Resolved: The USFG should adopt across-the-board tax cuts for individual and corporate tax brackets

C1) We should reduce the corporate tax rate Having a competitive tax system is increasingly important in a globalized economy. Globalization means firms wishing to invest capital in a region can be easily encouraged—or deterred—if taxes increase or decrease. High corporate taxes discourage investment and reduce economic growth. America has the highest statutory corporate tax rate in the developed world at 39.1%.[1] This is 14.3% higher than the OECD average of 24.8%. The harmful effects of high corporate taxes are visible in our economic system. Johansson et al. has a paper published by the OECD investigating the impacts of different types of taxes and economic growth. The paper found that corporate taxes, followed by income taxes, are the most detrimental to economic growth. The study found that a 1% shift of tax revenues from income and corporate taxes to consumption and property taxes would increase GDP per capita by 0.25 – 1% in the long run.[2] Johansson also found that statutory corporate tax rates of 30 to 35%, which the US now surpasses, reduces investment by 1.9%. To quote Johansson, lowering the statutory corporate tax rate would “lead to particularly large productivity gains in firms that are dynamic and profitable, i.e. those that can make the largest contribution to GDP growth.” The reason for this is because many of the firms that are productive also rely on retained earnings to pay for their expansion. Tax cuts would increase the amount of retained earnings and increase prospects for future firm expansion. Another OECD paper by Jens Arnold confirms the findings of Johansson and concluded that corporate taxes “have the most negative effect on GDP per capita.”[3] Economists Young Lee and Roger Gordon, using a dataset with 70 countries and a timespan of 27 years, have found that a ten percent cut in the corporate tax rate would increase economic growth by one to two percent.[4] The biggest problem with having the highest corporate tax rate in the world is that it reduces our international competitiveness. Incentives matter, and taxing labor and capital simply means that the incentives to make more of it decrease. If a country has a significantly lower corporate tax rate than we do, it is our companies and workers that suffer. The current corporate tax rate caused companies to shift $50 billion away from the United States to countries with lower corporate taxes.[5] Despite our high corporate tax rate rayr, we do not have much to show in the way of revenue. Economists Alex Brill and Kevin Hasset have found that the revenue maximizing corporate tax rate is 26%.[6] Any corporate tax rate above 26% would decrease revenue. This is not surprising as the average OECD corporate tax rate is 24.8%. As international businesses can relocate to a location where taxation is lower (which means more profits), having a tax rate far above the OECD average would deter potential businesses from entering the country. This means a smaller tax base. Brill’s and Hasset’s study is supported by basic cross sectional data. In the US, corporate income tax revenue makes up 2.2% of our GDP; for the OECD, that number is 3.4%.[7] Despite having the highest corporate tax rate in the world, the percent of our corporate tax rate revenue to our GDP is over one percent lower than the OECD average. This confirms the Brill and Hasset analysis that current corporate tax rates are on the far side of the Laffur Curve. Studies claiming that corporate tax cuts do not cause growth have no solid foundation. Owen Zidar, who opposes tax cuts for the rich, finds that tax cuts for the middle class cause economic growth.[8] It is well accepted that tax cuts for the middle class would increase consumption and cause growth. Luckily, corporate tax rates do cut taxes for the middle class. According to another study by Zidar, workers receive 35% of the benefit from corporate tax cuts.[9] The literature says tax cuts for the middle class cause growth, and corporate taxes benefit the middle class; it seems illogical to claim corporate tax rates would not help the economy. The Zidar estimates are a bit on the conservative side. The CBO has found that “domestic labor bears slightly more than 70 percent of the burden of the corporate income tax.”[10] Economists from the National Bureau of Economic Research have found that workers of unionized industries carry 56% of the tax burden from corporate taxes.[11] A tax cut would bring a huge benefit to middle and lower class workers. C2) Reduced income taxes cause growth Lower income taxes cause growth; yes, even for the rich. It is well accepted that tax cuts for the middle class cause growth, so I assume the majority of this debate will revolve around tax cuts for the wealthy. Taxes for the wealthy make up for the majority of our revenue, and it is only the top quintile of incomes that actually pay significantly more to the government than what they cost (e.g. they pay more taxes but use fewer social services).[12] Using tax revenues as a proxy for tax rates would work out pretty well. The following graph, using local tax revenues as a proxy for local tax rates, compares tax revenues to growth rates. Here is the data: There is a clear and strong correlation between lower tax revenue and faster GSP growth. According to the data, 40% of the variance in growth rates at a local level are determined by the tax burden.[13] This data does not include severance taxes or growth related to oil and gas. This is because merely having an abundance of resources could interfere with the results. While defending tax cuts we must look at the 1980s. I will defend Reaganomics responsibly. You think tax cuts in the 80s were the cause of the rapid growth during that decade? They weren’t. Federal Reserve policies must be credited for that. But that does not mean the Reagan tax cuts were a failure—they were a great success. The benefits from the tax cuts were long term; they increased innovation and heavily contributed to the growth in the 1990s a decade later. According to the American Enterprise Institute, “Reagan’s economic legacy is inextricably interwoven with the Information Revolution that the IBM PC helped kick off. His message of competitive markets, entrepreneurial vigor, and minimal regulation found a willing audience in an era of rapid technological change, where innovation was opening new opportunities seemingly every day. … [T]he changes Reagan championed in the tax system fostered innovation and entrepreneurialism even as they encouraged the development of venture capital and investment in human capital.”[14] His policies allowed businesses, which may not have been created due to high risks from a terrible tax code, to come to fruition. Tax cuts do not benefit us in between each business cycle; tax cuts take years for the benefits of increased investment to show up. Reagan’s tax cuts didn’t cause mega growth in the 80s, but it caused growth well past his term and beyond. The example of Reaganomics—that tax cuts take time to kick in—is confirmed by peer-reviewed literature. A study by economist Robert Reed argued that “tax policies take time to work,” and that when the effects kick in, “a negative relationship between taxes and income growth emerges.”[15] When we increase taxes, it takes time before the negative effects fully take hold—the reverse holds true. More progressive tax systems lower economic growth. A progressive tax system means the wealthy pay more than the poor; the larger the gap between the amount the rich pay and the poor, the more progressive a tax system is. When a tax system increases in progressivity, meaning the rich pay more taxes, there is less growth. A Philadelphia Federal Reserve study observed that “a decrease in tax progressivity did lead to higher growth … differences in tax code across countries could explain up to a two and half percent variation in economic growth.”[16] The negative effects of high taxes, even on the wealthy, has been confirmed by studies by the Mercatus center as well as the American Economic Association.[17-18] Reducing tax rates on the wealthy would promote more economic growth. C3) Revenue As I showed in the case of corporate taxes, we could reduce the corporate tax rate by over 10% and increase revenue.Income taxes are a different story. Depending on how a tax cut is crafted, tax cuts may or may not pay for themselves. If the marginal rate was extremely high, reducing it to a moderate level would reduce deficits. There are always Laffur curve effects, so the changes in revenue could be exaggerated by a static analysis. This is not to say that all tax cuts pay for themselves. Despite revenue losses, tax cuts would still increase GDP growth. If we reversed the 2012 4% hike in taxes, revenues would only fall by $14 billion, but GDP would grow by 0.43%.[19] In fact, revenue maximizing policies would be detrimental to our economy as a whole.[21] Instead, we should focus on reducing spending alongside tax reductions. Sweden, for example, reduced the top marginal rate by 20% in the last recession, but they also prevented going into debt by reducing welfare spending. Countries that successfully reduce their debt-to-GDP ratios find that spending cuts rather than tax increases are a better way to fix the problem without reducing economic growth.[20] Spending cuts can increase growth. According to a research paper by the Mercatus Center, “fiscal adjustments on average reduced debt-to-GDP ratio by 0.19 percentage points of GDP in a given year. GDP grew by 3.47 percentage points in total, which is 0.58 percentage points higher than the average growth of G7 countries.”[20] I am in favor of reducing spending alongside tax reductions. Reducing the corporate tax rate would increase revenue—abolishing the corporate tax rate would have little effect on our budgets.[22] http://bit.ly...;