Phil Hauck's TEC Blog

Sunday, November 18, 2012

Approach to the Fiscal Cliff: Studies show ...

The Fiscal Cliff is apparently all about raising income taxes and figuring out what spending cuts to make.  Consider these approaches, based on studies of what has worked and what hasn't:
Tax Structure Changes:  A 2008 study (before the "Great Recession") of prior country experiences by Jens Arnold for the Organization for Economic Cooperation & Development suggested the most effective sequence to achieve growth via structure changes is:
First:  Property taxes and other recurrent taxes on immovable property are the most "growth-friendly."  They doesn't take away personal income already committed for household spending.
Second:  Consumption taxes ... if people spend, tax that ... with exemptions on survival requirements like food, medicine.
Third:  Personal income taxes.
Last:  Corporate income taxes.  Taxing businesses' net income prevents those dollars from being used to create jobs.  They "appear to have the most negative effect on GDP per capita."
Spending:  Studies by Reinheart/Rogoff and Kumar/Woo:  At 90% debt-to-GDP (the U.S. is at 103% and growing), "the debt effect becomes large and negative" ... causing "average growth to fall significantly."
A Biggs/Jensen/Hassett review of 21 countries' experiences indicated "the more aggressively a country cuts expenditures, the more likely it is to successfully reduce debt in the long-term."  Where successful consolidation has occurred, the typical relationship of revenue from spending cuts vs tax increases is 85/15.  "In particular, cuts to social transfers, largely entitlement spending and the government wage bill, are more likely to reduce debt and deficits than cuts to other expenditures. ... Cutting government spending reduces GDP growth in the short run, even though it increases the likelihood of economic growth in the long run." 
These are from the 2011 book, The 4% Solution.
        So, what approaches are our representatives in Washington taking?

1 comment:

  1. It seems our friends in Washington are trying to do everything contrary to the evidence for show purposes. What about letting the sequestration go into effect. It cuts spending and will be painful for government. They need to start feeling the pain. Thoughts?