RISING TIDE, RISING
BOATS?
An Examination of Tax Policy’s Ramifications on Economic
Growth and Well-Being
Presented by: Bettina Jones
Preview
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Introduction to the topic
Literature review
Methodology of the research
Problem analysis
Policy recommendations
Conclusion
Introduction to the Problem
■ Hot debate: what is the overall effect of tax
increases/decreases on society?
■ In the U.S., this is usually a partisan issue
■ While free markets are economically efficient, they
also experience market failure.
■ What is better for the society overall? Of course, we
need both growth and welfare, but what is the
equilibrium between the two?
Literature Review
■ Central question of the literature: does growth lead
to equality or equality lead to growth? (Which came
first, the chicken or the egg?)
■ Many researchers have found that there is a
negative relationship between taxes and growth.
■ Why? Because taxes increase cost of activities and
decrease willingness to risk.
Literature Review
■ Different types of taxes can have different
economic/social effects
■ Progressive taxes (economically bad, socially good)
■ Regressive taxes (economically good, socially bad)
■ Flat taxes (economically good, socially bad)
■ Basic problem in the literature: Trickle-down economics
vs. income equality-first economics
■ = Multiplier effects vs. spend-to-save ratio
Methodology
■ 3 research papers are examined, each arguing
different sides of the issue.
■ Both theoretical accuracy and results of the
regressions are considered.
■ From the failings/successes of all three papers, 3
main policy recommendations are drawn.
ANALYSIS OF THE
PROBLEM
Part 1: In Support of Tax Cuts for Economic Growth
“The Impact of Tax Cuts on Economic Growth: Evidence from the Canadian
Provinces.” Ferede and Dahlby, 2012.
Ferede and Dahlby, 2012
■ General results:
■ Higher corporate income tax rate, lower GDP per capita
growth rate (-0.125 at the 95% confidence level)
■ These figures were mainly due to the decreased
likelihood of investing , which has sense to it.
■ We can only draw conclusions about corporate income
taxes—sales tax and personal income tax were
positive/insignificant.
ANALYSIS OF THE
PROBLEM
Part 2a: In Support of Income Equality as an Economic Growth Tool
“Do Rising Top Incomes Lift All Boats?” (Andrews, Jencks, and Leigh, 2011).
Andrews, Jencks, and Leigh (2011)
■ Study of 12 developed nations between 1905 and 2000
■ After 1960, 1% increase in top decile’s income share is
associated with an 0.12% rise in GDP growth during the
following year.
■ Mirror image of Kuznets Curve
■ But, it was also, of course, associated with loss to lower
90%
■ Their “boat” did not reach a break-even point until 13
years later
ANALYSIS OF THE
PROBLEM
Part 2b: In Support of Income Equality as an Economic Growth Tool
“New Data Illustrate the Failure of the Trickle-Down Experiment.” (Duke, 2015)
Duke (2015)
ANALYSIS OF THE
PROBLEM
Part 3: In Support of Tax Cuts to Boost Growth
“Marginal Tax Rates and U.S. Growth: Flaws in the 2012 CRS Study” (Taylor and
Taylor, 2014)
Taylor and Taylor (2014)
■ Before the 2012 U.S. Presidential Election (Incumbent
Obama vs. Romney), the Congressional Research Service
(CRS) released a paper
■ The paper (Hungerford, 2012) claimed no relationship
between marginal tax rates and economic growth
■ This was viewed as politically motivated (supporting
Obama and refuting Romney)
■ Taylor and Taylor redid the study using the same data, but
making some changes
Taylor and Taylor (2014)
■ They used lags to determine years-long after-effects
■ They used dummy variables to control for various
aspects (international/local events, growth rate of
monetary base and labor force, etc).
■ The F-Statistic was significant at the 1% confidence
level. In Hungerford’s study, the F-Statistic was not
significant at all, which led him to say there was no
relationship.
Policy Recommendations and
Conclusions
■ 1. Researchers should be wary of “eyeballing bias” and take as
many control factors as possible into consideration. Time lags
should also be put in place to allow time for policy changes to
take full effect.
■ 2. Researchers should break down taxes into their types
(income, corporate income, sales, property) and also ensure
that it is marginal tax rate, not average tax rate, that they
consider.
■ 3. Policymakers should be open to accepting the positive sides
and negative sides of both arguments. Lowering corporate
income taxes does seem to cause economic growth, but
economic growth is not necessarily the only measure of a
society’s well-being. Policies should be more well-rounded.