INCOME TAXES

Income taxes Should they be raised for support of the military and defense or decreased to stimulate the economy

Income taxes Should they be raised for support of the military and defense or decreased to stimulate the economy

Most economists would reject taxes that discriminate between capital and labor. Both are inputs of production, and any discrimination between the two would distort choices as to which to use, and this would likely reduce efficiency. However, in a global economy, some argue that capital has greater mobility than labor. Dani Rodrik contends that competition among states for capital drives down taxes on this input, resulting in some combination of higher taxes on labor and reduced government services. A casualty of these developments is the capacity of states to provide social security and equality-seeking redistribution.

The evidence of decline in income tax rates, both individual and corporate, in many countries is indisputable. Whether this phenomenon results from tax competition over capital, and whether reduced government expenditures undermine social security and redistribution, are debatable propositions. One alternative explanation is a shift from income taxes to consumption taxation, which these countries have employed over the same period.

A consumption tax does not discriminate between labor and capital in the sense that it does not distinguish between the sources available to pay for consumption (income from labor, income from capital, or disinvestment). As an empirical matter, owners of capital over their lifetimes may have more resources available for consumption, although the data are ambiguous. Franco Modigliani contends that wealth accumulation in large industrial countries, with the United States as the foremost example, is mostly matched by disinvestment. These data suggest that savings largely serve as a means of evening out consumption over a typical life cycle. Others contend that a significant amount of wealth is not consumed, but rather transferred intergenerationally(Murphy, 2002).

A technical question is whether consumption taxes can have a progressive rate structure. The most common form of consumption taxes are value-added taxes (VATs) or general sales taxes (GSTs), which have flat rates. William Andrews has offered a solution to the problem, although it presents significant practical difficulties. An alternative approach would combine flat consumption taxes with highly progressive wealth taxes, probably in the form of a tax on wealth transfers. (Murphy and Nagel, 2002)

Many economists prefer consumption taxes to income taxes on efficiency grounds, all other things being equal. Savings, some argue, have a positive impact because ...