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URL:  http://boards.fool.com/your-post-is-well-taken-but-there-is-a-caveat-30380037.aspx

Subject:  Re: The Fiscal Cliff-Solving the wrong problem Date:  11/14/2012  6:19 AM
Author:  MadCapitalist Number:  408433 of 455309

Your post is well taken but there is a caveat. Raising of the taxes on the wealthy will probably not affect their spending because their incomes will still be far more than they spend; however, a rise in the taxes on the middle class that spends nearly everything they earn will be lowered and hurt the economy.

Maybe investment and entrepreneurship, not spending, is the key. Maybe high marginal rates and highly progressive income taxes are destructive of economic growth. That is what numerous researchers have concluded. In fact, none of the studies that I found suggested that high taxes hurt economic growth because it reduces consumption. On the contrary, high taxes hurt economic growth because it reduces saving and investment (as well as the labor supply).

As Romer concluded:

"...investment falls sharply in response to exogenous tax increases. Indeed, the strong response of investment helps to explain why the output consequences of tax changes are so large."

Or Jens Arnold:

"There is also evidence of a negative relationship between the progressivity of personal income taxes and growth."

Or Åsa Johansson, Christopher Heady, Jens Arnold, Bert Brys and Laura Vartia:

"...high top marginal rates of personal income tax can reduce productivity growth by reducing entrepreneurial activity."

Or Gareth D. Myles:

"There is clear evidence that the personal income tax does affect the choice to enter entrepreneurship and the decisions of entrepreneurs. An increase in personal income tax reduces growth by discouraging entrepreneurship."

Or Laura Vartia:

"The paper finds evidence that corporate and top personal income taxes have a negative effect on productivity. In contrast, tax incentives for research and development (R&D) are found to have a positive effect on productivity. These effects are stronger in those industries that are inherently more profitable, have more entrepreneurial activity and are more R&D intensive, respectively."

Or Barry W. Poulson and Jules Gordon Kaplan:

"The analysis reveals that higher marginal tax rates had a negative impact on economic growth in the states. The analysis also shows that greater regressivity had a positive impact on economic growth."

Or Milagros Palacios and Kumi Harischandra:

"The evidence from economic research indicates that tax rates—and, in particular, marginal tax rates—do indeed influence individual behavior when it comes to working, investing, saving, and entrepreneurship. Perhaps most importantly, high and increasing marginal taxes contribute to lower rates of economic growth, reduced rates of personal income growth, lower rates of capital formation, lower than expected aggregate labor supply, and reduced entrepreneurship. In short, high and increasing marginal tax rates reduce economic growth by creating strong disincentives to hard work, savings, investment, and entrepreneurship."

Or Elizabeth M. Caucutt, Selahattin Imrohoroglu, and Krishna B. Kumar

"We find it interesting that a less progressive tax system, which is rarely perceived as a egalitarian measure, gives rise to increased growth, decreased inequality, and greater mobility for the poor in the long run, especially in light of contradicting claims in the literature regarding the connection between growth and inequality."

Or Neil Bania, Jo Anna Gray, or Joe A. Stone:

"Results for U.S. states provide support for the “growth hill” predicted by the Barro-style models: the incremental effect of tax financed expenditures on productive government activities is non-monotonic – initially positive (a positive linear effect), but eventually negative (a sufficiently negative quadratic effect). The decline arises primarily from the crowding out of private capital as the rising (distortionary) tax share reduces the net return to private capital."

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