More Thoughts on the Economy

There are a few more items on the economy I wanted to mention, continuing from earlier. First, income tax rates:

Now let's take a look at corporate tax rates. In general, corporate tax rates are falling:

AS THE effects of the financial crisis ripple out into the wider economy, businesses are struggling. With access to credit all but choked off and global demand falling, firms are keen for any help they can get. America's big companies have a friend in John McCain, who says he will cut the top federal corporate tax rate from 35% to 25%. Once state and local taxes are added, the combined rate amounts to an average 40% of profits, the second highest in rich countries. Over the past decade, corporate-tax rates have fallen considerably, especially in the countries of the European Union.

Why is it so difficult to consider that tax relief can stimulate economic growth?

Cut Payroll Tax Rates:

• For about the cost of the $825 billion House version of the stimulus bill, payroll taxes for Social Security could be cut in half, says former Federal Reserve Board member Lawrence B. Lindsey.
• A 3 percentage-point reduction in payroll taxes would increase workers' take home pay an average of $1,500.
• Reducing the employer's tax share by 3 percentage points would increase businesses' cash flow an average of $1,500 per worker.
• This tax cut would reduce unemployment by lowering labor costs.

Cut Corporate Tax Rates:

• Cutting taxes on future profits is much more likely to spur new investment.
• Congressional Republicans propose a step in the right direction: reducing the corporate income tax rate from 35 percent to 25 percent -- the average rate in the European Union.
• This would encourage businesses to hire additional workers, accelerate investment and make American companies more competitive internationally.

Cut Capital Gains Tax Rates:

• Republicans have also proposed reducing the capital gains tax levied on the increased value of an asset, such as stock or real estate, when it is sold.
• The current 15 percent rate is scheduled to rise to 20 percent as the Bush tax cuts expire.
• Making the lower rate permanent would be helpful.
• Past capital gains tax cuts have yielded an immediate increase in government revenue.

Lately in the news there have been Liberals griping about the Republican party being about nothing but tax cuts. Well, why not? It seems that in the US our taxes are still too high. And these high taxes are exasperating the effects of the recession we are now in. Or maybe they could at least consider that high small business corporate tax rates hurt the economy? Can we not at least consider tax competition?



The last piece I wanted to mention was The Optimum Government.

If you knew economic growth and new job creation begin to slow when total government spending is larger than about 25 percent of the economy, and you knew total government spending in the United States is about 36 percent of gross domestic product (GDP), would you propose policies to make government larger or smaller to create more jobs and boost economic growth?

Over the last few decades, many economists have done studies on the "optimum" size of government. A new study just completed shows the optimum size of government is less than 25 percent of GDP.

So we have a bit of evidence here to suggest that the highest marginal tax rate should be no more than 20%, and that the optimal size of government is around 25% of the GDP.

Rather than increasing the size of government, the empirical evidence shows that sharply reducing taxes, regulations, and government spending down to at least 25 percent of GDP would do the most to spur economic growth and create more jobs over the long run.

Again, is the Obama economic plan doing everything in its power to chase business out of the US?