax hike in history if Obama is re-elected. In yesterday’s journal, Nobel Prize winning economist Pete Diamond wrote that higher taxes don’t slow growth. The really interesting part of this piece is he is the first Keynesian economist I have seen that validates the Laffer curve is real. Most try to destroy the logic behind the Laffer curve.
According to our analysis of current tax rates and their elasticity, the revenue-maximizing top federal marginal income tax rate would be in or near the range of 50%-70% (taking into account that individuals face additional taxes from Medicare and state and local taxes). Thus we conclude that raising the top tax rate is very likely to result in revenue increases at least until we reach the 50% rate that held during the first Reagan administration, and possibly until the 70% rate of the 1970s. To reduce tax avoidance opportunities, tax rates on capital gains and dividends should increase along with the basic rate. Closing loopholes and stepping up enforcement would further limit tax avoidance and evasion.
What’s interesting about that statement is that if Obama’s tax increases hold, marginal tax rates will be in the 50-70% rate depending on how much you make.
James Pethokoukis calls bs on Diamond’s logic. Diamond used an economic series starting in 1970, not after Thatcher and Reagan took office. That skews statistics. This is why statistics aren’t always what they seem. You have to know the assumptions behind the numbers. I think recent political polling data reflect that.
If we throw American statistics on GDP growth and taxes out, and just focus on European style economies, data looks interesting. That’s what the WSJ does today here. Germany cut it’s top rates.
The Schröder government, and later the coalition under Angela Merkel, also cut federal corporate income taxes to 15% from 45% in 1998. Include state taxes, and the effective corporate rate today is close to 30%, down from 50% or more in the 1990s. These reforms made Germany more competitive, attracted investment and jobs, and paved the way for the country’s economic resurgence and an unemployment rate currently at 5.7%.