AN, great posts on the other effects on GDP. When I was reading previous posts, I kept thinking how over simplified the analyses were in attempting to show tax policy effect on GDP. Based on the data, it is quite obvious that there is nowhere near a 1 to 1 correlations (or causation). Even more so because the top tax rate has applied to so many different wealth levels over the years, and subject to so many different carve outs.
The whole increasing taxes reduces savings and increases companies desire to invest idea (mouthful I know), seems a bit short sighted and simplistic as well. No intelligent business will throw away 1 dollar to save 30 cents, obviously. If the investment purchase makes sense in terms of increasing a company’s profit or revenue, the company will make it anyways. I can see how a higher rate could encourage less savings, and increase more spending, tipping the scales on those investments that are borderline. But then wouldn’t that spending be artificially encouraged. Furthermore, saving for a rainy day or a big purchase might be a better decision for the company. By distorting the prices of things (investment purchases), you end up with misallocated resources and therefore creating waste. And not only that, but you have taken more money out of the companies hands (through your higher rates) to achieve this distorted market. Which is obviously not stimulative. Ignore for the purpose of this argument the dis-incentive side of higher taxes on additional work. It seems bad any way you look at it. Cash is no good sitting under a mattress (so to speak), companies will spend their profits or save for an uncertain future to be spent another day and perhaps bigger and better investments. How can government claim to know what is best for the millions of different companies out there with their minutia of different needs.
You may say that I am arguing from an efficient market hypothesis, but I ask you, “what is a better assumption?” Government clearly does not strike me as the paragon of efficiency or knowledge. And when people or businesses waste money, at least it is money they have earned, not money they have commandeered.
