Notre Dame economist Charles K. Wilber will be taking readers' questions on his article "Awakening the Giant" this Thursday October 14. To pose a question simply post to the article comments' boxes. Here is Wilber on why the government should consider raising taxes--and why that idea is so fiercely resisted:
Two arguments are typically made against raising taxes: first, that citizens are already overburdened and second, that more taxes will reduce incentives to save, invest and work. In fact the available empirical evidence supports neither contention. The United States and Japan have the lowest rate of taxes (federal, state and local) out of income (G.D.P.) among the major industrial countries: 27 percent and 28 percent compared with an average of 45 percent for Europe. The excessive-burden argument against tax increases is therefore unpersuasive.
What about the argument that high taxes work as a disincentive that slows economic growth? When cross-country studies are used to measure economic growth for industrial countries in comparison with tax rates, there is no undisputed relationship. Some high-tax countries grow rapidly; others grow slowly. It is the same for (relatively) low-tax countries. Econometric attempts to tease out a relationship have led to mixed results with no clear-cut outcomes. Some years back Robert Barro of Harvard University found a relationship, and a few others have done so after him; but many studies find no relationship. Empirical studies appear to indicate that higher taxes do have a small effect on investment, but the results are murkier in terms of any effect on savings and work.
From my viewpoint as an economist concerned for the common good, the Reagan and Bush tax cuts, coupled with dramatic increases in military expenditures, have led not only to persistent structural federal deficits but also to a record widening of the income and wealth distribution between the rich and the poor. In the near future, tax increases will be needed to help close that structural deficit. Increasing the progressivity of the federal income tax is an important step, but other options ought also to be part of the political dialogue.
First is the adoption of a value added tax system for the United States. An exemption for basics (food, housing, medical care) would reduce the regressivity inherent in any such excise tax. The overall level of income taxes could be reduced (while increasing progressivity) as an incentive to accept a VAT. It would be easy to share the VAT revenues with states and local governments to carry out needed programs. An added advantage is that the tax would fall on consumption rather than income, thereby providing some incentive for savings.
Second, increased taxation of gasoline could raise additional revenues and encourage conservation in its use. U.S. gasoline prices are still among the lowest among industrial countries and, in real terms, not significantly higher than they were before the 1973 oil crisis. The following inflation-adjusted gasoline prices are on an annual basis: 1958 $2.24; 1968 $2.11; 1978 $2.16; 1988 $1.75; 1998 $1.35; 2008 $3.23; and 2009 $2.28. If additional gas taxes were used partly to subsidize public transportation, it could be of real help to the poor.
Again, you can pose questions to Professor Wilber here.