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International Tax Competition
| Article
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18826 |
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Section : |
MODERN THOUGHT
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| Issue
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12 / 1991 |
6,487 Words |
| Author
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Alan Reynolds
Alan Reynolds is director of economic research at the Hudson
Institute, Indianapolis, Indiana. |
The seemingly obvious idea that bad tax policy can discourage economic growth was neglected before the mid-1970s--relegated to a minor branch of microeconomics called "public finance." Instead, the most prominent economists mainly argued over whether the budget deficit or money supply was the best tool for "demand management"--that is, for encouraging people to spend more or less, in order to "fine tune" the economy's short-term wiggles.
In a 1960 article in the New Republic, for example, Nobel laureate James Tobin of Yale advocated "restriction of consumption by [an] increase in personal income tax at all levels," in order "to bring under public decision the board allocation of national output." That is, the government should take money from ordinary folks, who would just spend what they earned, and instead use the loot to subsidize the politicians' favorite industries (presumably, those with the most generous campaign contributions). More than a decade later, in 1971, Lester Thurow of MIT wrote an entire book on taxation that somehow managed to completely ignore any possible effects on incentives or supply. "The aim of the macroeconomic policymaker is to raise or lower demand," wrote Thurow, farther adding "different taxes have different effects [only] because they affect the incomes of groups with different propensities to consume or invest." Taxes were still considered a method of manipulating how individuals or businesses spent money. Any effects on incentives to work or invest, or even to evade taxes or invest abroad, were either brushed aside or, more often, simply ignored. People would supposedly work just as hard, and earn and save just as much, whether their earnings were taxed at 20 percent or 70 percent.
By the late 1970s though, this sort of "demand management" economics had been discredited everywhere, except on our college campuses, by the experience of chronic "stagflation." Conventional, demand-side economists were baffled by the simultaneous experience of inflation and high unemployment. After all, they had always advocated "stimulating demand" to deal with unemployment, and "restricting demand" to deal with inflation. So, the experience of both high inflation and high employment meant the government would somehow have to stimulate and restrict demand at the same time!
Even within their own logic, it would have been perfectly logical of the apostles of "demand management" to advocate cutting tax rates in recession and cutting government spending in booms. Yet they instead turned that completely around and advocated more spending in recessions and higher taxes in booms. Since neither the new
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