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October 28, 2012

A tax agreement among economists

Much of the rhetoric is this national election comes down to tax policy. While taxes are often discussed in campaigns, the huge and growing public debt, the stubborn Great Recession, and our worsening income distribution has brought tax policy to the forefront.

Economists span the spectrum from liberalism to conservatism. When it comes to tax policy, they speak in a remarkably united voice. Politicians often detest economists’ prescriptions because they are designed with the long term in mind, while politics is decidedly short term.

Policies designed to spur economic growth and efficiency will yield dividends to us all. But, these dividends seem less obvious than their various costs. Taxpayers are troubled when economists recommend we give up some deductions of dubious economic rationale but rather the result of political pandering.

Economists’ policies are designed for efficiency. Economists see tax policy as a tide that will raise all ships, not raise some by sinking others. We view tax policy not as a tool for class warfare, from either the perspective of the 1 percent or the 99 percent.

I begin with recommendations designed to make the economy more efficient.

We can take our first cue from Canada, a nation with a more coherent economic policy than ours. Their corporate tax rate is now 15 percent, which is on the low side, but certainly not the lowest of prosperous and globally competitive nations. Their rationale is that the lower tax rate allows Canadians to consume products at a lower cost. Meanwhile, the nation is more globally competitive and export-oriented. A reduction in the corporate tax rate acts like an export tariff reduction. Economists universally agree that such tariffs make no sense at all.

If the profits of corporations are reduced, that tax revenue is better recovered by taxing those who command a share of profits through dividends and capital gains. In fact, by reducing the corporate tax and increasing dividends and corporate capital gains taxes, we can spur our export industry and domestic consumption without increasing the after-tax income of the wealthy. We simply tax these earnings at a later stage. Meanwhile, the economy grows. That is a no-brainer, but it smacks in the face of what some deem to be fair. There, we cut off our nose to spite our face. Canada does not, though.

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