Sep 17 2010

Obama versus the supply-siders – to extend the Bush tax cuts or not? That is the question…

As the United States enters its mid-term election period, one of the major issues being discussed in Washington D.C. is whether or not the “Bush Tax Cuts” of 2001 and 2003 should be extended. In essence, the tax cuts under the previous president lowered America’s marginal tax rates at all income brackets. From the Wikipedia article on the “Bush tax cuts”:

  • a new 10% bracket was created for single filers with taxable income up to $6,000, joint filers up to $12,000, and heads of households up to $10,000.
  • the 15% bracket’s lower threshold was indexed to the new 10% bracket
  • the 28% bracket would be lowered to 25% by 2006.
  • the 31% bracket would be lowered to 28% by 2006
  • the 36% bracket would be lowered to 33% by 2006
  • the 39.6% bracket would be lowered to 35% by 2006

To be clear, the White House and president Obama do not want to repeal all of the tax cuts above, only those enjoyed by those in the highest income bracket. The 35% marginal tax rate only applies to households earning above $250,000 in the United States. This bracket includes less than 2% of American households. So what Obama wants to do is raise the marginal tax rate by 4% on income earned above and beyond $250,000. Only a couple of million Americans will be affected by this tax increase, while more than 98% of American households will experience no increase in income taxes.

The backlash against Obama has been fierce. The main argument against raising taxes on the richest Americans comes from the Republican party, who argue that higher taxes on the rich will decrease the incentive for workers to produce more output and increase productivity to earn higher incomes. In addition, say the Republicans, it is the rich who are the investors, the capitalists, the firm owners in an economy. Increasing income taxes on the rich will decrease their incentive to invest and thus decrease the overall demand for labor in the nation, leading to lower overall levels of employment and national output. This supply-side argument claims that higher taxes may in fact lead to less taxable income, thus lower tax revenues for the government.

The Economist’s Free Exchange Blog wrote a piece last year on supply-side economics and the Laffer Curve, a popular graphic used by the supply-side to argue against increases in taxes.

Laffer Curve

“The basic reasoning behind the so-called “Laffer curve” is plain, uncontroversial, and by no means was discovered by Arthur Laffer. There is nothing to tax if no one produces anything. But taxes affect the return and therefore the motive to supply labour to economic production. An increase in the tax rate can reduce the pool of wealth to tax — the tax base — by reducing the supply of labour. No taxes, no revenue. Also, 100 percent tax rates, no revenue. Somewhere in between — exactly where depends on, among other things, the responsiveness of labour supply to after-tax wages — there will be a point at which an increase in rates delivers a decrease in revenue. If the tax rate is already past that point, a tax cut delivers more revenue.

…labour supply is just one of many ways in which an increase in tax rates may reduce the effective tax base. In addition to working less, individuals may alter their savings and investment patterns, bargain to shift more of their labour compensation to untaxable perks and benefits, move to a different tax jurisdiction, consume more tax-deductible goods, or simply hide income from the tax authorities.”

As Laffer’s model shows, at certain tax rates, a tax cut will lead to an increase in tax revenue. So how can policy makers be sure whether the United States is currently at a point on its Laffer curve that an increase in taxes won’t result in a decrease in tax revenue?

“Supply-siders” who oppose Obama’s plan to repeal the tax cut, and even argue further tax cuts would benefit the US economy, need to look more carefully at where America is on the Laffer curve.

Republican politicians of late have exhibited a dismaying lack of respect for basic science, and it is not much of a surprise that many are also cavalier about fiscal economics. At current tax rates, new cuts will not “pay for themselves” in the short run. Emphasizing this point, however, does not begin to imply that raising tax rates is smart or harmless.

In a separate piece on the Economist’s blog, the relationship between tax rates and long-run economic growth is further analyzed.  The blog presents the main point of the supply-side argument:

Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent.

On the other hand…

…we find that a tax cut of one percent of GDP increases real output by approximately three percent over the next three years.

So do tax cuts “pay for themselves” as some politicians in the United States have argued in opposition to Obama’s desire to let Bush’s tax cuts expire?

Tax cuts don’t exactly “pay for themselves”, but they also don’t diminish revenue after about two years. That is, after about two years, the government receives revenues equal to what it would have received at the higher rate, but taxpayers enjoy a lower burden. It is an important advance to discover that because cuts do lead to an immediate dip in revenue, they often inspire offsetting tax increases that retard the growth effect of the origina cut. Nevertheless, the effect of cuts on output is generally strong enough to bring revenue back to where it would have been otherwise.

So it’s possible that keeping taxes lower may indeed lead to higher growth and more taxable income down the road in the United States. But all the above analysis neglects to take into account one other VERY important consideration that the US government must consider at this point in time. In a year in which several European nations, most notably Greece, have encountered debt crises, the need to generate tax revenues to finance government spending is as important as ever.

Ironically, some of the same people who oppose ending the Bush tax cuts on the rich also oppose deficit financed fiscal stimulus. People like Niall Ferguson argue that continued deficits threaten to “bring down the US bond market” as foreign and domestic investors lose faith in the US government’s ability to pay off its ever growing national debt. These “deficit hawks” argue that the US should take drastic steps to balance its federal budget, much as several European governments have begun to do, to reduce the likelihood that investors will begin demand higher interest rates for investing in government bonds, which in turn could drive up interest rates for the private sector, crowding out private investment and plunging the US economy into another recession.

The tradeoff may come down to this. Higher taxes now, or higher interest rates AND higher taxes  in the future. Raising taxes on the rich now will allow the US to achieve a more balanced budget in the future. This means less government borrowing, less government debt, and lower interest rates on government bonds and in the private sector. It also means that there will be less debt to pay interest on, which makes debt repayment (currently almost 10% of the government’s non-discretionary budget),  less of a burden in the future. A more balanced budget now (achievable if we repeal the tax cuts for the riches Americans) means less debt in the future, lower taxes in the future, and lower interest rates in the future.

I’ve always said that humans are short-run creatures living in a long-run world. I think Americans epitomize this reality. American voters can always be convinced to vote against new taxes, or vote for the guy who promises to lower their taxes. But in this case, over 98% of Americans will not even be affected in the short-run, however in the long-run the majority stands to gain from tax increases on the rich in the form of less debt to be repaid and more private investment as government borrowing and the resulting crowding-out of interest sensitive spending by the private sector is reduced.

By the way, one of the most prominent supply-side economists of the last half century agrees with me on this one. Here’s former Chairman of the Federal Reserve Alan Greenspan arguing for a repeal of the Bush tax cuts:

Discussion questions:

  1. Under what circumstances would a tax increase harm not only workers and firms, but reduce government tax revenue as well?
  2. What would a Keynesian say about the wisdom of raising taxes at a time when unemployment is as high as it is in the United States right now?
  3. How does achieving a more balanced budget now assure that Americans will have to pay less in taxes in the future?
  4. Do you believe that asking the riches Americans to pay 4% more in marginal taxes now will lead to more unemployment in America? Why or why not?

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

32 responses so far

32 Responses to “Obama versus the supply-siders – to extend the Bush tax cuts or not? That is the question…”

  1. Nick Beedeon 09 Sep 2007 at 9:49 pm

    The Laffter Curve's purpose, I believe, is to show at what taxing percentage would the tax revenue be most beneficial. I find this interesting because toward the end of this article, it states:

    "In addition to working less, individuals may alter their savings and investment patterns, bargain to shift more of their labour compensation to untaxable perks and benefits, move to a different tax jurisdiction, consume more tax-deductible goods, or simply hide income from the tax authorities."

    Doesn't this mean that the graph could never be precise? The graph's purpose is to show at what exact point on the graph would be most beneficial, but that point can change daily if, according to this quotation, so many individuals have the options to alter their savings, which, for that individual, changes the number of which the best percentage would benefit the government more. Individuals in the free market can do this at any time, so how could the Laffer Curve be accurate? What does it really show? It may point governments in the right direction, but not much else.

    The article states "The basic reasoning behind the so-called “Laffer curve” is plain, uncontroversial". I agree that the reasoning is basic and plain, but uncontroversial? The accuracy is arguable.

  2. […] Hey, what are you Laffing at? The relationship between tax rate and tax revenue […]

  3. yunqimokon 04 Apr 2008 at 1:11 pm

    The Laffer Curve makes a lot of sense. Unfortunately, there is just no way to determine where the tax that will lead to maximum revenue will be at. This leads to great debate, since policy makers, depending on their political agenda, are able to manipulate and discern for the public where they think the point is at. For Republicans and supply-siders, they keep mantaining that the tax is above the maximum level, and that there should be tax cuts. However, there is nothing solid to prove or disprove this theory. In the end, it all goes back to politics as leaders know that the ordinary non-economist citizen would love to have tax cuts, and then support that government. So in effect, the Laffer curve is quite useless.

  4. Jack Loon 07 Apr 2008 at 10:25 pm

    This concept of the relationship between tax rate and tax revenue seems logical. However, since the article mentions that we never really know where we are on the curve, doesn't it make the Laffer Curve useless? Tax cuts have become merely a tool for political leaders to gain support. The common citizen would raise their fists and shout "Aye!" at the sound of a tax cuts. Afterall, tax cuts means you're better off right? Or not.

  5. ElaineLungon 07 Apr 2008 at 10:35 pm

    I kind of lol at the Laffer Curve every time I see it. Why? Well, obviously its name, but also as others have pointed out, its (lack of) usefulness. Sure, it's logically sound, but I'm not entirely convinced of its practical use. Nick asks if the Laffer Curve could ever be accurate — and the clear answer appears to be no. McCain and co. like to go on about tax cuts for all, apparently ignorant of the significant portion — a portion we could possibly be on — of the Laffer Curve that show a decrease in taxes may only decrease revenue.

    Blah blah. A lot of what they say is talk, anyways.

  6. Chan Min Parkon 07 Apr 2008 at 11:07 pm

    The explanations for the Laffer Curve make perfect sense. At a certain point, tax revenues are maximized. Low tax rates will stimulate investment etc while high tax rates will allow the government to bring in tax revenue. Somewhere in the middle, tax revenue is maximized. However this is simply theoretical because at low tax rates, nobody knows what the people will do. If tax rates are lowered, some people might go out and make more money. However some might work less and make the same amount of money. In that case, investment is not stimulated and people just simply work less. So its make sense but its theoretical

  7. kevinyehon 07 Apr 2008 at 11:54 pm

    Theoretically wouldn't the government be able to determine the nation's position on the Laffer curve by experimenting with tax cuts and raises and seeing their effect on the amount of tax revenue?

  8. Kristie Chungon 09 Apr 2008 at 12:37 am

    The Laffer Curve is logically sound, but as nations can never really determine where they are on the curve, it doesn't seem all that useful. There really isn't a way to determine what tax rate would generate the greatest revenue. For example, a lowered tax rate doesn't invoke a universal response; some people may spend more of their money, while others may not.

  9. kevinchiuon 09 Apr 2008 at 1:00 pm

    Do nations actually have to determine precisely where they are on the Laffer curve? Can't they figure out an approximate range (as in whether they will benefit from raising or cutting taxes) and proceed based on that? For instance, if a nation knows it is well below the "M" point, through determining/experimenting as Kevin Yeh pointed out, raising taxes should increase tax revenue. Then based on determining whether the tax revune is enough, they can change their policies the following year and see the effect. I just don't see why it's essential to know where point "M" is and precisely where a nation is on the curve. (This is all assuming the reasoning behind the Laffer Curve is uncontroversial and ceterus paribus)

  10. Jeewonon 09 Apr 2008 at 8:58 pm

    Laffer Curve is a great illustration of the relationship between tax rates and tax revenues, as we know for a fact that if the tax rate is raised to 100 percent, there would be no tax revenue because there is no incentive to work when people are required to give all their income to the government. However, despite the logic behind this Laffer Curve, we do not know where the nation's tax rate is on the Laffer Curve. In order to find the optimal point m, the government would have to experiment and determine what the tax rate should be. Yet, it is time-consuming and an experiment on the entire nation is not so easy. The Laffer Curve could also be flawed, since we do not know whether or not a declining tax rate acts as an incentive to work.

  11. MichaelChowon 09 Apr 2008 at 9:46 pm

    The concept behind the Laffer Curve is pretty straight forward illustrating its relationship between tax rate and tax revenue. But like what Jack already mentioned I don't really see much significance in this whole "Laffer Curve" because the point of the the desired tax rate to achieve the maximum tax revenue cannot be determined by any unit or equation.

  12. judychenon 10 Apr 2008 at 10:00 pm

    Laffer Curve actually makes senses. Being a consumer, we don't want to buy things more expensive than we expected especially when we know the part of what we pay goes to government. Firms are profit maximizers as well, so why would they invest a lot when they don't get the expected rate of return back. Even though there's no equation can actually help us to determine what tax rate would maximize tax revenue, it still gives the government basic idea about what consumers and firms think.

  13. alicesuon 10 Apr 2008 at 11:28 pm

    Everyone seems to be asserting that the Laffer Curve is "useless" because it's inaccurate and doesn't allow us to determine EXACTLY where point "m" is on the curve. However, this doesn't mean that it renders it completely insignificant. The Laffer Curve, like most of the other curves and graphs we have learned about, is a theoretical manifestation of economic philosophy. It is difficult and maybe impossible to pinpoint the exact point on the curve that our economy is located on at the moment, since as Nick Beede pointed out, various factors could cause it to shift as often as every day; however, isn't this true for the other curves we have learned about as well? The very same factors that cause ambiguity about our position on the Laffer Curve also cause uncertainty in the level of full employment, the exact spot for allocative efficiency, etc. All the statistics that we get from economic graphs and calculations are based on surveys/experimentation with data that could change from day to day. What they are meant for, however, is to help us understand economic concepts such as why tax cuts can be either beneficial or harmful to the economy, depending on the status of the economy at the time; and in this regard, the Laffer Curve serves its purpose in a straightforward and simple way.

  14. Mondon 14 Apr 2008 at 1:07 am

    In theory if the government raised and cut taxes over the courses of the next few years or decades, it would give them a good idea on which does it yield the maximum point of tax revenue return. It does kind of seem useless at this time, but maybe in a few years, it can give up a new insight into the tax revenue of the past few years or so.

  15. christianoon 02 Sep 2009 at 10:06 pm

    The laffer curve illustrates that there is an optimal tax rate which yields the most possible tax revenue for the government. This makes sense as too high tax rates would decrease peoples' incentive to work and firms' incentive to invest.

    The relationship between tax rates and economic growth is generally indirect as taxes increase, consumption and investment decrease causing a decrease in AD. In recessions, it would be reasonable to have low taxes in order to stimulate C and I whereas in good times the government should place relatively high taxes in order to balance their deficit from the previous tax cut.

  16. Marc Lemannon 03 Sep 2009 at 7:55 am

    A tax increase could harm workers and firms by decreasing their disposable income, which as a result could also reduce government tax revenues as people would spend less on other taxed goods. An increase in tax could also result in a less incentivized workforce, or with people attempting to evade the taxes.

    To a certain point, a cut in taxes would result in flat or increased tax revenue for the government in the long run. Initially, workers could work less and still receive the same disposable income, but eventually the tax cut would incentivize workers to work harder for their money. This is subject to many factors, and should be researched by governments before implemented to find out how beneficial it could be to the economy.

    In a Republican view-point there is probably an inverse relationship between tax rates and economic growth. The lower the tax rate is, the more disposable income the consumers have to spend on goods, increasing consumption and investment in aggregate demand. On the other hand, the classical viewpoint might believe that there is no relationship, and that taxes can increase and people will have to work harder, also leading to growth in the economy.

  17. Christian Clausenon 03 Sep 2009 at 9:14 pm

    1. Under what circumstances would a tax increase harm not only workers and firms, but reduce government tax revenue as well?

    When the tax % is too high, which means that the workers become less efficient, and although their tax is now higher, their productivity has gone down.

    2. What do you think of the Republican view in the United States that tax cuts will “pay for themselves” through increased national income? Will cutting taxes lead to more tax revenue in the short-run? What about in the long-run? Discuss.

    Initially it might give boost in the morale, urging the workers to be more productive and earn and earn much more. But there is a limit to what people actually need, and in the long-run they will realize that they can now easily sustain themselves by working less.

    3. What is the likely relationship between tax rates and economic growth? Explain.

    I can't think of a graph that'd resemble this relationship, other than another laffer curve with economic growth on the x-axis.

  18. Rocio Perezon 06 Sep 2009 at 1:39 am

    What do you think of the Republican view in the United States that tax cuts will “pay for themselves” through increased national income? Will cutting taxes lead to more tax revenue in the short-run? What about in the long-run? Discuss.

    I agree with the statement, but not entirely in the short run. A sudden tax cut means that a worker's disposable income is now higher for the same amount working hours, hence there will be no sudden motivation to work harder or dedicate more time, hence no dramatic increase in productivity. In the long run, however, a nation with lower income taxes will have a harder working force as each individual receives a higher reward, but this is a very generalized statement. Very important is the fact that nations with lower progressive taxes attract high income earners who contribute to the country's economy and overall national income. From what I've seen in Switzerland, it is highly suitable for successful people such as high earning athletes or even firms.

  19. Gabriel Martinon 06 Sep 2009 at 7:14 pm

    Very high taxes result in a loss of government revenue. Since the tax rate is very high, workers only get to keep a small percentage of their income and therefore have little incentive to work hard. If the economy is in a recession then a tax increase would certainly harm workers and firms as well as reduce government revenue. There is an inverse relationship between tax rates and economic growth. Due to a lower tax rate, consumption will increase because of a higher disposable income and investment will increase because of lower costs for firms. As a result AD would increase and output (real GDP) would increase. The opposite is true for higher taxes. Higher taxes decrease the disposable income of households and increase the costs of firm so consumption and investment would decrease. The fall in AD would cause a fall in output.

  20. Alex Hanon 06 Sep 2009 at 11:22 pm

    If a government raises its direct tax rate too much, workers will be disincentivized to work harder as they will keep less of their income. This has a negative impact on the economy's level of output. Also, their disposable incomes will shrink which reduces spending. Thus governments will receive less indirect taxes. This could be disadvantageous for the country because governments will not have enough revenue to provide private goods.

    In the short run, workers have suddenly faced increased taxes so they will slowly start to slack off in their jobs and start to buy less which will slowly reduce revenue for the government. In the long run I think this will worsen. People may start to find sly ways to avoid being taxed an example may be buying more tax- deducible goods. Or people may leave the country to seek a place to live where they can be taxed less. Thus the government will continually lose tax paying citizens.

    Supply-siders will say that there is an inverse relationship between tax rates and economic growth. They view taxes as anti growth because workers are disincentivized to work or stay in the country. But a demand-sider may argue that if taxes are collected and the government spends on infra structure, public goods or health care, people may be incentivized to stay in that country and may be ok with living there despite high taxes. In this case, taxes will not necessarily decrease the nations productivity.

  21. Younes Huberon 07 Sep 2009 at 12:24 am

    I beg to differ with all the comments on the laffer curve's usefulness. I understand how you all might perceive this graph to be utterly useless as you can never truly know where your nation currently stands there. However, in my opinion you are all failing to see the "point" of the laffer curve. It is not meant to be used as an exact measurement to know whether to raise or lower taxes (since the ideal tax rate may vary) , more likely, I think, the laffer curve is a graphic representation of the concept that taxes cannot be too high nor too low if the maximum tax revenue is to be achieved.

  22. Laura Perezon 07 Sep 2009 at 3:27 am

    1) When workers are being less productive and causing them to find measures of avoiding paying high taxes and earning high income (such as moving to another country where tax cuts are less). It is after this point that the government was better off setting lower tax rates so that each person pays less but has more incentive to work harder since they are keeping a larger portion of the money they are earning and are more prone to accept better jobs and higher wages, which otherwise might have forced a worker to think twice about accepting this.

    2) In the short run wages are fixed which means that tax cuts will result in higher profits for the firm. This does not become higher tax revenue until the LONG run when wages are flexible. This money earned from not paying tax rates will increase the wages in the firm and invest in more efficient capital and therefore increase incentive to work and increase productivity. But in the short run there should be no difference in the tax revenue with a cut in taxes.

    3) Tax revenue increases up to a certain point (the peak on the Laffer curve) but I don't think economic growth follows this pattern. The greatest economic growth would exist when tax rates are 0% because the incentive for people to work would be at its highest. So the most likely relationship between economic growth and tax rates is an inverse one.

  23. Laura Perezon 07 Sep 2009 at 7:29 pm

    I realized that for my second answer I was only thinking of corporate taxes…

  24. chamonix.echl.f09on 08 May 2010 at 4:49 am

    1. A tax increase will hurt both workers and firms as well as the government if the tax rate is far too high. This will cause any number of tax evasion tactics, as listed in the post, which will mean that the government revenue drops. If the government raises taxes high enough, the incentive to work will vanish.

    2. I do not agree with the Republican view that tax cuts will "pay for themselves." Unless the government is taxing at so high a level that tax evasion is the norm, there will be hardly any increase in tax payments. Although a drop in taxes will promote spending and therefore encourage economic growth in the short run, this will generally not be to a significant enough degree to last into the long run. The nation will also lose many vital social services that are essential to the current operation of the economy.

    3. If tax rates are lower, then people will spend more, thus encouraging economic growth. Therefore there is an inverse relationship between taxes and growth. However, very low levels of taxes will lead to a decline in economic growth as less people will be able to work (cuts in education and health care) and willing to work (if the government provides the people with nothing, they may move.)

    Chamonix

  25. chamonix.echl.f09on 08 May 2010 at 4:57 am

    Elaine,

    I thought that your post was very interesting. It is true, a lot of the right-wing Politicians seem to have very unrealistic ideas of taxes and want tax cuts without foresight. I think that these people like to use the Laffer Curve to prove untrue points about taxation rates. However, I do think that we can get an idea of where we are on the curve. By examining the rate of tax evasion and comparing it to tax rates, we can understand our place on the curve. (I know that obviously tax evasion is hard to calculate, but we could look at social security numbers or voter registration and changes over time in number of people paying taxes.) By examining these rates in different states or localities, we would be able to get a general idea of the rates of the curve. I think that the main thing is that we are not, as the right-wing like to attest, taxing more than the optimum rate. We would surely see a greater incidence of tax evasion. So, in short, I agree that it’s hard to calculate but don’t think that it’s useless.

    Thanks for the post,

    Chamonix

  26. axu2on 04 Oct 2012 at 6:10 pm

    Under what circumstances would a tax increase harm not only workers and firms, but reduce government tax revenue as well?
    A tax increase will harm both the workers and the firms. Because of the tax increase the workers will be less productive since they will be avoiding to pay this higher taxation. Workers will be disincentivized to work hard. With less private income, workers would reduce spending thus will harm the whole economic system. Reduced spending result in reduced revenue to provide.

    What would a Keynesian say about the wisdom of raising taxes at a time when unemployment is as high as it is in the United States right now?
    According the Keynesian theory government spending can be used to increase aggregate demand, thus increasing economic activity, reducing unemployment and deflation. They would raise saving thus lower the demand for both products and labour. They would insist on tax cuts instead.

    How does achieving a more balanced budget now assure that Americans will have to pay less in taxes in the future?
    Tax reductions will spur growth and generate revenues, which will pay not only for the tax cuts but also for other expenditures, ultimately leading to a balanced budget.
    Do you believe that asking the riches Americans to pay 4% more in marginal taxes now will lead to more unemployment in America? Why or why not?
    Because the government need money to do their projects, they always gets bigger and bigger thus there will be higher tax. Such as the riches American to pay 4% more in marginal tax. Thus because it is asking the riches to pay, as the riches do have higherarchy in any firms they have less money to pay the employees. With no money to pay the employees, there will be unemployment.

  27. mtuin2on 09 Oct 2012 at 1:01 am

    •Under what circumstances would a tax increase harm not only workers and firms, but reduce government tax revenue as well?
    A tax increase would be harmful to both sides if it was set at too high a rate. Not only would workers and firms suffer from an extremely high tax rate, but the high rate would be a disincentive to earn income, which may actually lead to a reduction in government tax revenue as the income earned and investment into the economy decreases.

    •What would a Keynesian say about the wisdom of raising taxes at a time when unemployment is as high as it is in the United States right now?
    Keynesians believe that the government should intervene to attempt to raise aggregate demand in an economy, in order to increase potential output and therefore employment. They believe this can be accomplished through tax cuts, because by reducing taxes people have more money to spend and therefore will increase aggregate demand. Therefore, Keynesians would be against raising taxes when unemployment is currently at such a high rate.

    •How does achieving a more balanced budget now assure that Americans will have to pay less in taxes in the future?
    A lot of the taxes collected need to be used so that the government does not need to borrow more money for spending, putting themselves further into debt. So, if the government were to balance their budget now, they would not need to collect as many taxes in the future, therefore benefitting Americans.

    •Do you believe that asking the richest Americans to pay 4% more in marginal taxes now will lead to more unemployment in America? Why or why not?
    In theory, by taxing the rich more (who create jobs, invest, etc. and drive the economy), there would be more unemployment because these higher taxes create a disincentive for the rich to continue creating jobs and investing. However, I think that, in reality, a 4% increase in tax rate will not drive the rich to attempt to earn less just so that they can drop to a lower income bracket – many of them are far over the bottom limit for the highest income bracket and so rather than trying to reduce their income to avoid a tax, they may actually try to earn more to offset the cost of that tax. However, a significantly larger increase in tax rate may have a more negative effect.

  28. Nadiya Son 09 Oct 2012 at 9:33 am

    •Under what circumstances would a tax increase harm not only workers and firms, but reduce government tax revenue as well?
    A tax increase could be harmful to everyone, workers, firms, and the government, if it was too high. If tax rates are raised unreasonably, then there will be less incentive for people to earn more money, as people stop trying to raise their income, there will be less taxable income overall, therefore the government's tax revenue will decrease.

    •What would a Keynesian say about the wisdom of raising taxes at a time when unemployment is as high as it is in the United States right now?
    Keynesians believe that government intervention is necessary in order to raise aggregate demand. They believe that this can be done by tax cuts (not tax raises), so they would be against the plan to raise taxes on the rich, especially in such times of low employment, where employment levels do depend on the rich who have the power to create more jobs.

    •How does achieving a more balanced budget now assure that Americans will have to pay less in taxes in the future?
    A large portion of the tax collected needs to be used in order for the US government to stop borrowing money and falling further into debt. It is better to get rid of this debt now, before it and its interest rate increases, so in the future, tax payers would have to pay even more to pay off this debt.

    •Do you believe that asking the richest Americans to pay 4% more in marginal taxes now will lead to more unemployment in America? Why or why not?
    According to this article, an increase in tax to the rich would lead to more unemployment in America because the rich create more jobs, invest, have a large impact on the economy etc. However a 4% increase is not too large of an increase to stop people from wanting to be in the top bracket, especially because many are way above the lowest level of that bracket, so bringing down their income would be pointless, on the other hand this 4% increase might stimulate the rich to earn even more in order to balance that extra four percent. As long as the tax raise isn't too high, the incentive should still be there.

  29. sophie zhouon 03 Nov 2012 at 7:10 pm

    •Under what circumstances would a tax increase harm not only workers and firms, but reduce government tax revenue as well?
    According to supply side economists, when marginal tax rate decreases from certain level total tax revenue increases due to high income level population is encouraged to invest more. On the other hand, when marginal tax rate reaches a level where total tax revenue is in its maximum if government increases marginal tax rate, the total tax revenue decreases. This is because investors are discouraged from lower disposable income.
    •What would a Keynesian say about the wisdom of raising taxes at a time when unemployment is as high as it is in the United States right now?
    The aggregate supply curve, according to Keynesian, is parallel to the horizontal axis when the economy is producing with deflationary gap. When the economy face recessionary problems, the supply side policies are ineffective. Demand side policies allow the economy to recover from recessionary gap. The most effective expansionary demand side policy in this case, is to increase government expenditure. In order to finance government expenditure, tax revenue should be increased through increasing progressive income tax.
    •How does achieving a more balanced budget now assure that Americans will have to pay less in taxes in the future
    Government can finance its deficit either from collecting tax or borrow from domestic and abroad sources. If government borrow more now, they have to pay more interest in the future. On the other hand, if government finance through collecting high tax rate on wealthy population, they do not need to pay in the future.
    •Do you believe that asking the richest Americans to pay 4% more in marginal taxes now will lead to more unemployment in America? Why or why not?
    I believe the above scenario will happen if the marginal tax rate is at its optimum before the increase in tax rate. This is because if marginal tax rate is at its maximum, the total revenue is also at its maximum.

  30. ypaion 18 Nov 2012 at 6:20 am

    • Under what circumstances would a tax increase harm not only workers and firms, but reduce government tax revenue as well?
    If a tax increase is set at an extremely high rate, it will harm both sides. For the workers, although the tax rates have increased, the efficiency has decreased; and for the firms, there will be fewer incentives for them to earn income. In addition, when the marginal tax rate has gone up to a level where the total tax revenue is at its maximum if the government increases it marginal tax rate, then the total revenue will decrease, and thus leads to reduced government tax revenue.
    • What would a Keynesian say about the wisdom of raising taxes at a time when unemployment is as high as it is in the United States right now?
    Keynesians supports lowering taxes. Their belief is that the government should interfere in the economy by raising aggregate demand in order to increase output. Thus, raising taxes at a time when unemployment is high in the United States would not be favourable for Keynesians.
    • How does achieving a more balanced budget now assure that Americans will have to pay less in taxes in the future?
    If the Americans have more balanced budget now, then it means that they will have less debt in the future. And since people would have to pay less money due to less debt in the future, it will mean that they have fewer taxes to pay. This would in turn benefit the Americans.
    • Do you believe that asking the richest Americans to pay 4% more in marginal taxes now will lead to more unemployment in America? Why or why not?
    Although it is said that in theory, taxing the rich would lead to more unemployment rates in America, I believe that the 4% increase in tax rate is such a small number that it will not have a large change or effect to give the rich less incentive to invest or create more jobs for country, and thus won’t lead to unemployment. However, if the marginal tax rate is at the optimal point before the increase f tax rates, or that there is a larger percentage of increase of tax rates, then it might lead to a negative effect resulting more unemployment in America.

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