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Anti-tax policies don't solve anything

BY DANIEL TAIBLESON | MAY 10, 2012 6:30 AM

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The fact that anti-tax economic theories continue to weigh so heavily in debates over how to best address our current economic problems remains astonishing to me. Not because I do not appreciate the persuasive power of anti-tax arguments, but because even the mildest degree of scrutiny often reveals anti-tax theories to be totally without empirical grounding.

To be sure, most policies derived by these nonsense economic theories are not themselves damaging. However, when you consider that every dollar we lose as a consequence of some anti-tax policy is one fewer dollar we could otherwise invest in a policy that might actually achieve some measurable good, it is hard to think of ineffective anti-tax policies as anything but a scourge.

It is for these reasons, that we literally cannot afford to spend one more second or budgetary dollar entertaining the whims of anti-tax advocates and their unfounded anti-tax economic theories.

Since Arthur Laffer provided the groundwork for modern supply-side economic theory, anti-tax advocates of all political persuasions have argued that the only way to address unemployment is through tax cuts. Sadly, they rarely explain in concrete terms how it is cutting taxes will solve persistent unemployment.

Let us pretend however, that their belief that tax cuts can solve our unemployment problem is not ideological in nature but rather reflects the ideas of Laffer. If that is the case, then we can deduce that any reduction in unemployment via tax cuts would stem from a decrease in the "tax wedge."

For those of you unfamiliar with the concept of the tax wedge, it refers to the difference between the cost to an employer of hiring a worker and the after-tax benefit that worker receives. In theory, this means that tax cuts could reduce unemployment because an employer could hire a worker at a lower cost without reducing that worker's after-tax income.

However, whether we are currently in a situation that would realize any benefit from further decreasing the tax wedge is questionable. I'll explain.

One reason to think that further reducing taxes would do little to spur hiring is that tax rates are currently near historic lows. In fact, federal revenues as a percentage of GDP in the United States are 3.8 percent below our post-World War II average, and corporate tax revenues as a percentage of GDP are lower now than at any time since World War II.

Another reason to be skeptical of realizing any benefit from further reducing taxes is that there have been no significant increases in tax rates on the average worker since Reagan increased payroll taxes in 1983. Furthermore, the Obama administration oversaw the implementation of a 2 percent payroll tax break in 2011.

Yet the most compelling reason to think that reducing taxes will do little to address our unemployment problem can be found in two recent reports released by the Organization for Economic Cooperation and Development. The first concerns member states' tax rates, and the second concerns employment numbers.

When viewed together, the reports' most recent numbers reveal two important facts. The first is that the United States has a rather small tax wedge. In fact, of all 34 organization-member countries, the United States has ninth-smallest tax wedge. The second, and far more important, is that half of all the countries with a larger tax wedge than the United States employ a larger percentage of their working-age population, and half of the countries with a smaller tax wedge employ fewer people.

I am well aware that correlation is not causation, but an entire economic theory based on the premise that a causal relationship exists without any hint at a corollary one? That is some profoundly detached thinking.

I have nothing against cutting taxes specifically. In fact, I wish the anti-tax advocates were right. I wish tax cuts reduced tax evasion, but tax evasion increased after the implementation of the Bush tax cuts. I wish lower capital-gains taxes incentivized investments in new enterprises, but they don't. I wish there were more than a notional reason to believe that cutting corporate tax rates would lead more foreign businesses to invest in the United States, but there isn't. Most of all, I wish that tax cuts would solve our unemployment problem, but there is absolutely no reason to think that they will.

I feel no animus toward anti-tax policies, but I do harbor an extreme distaste for ineffective policies that waste large sums of money while achieving no positive outcomes. It just so happens to be the case that most policies informed by anti-tax economic theory are profoundly wasteful and achieve nothing.


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