Why increasing taxes is bad

These tax cuts will simply add more overcompensation for those why have already got the most. When Howard left office, it was Tax would need to be 2. Tax would need to be 3. Stimulus is only useful if it generates additional spending in the economy. If the intended stimulus is saved, then it does not increase spending and is therefore wasted.

During a recession people become worried about the future and they attempt to build up a financial buffer by saving money. They do this in case they lose income through less hours or work or losing their job entirely. This means a large proportion of any tax cut that go to high income earners will be saved and its stimulatory effect will be much smaller.

Tax cuts and money given to low-income households are more likely to be spent as these households spend almost all their income on the essentials of life and have little or no capacity to save. These means that the stage 3 tax cuts, which mainly go to high income earners are likely to be poor stimulus.

The timing of the stage 3 tax cuts also makes them poor stimulus. They are not legislated to come into effect until It is very unlikely that the economy will need major stimulus that many years after the recession. The Government when it legislated the stage 3 tax cuts in and then again when they increased them in said that they were affordable because of the expected strong economic growth out to The Government was arguing that when times were good, we should cut taxes.

Since the economy has collapsed into recession following the coronavirus pandemic. The Government is now effectively arguing that when times are bad, we need the same tax cuts. It is commonly believed that taxation is deeply unpopular with the public. But polling by the Australia Institute shows that people have a more sophisticated approach to taxation than is often understood. Australia Institute research polled a nationally representative sample of 1, Australians about their attitudes to tax.

When respondents were asked about budget priorities, the most popular response was spending on government services like health and education chosen by 36 per cent of respondents. The second least popular was tax cuts 12 per cent of respondents , the least popular was decreasing the deficit and repaying debt nine per cent of respondents.

He showed that tax rates could be so high that cutting them would actually increase revenue and raising them could decrease revenue. So, for example, consider a high-income Californian who is currently paying Then imagine that the advocates of higher tax rates get their way and raise his federal tax rate to 70 percent.

Put aside all the other ways he might adjust, and consider just his decision about how much to earn. His incentive to earn an additional dollar has fallen from Is it hard to imagine that that Californian will work less? In a perfectly competitive economy, with no monopoly power or other distortions — which is the kind of economy conservatives want us to believe we have — everyone gets paid his or her marginal product.

In that case, however, why do we care how hard the rich work? So the social benefit from getting high-income individuals to work a bit harder is the tax revenue generated by that extra effort — and conversely the cost of their working less is the reduction in the taxes they pay.

Or to put it a bit more succinctly, when taxing the rich, all we should care about is how much revenue we raise. The optimal tax rate on people with very high incomes is the rate that raises the maximum possible revenue. The fact is that there are gains from trade, and the fewer people there are producing things, the less trade there is. There is no contradiction between the idea that people are paid their marginal product and the idea that when they produce, other people benefit.

For more on this, see the essay by Robert P. Krugman, who is quite rich whether measured by income or wealth, is excluding himself from society. The vast majority of Americans do.

If you poll people about whether the rich should pay more in taxes, the majority will typically say yes. In a poll conducted by The Hill , 75 percent of respondents thought that the rich should pay a rate of 30 percent or lower. Unfortunately, the poll specified neither whether the question was about marginal tax rates or average tax rates, nor whether it was about income taxes or taxes in general.

Still, the data are striking. The median response of almost all income and demographic groups was that the maximum should be 25 percent. Hiking the marginal tax rates on labor or capital will reduce the incentive to work or save even if the higher revenue will be used well. There are other ways to raise a dollar of revenue for any given purpose. That reality is obscured when we focus on these effects of taxes and spending. Erica York is an economist with the Tax Foundation based in Washington.

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