Taxation Is Contractionary

“If you want more of something, subsidize it; if you want less of something, tax it.” –Ronald Reagan, the intuitive economist and Cold War winner. At the time of this article, Congress is battling with what President Trump is desiring to be the largest income tax cut in the history of the Nation. If passed, its repercussions may be very lasting. The last largest tax cut of its kind was pushed through by Reagan, which resultantly lead to what many economists have called the Reagan Revolution, persistent expansion and economic growth leading eventually to balanced budgets. Is this all true? Most likely; because the exact converse has been proven. In research published by Romer & Romer (American Economic Review, 2010), for all major postwar (WWII) tax policy actions, they found that an aggregate tax increase of +1% (of GDP) created a −3.1% decrease in productivity (of GDP) with said effects continuing to resonate negatively in the economy for at least 4 years after instituting the tax policy. They stated, “The behavior of output following these more exogenous changes indicates that tax increases are highly contractionary.” Therefore, the reverse effect of reducing taxes is logically and reasonably expansionary. Could the U.S. economy be relieved of a broad current taxation burden to generate resulting GDP growth in excess of +3% in addition to its current growth? Again, most likely. With that, the published Romer & Romer research can become a permanent prescient tool for taxation policy makers. For their full report….read more.