Economists have been searching for bold ideas to shake up an uncertain economic landscape since the recession. Of course, lower tax rates are something all businesses desire. However, it remains to be seen if lowering tax rates or implementing tax reforms will prove beneficial for long-term economic growth. Thus, there is still an ongoing discussion on the impact of taxation on economic development. Here, Bold Business looks at whether lowering taxes will, in fact, stimulate economic growth and drive business in a struggling economy.
According to a new paper published by Brookings, the “Effects of Income Tax Changes on Economic Growth”, tax rate cuts clearly stimulate a weak economy in the short-term. This statement has a bold and positive impact on workers and is good for business.
Although businesses thrive during lower tax rates, the government somewhat finds itself struggling—unless they can finance tax cuts with their own spending cuts. If they fail to achieve this, it can result in an increased federal budget deficit, which will raise interest rates and reduce national saving.
More on the Impact of Taxation on Economic Development
In the Brookings paper, Senior Fellow William Gale and Dartmouth Professor Andrew Samwick state that “rate-reducing income tax reforms may raise economic growth, but it is not a given”. They argue that “revenue-neutral tax reforms do not add to the deficit or debt”, and “distributionally-neutral base-broadening tax reforms spread out the tax burden but leave the total revenues to the government the same”.
Gale and Samwick identify four main areas of tax policy which they believe will stimulate and boost the economy in the long-term: a set of positive tax incentives which encourages work, saving and investment; ensuring tax cuts are targeted and bespoke to current economic activity; monitoring and adjusting to different types of incomes and consumption; and ensuring minimal increases in the budget deficit.
In a statement that might seem obvious, the fundamental finding of the Brookings paper is that not all tax changes will have the same impact on economic growth.
Gale and Samwick conclude that “reforms that improve incentives, reduce existing subsidies, avoid windfall gains, and avoid deficit financing will have more auspicious effects on the long-term size of the economy, but in some cases may also create trade-offs between equity and efficiency”. This scenario just goes to show that when it comes to the economy, it takes bold changes in tax reforms to make bold steps toward building a bold business!