Monday, December 08, 2008

Principles for Progressive Taxation During a Recession

Our friends at Citizens for Tax Justice in the United States have issued a short paper looking at tax principles to consider during a recession.

It's short enough to read fast, and as with all their output it's thoughtful and reasoned. (We don't necessarily endorse or reject any of their proposals here - but we generally like their output very much.)

Here's the preamble.

"The recession faced by the United States has changed the nature of the debate over taxes. Questions of who should pay how much to fund public services have been replaced with questions about how quickly we can boost the economy with tax cuts or government spending that is not paid for. Some of the points raised in this debate have been quite valid, while others have been more problematic. While raising taxes to balance the federal budget is not a high priority during an economic downturn, this should not be used as a justification for enacting unlimited tax cuts without replacing the lost revenue in the future. The following principles can guide the search for a rational and fair tax policy that will mitigate the recession without causing long-term fiscal damage."

And it makes many points, including these ones:

"Boosting the income of poor or middle-class families will lead to a much larger boost in consumption, and therefore greater stimulative effect on the economy, than boosting the income of rich families.

This is backed up by economic research showing that creating new breaks for investment has less stimulative effect than increasing benefits for low-income people. Moody’s economist Mark Zandi estimates that every dollar of additional unemployment insurance benefits increases real GDP by $1.64, and every dollar of additional Food Stamps increases real GDP by $1.73. These are initiatives that would target people most likely to spend, right away, any extra cash (or vouchers) they receive. The same can be said, to a lesser extent, of tax cuts aimed at the same people. Zandi estimates that every dollar of reduced payroll taxes would increase real GDP by $1.29
. . . .
The implications of this are very clear. Expanding the loophole that already exists in the income tax for capital gains and dividends is not likely to have a great stimulative effect."

And much more. Read the full report.


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