Taxing our way to prosperity -- NOT!

We're in the middle of an election year and the political rhetoric is creating an intoxicating elixir that sounds attractive to voters, but could prove to be toxic to our frail economy. The economy is attempting to recover, banks are failing, Americans are feeling the pinch of higher gasoline prices, home values are down and unemployment is rising. Given the depressed mood of voters it's easy to look to our country's leaders for solutions. Unfortunately, the wrong solutions will compound our economic problems instead of fix them. Fortunately, there is research that can help us see through the rhetoric.

At the heart of the issue is whether government solutions will increase the tax burden for individuals and corporations. The issue of taxes in this country has been debated for centuries and significant research was conducted throughout the 20th century, providing time-tested facts upon which we can judge political jockeying.

In 1998, Alan Reynolds, senior fellow and director of research at the Hudson Institute, a non-partisan think tank, published research titled The International Importance of Low Tax Rates. I've included a link to the research below, but I'll publish his conclusion to save you the time:

"Although good tax policy alone does not ensure a good economy, world history offers no examples of economies that prospered with punitive tax rates. Governments, like companies, must compete in producing the most value at the lowest possible cost. Countries in which the marginal cost of government is relatively high find it more difficult to attract and retain physical capital, financial capital and human capital. Just as so-called "tax havens" attract investment and skilled immigrants, countries with punitive tax systems face chronic capital flight and brain drain.

In some countries in the top part of the table, taxes on trade (tariffs) were reduced. In others, such as Argentina, the monetary regime was changed. In still others, Social Security was privatized and the payroll tax burdens on employment thus were eased. But the one thing all of the fastest-growing economies of the past two decades have had in common is this: they either had very low tax rates to begin with or moved rapidly in that direction."

Simply said, a country can never tax its way to prosperity. Countries with higher tax rates lose jobs and have slower economies than countries with falling tax rates.

Given this simple truth, let's be careful about listening to political rhetoric. Home prices will rise again, but it will take time. Gasoline prices have come down, but we need to deliver real solutions inside of three years. The credit mess will work its way through the balance sheets of financial companies and then banks will moderate their underwriting standards, although we won't see the irresponsible lending that got us into this mess. New jobs will be created, but we need an environment where companies can thrive.

But a sure way to send more jobs and investment capital overseas is to increase taxes at a time when corporate profit margins and personal incomes are getting squeezed. Presidential campaign proposals to "fix" the economy must be viewed with careful scrutiny to make sure they can actually work, and not based simply on if they make us feel good.

Here is the original source article: