Austerity Measures Are the Proper Response to a Debt Crisis

Final Rebuttal Higher Taxes On The Wealthy Pro suggests that Obama"s plan will hurt Americans at every income level, because 1. Higher marginal rates will discourage individuals from working harder and saving larger portions of what they earn. [Private Saving] 2. Higher marginal rates will decrease the incentives for small businesses to invest and take on new economic risk. [Investment] 3. The tax hike will raise the cost of capital and if the cost of capital increases, businesses will demand less of it, thereby leading to fewer jobs available for those searching for work and lower wages for those employed. [Productive Growth] 4. Tax increases would severely harm GDP. [Real Per Capital GDP growth] To the extent that these mechanisms are valid, it is expected that there would be an inverse relationship between the top tax rates and savings, investment, productive growth, and real per capital GDP growth. [1] The above arguments will be examined in sequence. Private Saving Unlike what Pro has suggested, the effect of taxes on private saving is far from clear. To a certain extent, higher taxes would lead individuals to save more. [1] The rationale is that the tax hike changes the relative price of consuming now (saving less) and future consumption (saving more) in favor of future consumption. [1] Taking an analogy: when an individual has lower after-tax income, he or she may actually save more in order to maintain a target level of wealth (house purchase for example). This particular saving behavior would result in higher saving even if the after-tax income is lower. Reduced after-tax return may result in both lower saving and higher saving and the actual of a tax reduction depends on the relative magnitudes of these two different responses. [1] Indeed, the latest CRS report on tax rates concludes that private saving is relatively insensitive to tax rates: "Results of the regression analysis. .. suggest[ing] the top statutory tax rates are not associated with private saving. "[1] Investment Pro suggests that, in general, higher taxes would discourage risk-taking behavior. However, for many risk-averse investors, the capital gain tax could act as insurance for risky investments by reducing the losses as well as gains - it could decrease the variability of investment returns thereby encouraging investment. [1] Therefore, a rise in the capital gains top rate could increase investment because of reduced risk. The CRS report concludes that "but regression analysis does not find the correlations to be statistically significant suggesting that the top statutory tax rates do not necessarily have a demonstrably significant relationship with investment. "[1] In additional to the above analysis, the insignificant correlation between tax rates and investment can be also explained by the fact that most venture capital is supplied by pension funds, college endowments, foundations, and insurance companies - sources not associated with the capital gains tax. In 2003, only about 10% of investors in venture capital funds were individuals and families. [2] In summary, in accordance with the CRS findings, it is not unreasonable to conclude that past changes in tax rates have had no large clear effect on private saving and investment. Productive Growth Pro"s arguments suggest that higher taxes lead to lower productivity growth and lower tax rates enhance productivity growth. However, the CRS report suggests that there is no discernible relation between tax rates and productivity growth: "The regression analysis, however, does not find either relationship to be statistically significant, suggesting the top tax rates are not necessarily associated with productivity growth. "[1] Real Per Capital GDP Growth The top marginal tax rate in the 1950s was over 90% and the real GDP growth rate averaged 4.2% and real per capital GDP increased annually by 2.4% in the 1950s. In the 2000s, the top marginal tax rate was 35% while the average real GDP growth rate was 1.7% and real per capital GDP increased annually by less than 1%. [1] The statistical analysis using multivariate regression does not find that either top tax rate has a statistically significant association with the real GDP growth rate. [1] In conclusion, a tax rate change limited to a small group of taxpayers at the top of the income distribution would unlikely to have any discernible effect on private saving, investment, productive growth and economic growth. [1] Tax Increases vs. Spending Cuts Although tax increases alone may not immediately solve all the problems facing this country today, it should be acknowledged that the government is not collecting enough revenues. Today, when many millionaires and billionaires are doing exceptionally well, many ordinary Americans are suffering. According to data retrieved from Tax Policy Center, the tax revenue per GDP has declined since since 2001, from 19.5% in 2001 to 15.4% in 2011. [3] Even by taking the "Great Recession" into consideration, the 2003 and 2004 tax revenues are still considered historically low with 16.2% and 16.1% respectively. [3] The last time that the federal government balance its budget (FY2000), top marginal rate is 39.6%. Capital gains rate is 20%, and dividends tax rate is 20%. Compared to today"s rate (top marginal rate is 35%, Capital gains rate is 15%, and dividends rate is 15%), it is beyond doubt that the U. S. tax system is broken. [4] In fact, average tax rates for the highest income Americans have plummeted even as their incomes have skyrocketed. Of millionaires in 2009, a full 22,000 households making more $1 million annually pid less than 15 percent of their income in income taxes - and 1,470 managed to paid no federal income taxes on their million-plus-dollar incomes. [5] $950 billion increase in revenue is not an inconsiderable amount. In fact, the amount of tax revenue is exceptionally close to what President Obama has called for. In his latest offer, President Obama seeks to $1.2 trillion in fresh revenue over the next decades and limits the hike in tax rates to households earning more than $400,000 a year. [6] The number is also very closed to what House Speaker John Boehner has in mind: Boehner"s latest proposal calls for $1 trillion in new tax revenue from higher tax rates and the curbing of some tax deductions taken by high-income Americans. [6] Therefore, in solving the "fiscal cliff," the tax increases on the wealthy is not only necessary, but also will help the country. Conclusions Unsustainable austerity measures will plunge the country back into recession by cutting into the investment such as education and high-value research, and leaving many low income families unprotected. [4] On the other hand, higher taxes on the wealthy are not only necessary, but also desirable. It is necessary because in a time when all Americans are being asked to come together to make the sort of shared sacrifices, continuing to allow some of the wealthiest Americans to use special tax breaks to avoid paying their fair share simply cannot be justified. It is desirable because the additional revenue will help the country avoid the ominous "fiscal cliff" and will allow the country to continue making the crucial investments that are necessary to grow the economy. The choice is yours. Thank you. References [1]. . http://democrats.waysandmeans.house.gov... [2]. . http://www.fas.org... [3]. . http://www.taxpolicycenter.org... [4]. . http://www.fiscalcommission.gov... [5]. . http://www.whitehouse.gov... [6]. . http://www.reuters.com...