Wednesday, September 21, 2005

The benefits of 'real' tax cuts

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Indonesian President Sasilo Bambang Yudhoyono has pledged to reduce corporate and personal tax rates to stimulate higher levels of investment. The Indonesian president has recognised the contribution that tax cuts have made to some of the emerging growth economies such as:

  1. Turkey has achieved real economic growth of 7% between 1985-89 and 9% in 1990 after lowering the lowest marginal tax rate from 40% to 25%, and the top marginal tax rate from 75% to 50%.
  2. South Korea recorded growth of 9.3% between 1981-89 are adopting tax cuts and expanding the range of tax deductions.
  3. Ireland was the fastest growing member of the OECD in the 1990s after it reduced taxes

Some tax cuts are more real than others. Consider that the US government offered tax cuts but neglected to cut spending, in the process burdening the country with a large public deficit running at 6% of GDP annually. The Australian government’s tax cuts made little contribution to the economy since they merely gave back to private citizens what inflation-inspired ‘bracket creep’ had taken from rises in nominal income. In contrast to the real gains made in the Turkish & Irish economies, the expansion in the US and Australian economies was the result of easy monetary policy and cannot be sustained.

The argument then should be - if tax cuts are a burden on economies - why not replace them with user-pay fees on services provided by governments, and allow citizens the choice as to whether they need them. Who could argue with that policy if they are so critical 'public goods'.

Postscript:
The facts for this article were derived from the Japan Times, though I’ve taken it upon myself to present the article in a better context. The original article suggested tax cuts are always good….an over-simplification.

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Reason is the standard for debate.

- Andrew Sheldon http://www.sheldonthinks.com/
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