Phil Hauck's TEC Blog

Thursday, January 31, 2013

More on our National Debt Debacle, all of which is unpopular

•  When a country starts to run into trouble:  Two sets of economists (Reinheart/Rogoff and Kumar/Woo) have done research of OECD countries that have gone through significant ups-and-downs that effectively states:  "At 90% of debt-to-GDP, the debt effect becomes large and negative causing a significant reduction in the rate of growth."
•  How to cut:  Another review of 21 OECD countries by economists Biggs/Jensen/Hassett, says "the more aggressively a country cuts spending, the more likely it is to successfully reduce debt in the long term.  A typical 'successful' consolidation consisted of 80% spending cuts and 20% tax increases."  In particular, they said, "cuts to social transfers, largely entitlement spending, and government wages, are more likely to permanently reduce debt and deficits than cuts to other expenditures."  It is a more effective way to lower government debt levels than increasing taxes.  It reduces GDP growth in the short run, but increases the likelihood and degree of economic growth in the long run.
 Tax Structure Changes:  A 2008 OECD study by Jens Arnold suggests these priorities for the tax structure change part:
First:  "Property taxes and particularly recurrent taxes on immovable property (assets/wealth), seem to be the most growth-friendly because they don't take away from spending capability  ... followed by consumption taxes, and then by personal income taxes." 
Second:  Corporate income tax increases appear to have the most negative efffect on growth of GDP per capita (i.e., they disrupt the trickle down of lower prices effect of additional investment).  "A reduction in corporate income taxes has a stronger positive effect on GDP per capita than a similar decrease in personal income taxation."  (Indeed, reducing corporate income taxes to zero would free major dollars for investment in R&D, testing, production and selling ... all of which adds jobs.  When profit dollars are siphoned for personal income instead, they would be taxed at personal income rates.)

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