High Tax Rates Hurt the Economy

Defending My Own ArgumentsMy opponent argues that the only reason people earn money is to improve their own standard of living. We agree on this. My opponent also points out that things like Environment and Crime Rates affect standard of living. This is true. However, this does not deal with the fact that higher taxes disincentivize productive behavior. People try to maximize their personal utility. So, let us say, hypothetically, that taxes were used to fund valuable services that improved standard of living. This is all good and well, but there would be no incentive to work and invest so these services could be funded. Very few people are going to work full time to fund community wide services, but almost everyone would be happy to use these services. This creates a free rider problem, where there are more people willing to use societies services than people willing to fund them. With lower taxes, people will be forced to work to maximize their own utility, reducing this free rider problem. My opponent attacks the Edward Prescott study I cited in previous argument by saying: "My opponent cites Edward Prescott's study as evidence for this. Virtually every other economist agrees that the major source of US growth recently has not been low taxes but high debt [4]. The periods examined by Prescott are very selective. The biggest growth the US ever had was during the 1950s-60s, when tax rates for the top tax bracket were about 91%, the biggest slump was during the 1920s when the rate was only about 25% [5]. If he had looked at these periods relative to other countries, he would have seen quite a different picture. The first period he chose, 1970–74, was when the US was mounting debt before the crash of the early 80s. The second was the early years of the Clinton administration, years marred by "the massive deficit and the problem of government spending" [6]. Europe had much less debt during these periods and that's why this study is misleading. That tax rates corresponded to productivity during these periods was the product of bad decision making, not effective economics. "My opponent's claim that "virtually every other economist agrees that the major source of US growth recently has not been low taxes but high debt" is both mystifying and unsupported. It is simply untrue that every other economist believes this. Moreover, this is disproven by two facts: the US does not have higher debt than other countries and high levels Debt actually reduce growth. It is not made clear what type of debt my opponent is talking about. Regardless, there is no measure of debt that puts the US at consistently higher rates of debt than European countries. It may be true that the US has higher levels of total debt than individual European countries. However, this is totally irrelevant. What matters is debt as a percentage of GDP, because a country with a large population and bigger economy would naturally have more debt than smaller economies (e. g. US has more total debt than France, but France has much smaller economy and population than US, so, as a percentage of GDP, France has higher Debt. This would mean that Debt is actually larger in France). Second, high debt typically reduces growth. The most influential economic paper on this comes from Carmen M. Reinhart and Kenneth S. Rogoff, who find that debt and growth are unrelated until debt reaches 90% of GDP, where debt starts hurting growth substantially. My opponent seems to imply that Prescott cherrypicked his dates. However, the same result has been replicated by numerous other economists using different dates and datasets. One of these was renowned Harvard Economist Raj Chetty who used Danish Firm Level Datato find that labor supply does go down when taxes goup. Another important paper came from Lee Ohanian, Andrea Raffo, and Richard Rogerson who used a larger dataset and found:"We document large differences in trend changes in hours worked across OECD countries between 1956 and 2004. We assess the extent to which these changes are consistent with the intratemporal first order condition from the neoclassical growth model, augmented with taxes on labor income and consumption expenditures. We find that the model can account for most of the trend changes in hours worked measured in the data. Differences in taxes explain much of the variation in hours worked both over time and across countries. " My opponent also claims that the studies to not take into account the fact that governments spend the money they take in. This is simply untrue. The studies look at how the economy performs when taxes are higher, this means that they do take into account the fact that the government spend the money that it takes in from higher taxes. For example, if a country raised taxes and spent it on programs that did help the economy, these studies would take this into account. This is because times of high taxes are also times of higher government spending, which is reflected entirely in these studies. My opponent also commits the straw man fallacy in critizing my claim that higher taxes cause high skilled emmigration. I never said that taxes are the only thing that mattered. I said that taxes are an important factor for high skilled workers and companies. This is why this point, made by my opponent, is irrelevant:"Look at the status quo. In the Bahamas there is no tax [1], yet not everyone emigrates to the Bahamas. People are obviously motivated to stay in certain countries by more than just the tax rate. "My assertion is supported by this study, which studied US states, that finds that:"The results indicate that 1% differences in state corporate tax rates are associated with 7-9% differences between the investment shares of foreign tax credit investors and the investment shares of all others, suggesting that state taxes significantly influence the pattern of foreign direct investment in the US. "This would suggest that taxes do strongly affect location decisions of firms. Responding to Opponents ClaimsMy opponent claims that government makes better decisions than private individuals. This is untrue simply because the government is not responding to consumer demands. There are no experts that are able to track the demands of millions of people, nobody has enough information to plan entire sectors of the economy. Only the price mechanism can do that. My opponent claims taxes increase equity. I agree, however more equity does not always mean higher standards of living if average income is much lower. France, with higher taxes than the US has more equity, but lower average income. The standard of living for middle class is higher in the US (in terms of median income). Government is not more efficient. This is an odd claim. Governments are notorious for innefficiency. This is because, unlike private firms, government is not subject to competition as private firms are. Failing government programs don't go away when they fail, they just continue to waste resources. When inneficient private firms fail, they go out of business. My opponent says that government investments are more likely to improve standard of living. This may be true of some basic services, but, unlike the private sector, the government does not respond to consumer demand. This means that, unlike the private sector, the government is not run based on what consumers want. Sources:(debt by country) . http://en.wikipedia.org...(Debt and Growth) . http://www.economics.harvard.edu...(Labor Supply Papers) . http://obs.rc.fas.harvard.edu... and . http://www.kansascityfed.org...;(Taxes and Location of Investment) . http://www.nber.org...(Median Income by Country) . http://www.oecd-ilibrary.org...;