Why the Economy Stubbornly Insists on Growing More Slowly When Taxes are Lower

[Donnachaidh]

http://www.angrybearblog.com/2010/12/why-economy-stubbornly-insists-on.html

An Economic Theory That Uses Micro Forces to Explain Macro Outcomes: Why the Economy Stubbornly Insists on Growing More Slowly When Taxes are Lower

Cross-posted at the Presimetrics blog.

I've been writing for years about the fact that a basic piece of economic theory does not apply to real world US data: unless one engages in the sort of assumptions that can justify eating ceramic plates as a cure for leprosy, there is simply no evidence that lower taxes lead to the good stuff we've been led to believe over non-cherry picked data sets. Recent examples include this look at the effect top federal marginal rates on various measures of growth, this look at the effect of top federal marginal rates on tax revenues, a different look at federal marginal rates and growth, and this look using state tax levels. I've also shown that effective tax rates also have fail to cooperate with theory when looking over the length of presidential administrations - examples include myriad posts and Presimetrics, the book I wrote with Michael Kanell.

I think the reason a lot of people have trouble accepting this is that they see some sort of conflict between this macro fact and and what seems to be a self-evident micro truth - if tax rates get high enough, people will work less. Now, such micro-macro conflicts have existed in the past, and are certainly aren't unique to economics. One obvious example we all live with is that to each of us, from where we're standing, the Earth does a pretty good job of appearing to be flat, and yet we know that its actually round(ish). For most applications, from running a marathon to building a house to making toast, assuming that the earth is flat doesn't hurt, and even simplifies matters. That is to say, for most applications facing critters roughly our physical size, a flat earth is a good model. On the other hand, we'd be much impoverished by sticking to that model at all times, as we'd lose out on satellites, our understanding of weather and geology, a great deal of transoceanic shipping, and Australia.

The same thing is true when it comes to the economy - failing to understand and account for the dichotomy between micro and macro truths is harmful. It has cost us, all 6.8 billion of us, economic growth and wealth, which is to say, it has cost us in quality and length of life. But nobody is trying to explain that dichotomy, in part because so few people see it. There is a profession that should be trying to explain this dichotomy, and that is the economic theorists. However, they seem to be pretending the data isn't there, so waiting around them to explain it means more loss of quality and length of life. So let me take a crack at it.


More at the link --