Uncertainty on Taxes Has a High Cost for US Economy - Opinion
Ever since the financial collapse of 2008 — and perhaps since the dawn of time — Democrats have argued that a struggling economy needs more government spending and more taxes, while Republicans have fought tooth and nail for less government spending and lower taxes. This has gone on so long that I got drawn to the ancient mystery of it. Which side is right?
According to Joseph J. Thorndike, director of the Tax History Project at Tax Analysts, tax rates aren’t nearly as important to economic growth as people think.
In the 1950s, taxes were high, but the economy still hummed at an impressive rate. In the early 1980s, Reagan cut taxes and took credit for ending a recession. But by the mid-1980s, he raised rates again to combat a growing deficit. The economy continued growing. Then George H. W. Bush and Bill Clinton raised taxes even more. Business kept booming.
“The economy will do what the economy will do, thanks largely to non-tax factors,” Thorndike said.
But one thing that does seem to matter, perhaps more than the tax rate itself, is the frequency with which the tax rates change. In the 1930s — during the Great Depression — tax rules shifted constantly, as the government reacted to the crisis. Since investors could never predict what taxes would be, they delayed new investments rather than make big decisions with too many unknowns. That prolonged the Depression.
Today’s investors are in the same boat. The crash of 2008 prompted a host of new policies, literally overnight. An unpredictable presidential election raises more questions about what tax policy will be.