Do Tax Cuts Lead to Economic Growth?

[Marokai Backbeat]

The answer to the thread question just seems to be "They can, but not always, and probably not income tax cut specifically, unless present rates are rather high, which they haven't been in decades."

Also, what Scott said. That tax rates don't really affect the economy as much as people suggest. (I'd say "regulations" can be included right along in that sentence, for that matter.)

[Torie]

Your hypo   Franknburger does not entail the government taking half the risk because if there are losses and no future profits, you/the corporation eat all the losses - unless you can sell the tax loss carryforwards to a third party for cash one way or the other. The US tax code and ancillary regulations has about 100 pages dealing with this issue, mostly in the context of mergers.

[Franknburger]

Your hypo   Franknburger does not entail the government taking half the risk because if there are losses and no future profits, you/the corporation eat all the losses - unless you can sell the tax loss carryforwards to a third party for cash one way or the other. The US tax code and ancillary regulations has about 100 pages dealing with this issue, mostly in the context of mergers.

Your point is valid for a complete start-up, but not for a going concern that is already profitable (and be it only due to importing into the US, with the intention to shift some of the production there as well).

[Torie]

Your hypo   Franknburger does not entail the government taking half the risk because if there are losses and no future profits, you/the corporation eat all the losses - unless you can sell the tax loss carryforwards to a third party for cash one way or the other. The US tax code and ancillary regulations has about 100 pages dealing with this issue, mostly in the context of mergers.

Your point is valid for a complete start-up, but not for a going concern that is already profitable (and be it only due to importing into the US, with the intention to shift some of the production there as well).

OK. You have profits from something else. I am not sure this is good policy by the way (the government, albeit even handedly - for once, subsidizing risk taking). I would be interested in a "dense" academic article on that point with real data, not just chat, if such a paper exists. Plus it creates an incentive for companies to become inefficient conglomerates - solely for tax reasons.

[Franknburger]

OK. You have profits from something else. I am not sure this is good policy by the way (the government, albeit even handedly - for once, subsidizing risk taking). I would be interested in a "dense" academic article on that point with real data, not just chat, if such a paper exists. Plus it creates an incentive for companies to become inefficient conglomerates - solely for tax reasons.

In fact, government would not be subsidising risk taking. It is just that government, by claiming a higher (nominal) share on profits, also takes a higher share of the risk that is associated with  profit generation.
To be clear: I am no friend of 'big government', but there are a number of (pretty costly) functions that government needs to assume (education, infrastructure, guaranteeing rule of law, etc.). If all that can be financed with 20% corporate tax - fine. But I don't know any country in the world that is able to maintain decent standards of public service provision at such a taxation level. So, tax decreases are typically financed by closing 'loopholes', which results in  effective tax rates that may be substantially higher than the nominal tax rate, thereby often penalising risk taking (which is never "business as usual", and as such typically not addressed properly by a "simplified" tax code).

I haven't seen (nor looked for) any academic article on that point, but I have myself done a few studies for organisations like the Asian Development Bank on individual countries' tax systems and their impact on business (especially small and medium enterprises).So, what I can offer you is a practioner's experience, and a plausible (though not empirically proven) explanation why tax reductions do not necessarily stimulate growth, and may on the long run even be counter-productive.

Otherwise: Your point on conglomerates is a good one. Haven't yet thought of it (I am more in the SME field). I may come back on it later, after giving it some more thought.

[Torie]

If taxable profits are calculated in a way that reflects really economic profits, then win or lose, it's tax neutral. If you artificially reduce taxable profits through accounting gimmicks (like accelerated depreciation), that loads the dice from an investment perspective. At the margin, it is a subsidy for investment. So, I'm hostile out of the gate, absent empirical data and more theory, that I don't possess at the moment.

[Franknburger]

If taxable profits are calculated in a way that reflects really economic profits, then win or lose, it's tax neutral. If you artificially reduce taxable profits through accounting gimmicks (like accelerated depreciation), that loads the dice from an investment perspective. At the margin, it is a subsidy for investment. So, I'm hostile out of the gate, absent empirical data and more theory, that I don't possess at the moment.

Have you ever done a return-on-investment calculation? In  the "profitable going concern" case, higher taxes mean lower cash-out during the investment phase, and lower cash surplus after break-even.  As the surpluses occur later in time, they are discounted stronger, so higher taxes tend to result in a higher internal rate of return. The effect depends of course on the specific payment and revenue streams, the extent to which investment costs are tax-deductible, and the discount rate applied. The longer the investment period, and the higher the discount rate applied, the stronger it will be.
In practical terms, this means that especially R&D and software  investments, which are typically 
not depreciated but directly written to expense accounts, and may require some time before generating earning / cost savings, become less profitable when taxes decrease. Large capital investment, e.g. construction of a new plant, may also be positively affected by high taxes.

IIRC, one of the points criticised in the 1980s by German corporations  in relation to the Reagan tax cuts was the exclusion of loss referral (to they extent it was ever allowed in the US, which is beyond my knowledge). German tax laws at that time allowed to refer losses back for up to two years. These corporations compared their past and projected tax debt under the German (56% corporate tax, but possibility of loss referral) and new US tax legislation (33% corporate tax), and concluded that German regulation resulted in lower average tax payment.

[Torie]

It thus appears that you agree with me.

[barfbag]

Yes because whether the increased revenue within the economy goes towards hiring people to handle investments, vacations, paying bills, or school, the money is spent somewhere and jobs are created at some point down the line. It then creates more tax dollars and an increase in revenue to pay off the deficit. Infrastructure is also a valuable quality in growing the economy as long as we don't hand out blank checks with no deadlines.

[King]

Yes, but not efficiently.

[Napoleon]

The answer to the thread question just seems to be "They can, but not always, and probably not income tax cut specifically, unless present rates are rather high, which they haven't been in decades."

Also, what Scott said. That tax rates don't really affect the economy as much as people suggest. (I'd say "regulations" can be included right along in that sentence, for that matter.)

[Frodo]

Tax cuts, like every other economic policy, is subject to the law of diminishing returns.  The first comprehensive income tax cuts under Kennedy and Reagan did wonders because taxes were high enough to begin with that the beneficial impact of tax cuts on the economy could be felt.  Now that taxes (at least on income) are relatively low compared to the rest of the developed world, the impact of further tax cuts (like George W. Bush's tax cuts in 2001 and 2003) are muted.

There is no economic case for further tax cuts.  Republicans and conservatives know this (I think), so they have turned to ideology instead. 

[barfbag]

It also depends on the state of the economy at the time. In 2003 we saw an immediate rise in the stock market, but in 2001 we were in the middle of a recession and saw more decline. I know 9/11 had to do with it as well. It's not going to get the job done by itself. Infrastructure as I mentioned before helps a lot as long as it's not blank checks for projects without end like the big dig project. Another important factor that goes underestimated is consumer confidence. People have to have confidence to invest and spend their money which we haven't seen in about 15 years.

[Fmr President & Senator Polnut]

It 'can' but it depends on the circumstances... as I've written before, they have diminishing returns. Taxes can be too high and can impact on economic activity. But I find the view that taxes just need to keep going down... and there's some kind of ideological mind-block for them... there's no significant evidence that tax cuts inherently stimulate the economy. Basically, if you don't care about the direct causal connections of the tax cuts on the economy, then you're only in a ideological bog where taxes must always go down... "but what about..." "they must always go down!!!!"

Kennedy's tax cuts did lead to economic growth and Reagan's did too, although 'trickle-down' is largely a myth. But at the same time Clinton's tax increases did help the government balance the books, which did aid in business confidence. Bush's tax cuts were utter failures and left the US without the ability to respond to the GFC without massive financial consequences.

So, what I'm saying is there isn't a 'rule' some think tax cuts always boost economic growth others say taxes should be increased... and I think they're both wrong as a generalisation, but they can both be a correct avenue depending on the circumstances.

At the moment? The last thing the Government should be doing is reducing their revenues while trying to restore their economic position.