Comment 28061

By A Smith (anonymous) | Posted January 08, 2009 at 00:17:06

Ryan, I disagree with you that moving from subsistence farming to a factory job is a step down the economic ladder. Otherwise, why would so many people from rural China be doing it today? Nevertheless, I agree with you that it sucks relative to the choices we have in Canada. If you want to help these workers, however, the best way is to increase capital investment and that means opening up trade as much as possible.

I agree with you that there is greater income disparity in the U.S. then most Western European countries, however this is because the rich carry an overwhelming share of the tax burden in the U.S.. In fact, ever since marginal rates have dropped from 91% to the current 35%, the average person has contributed less and less to government coffers. I think this has to do with the fact that as tax rates drop, rich people find it easier to simply pay their taxes, rather than spending money on hiring lawyers to get around them. However, because you tend to get back what you contribute, the rich also seem to benefit the most in terms of added wealth and opportunities.

I believe that if tax rates were increased to 50% or even higher, you would see income disparity drop over time. The funny thing is, you would also likely see the average person carry a heavier share of the tax burden. Therefore, I am not against raising marginal tax rates, because I agree with you that it would likely be a great way to help the average person.

Furthermore, of all the spending that government does, I think cash transfers to individuals is the least harmful to the economy and probably has zero effect on limiting growth. The only problem I can see is on the individuals who rely on for the long term. Therefore, I still think a job is preferable over handouts.

As to your 2007 growth stats, I find it interesting that many of the countries that show strong showings have also cut corporate rates in recent years. In fact, countries like the Netherlands have rates 10% lower than North America. Germany has also recently cut corporate rates, as has France. By allowing corporations to keep more of their income, the government makes it more likely they will invest. More private investment equals better tools for workers, which ultimately translates into better earnings potential.

Your last point about the boom years is dead on, except for your characterization that I don't agree with you. The thing about those years, however, is that the difference between what people paid in taxes and what they got back in social services was much greater than today. In fact, people used to get back only 85-90% of what they paid in taxes because much of the money was spent on things like missiles and overseas adventures. Today that gap is only about 2%, which means that people get back almost everything they pay in taxes and some people get more than they pay in taxes.
Furthermore, even though tax rates were higher in those years, tax collections as a share of the economy was much lower. In 1960, for example, all taxes paid to the government was 25.95%. Today with much lower rates, that number is 30%.

Therefore, the only thing that matters is what works. Judging by your arguments in this post, I don't think we are that far off from agreement. Perhaps through better analysis we can find methods that benefit all people, not simply the rich as has been the case in recent years and is becoming more so in Canada today. This requires willingness to bend to the truth, no matter how much it goes against each one of our established beliefs.

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