Sunday, April 4, 2010

Artus: Cut Taxes on Labor, Raise Taxes on Capital

The other day, I cited an interesting paper by Patrick Artus. Today I want to single out the conclusions of that paper, namely, to cut taxes on labor income and increase taxes on capital income. The first recommendation comes from the observation that current stimulus policies are going to have to be curtailed. Further stimulus should focus on increasing domestic demand, which is best done, Artus contends, by increasing the income of workers, whose propensity to spend is greater. Conversely, there is little propensity to invest at present, because of low capacity utilization, so relatively little harm will be done by increasing taxes on income to capital. Artus further recommends increasing taxes on pollution, presumably for the familiar Pigovian reasons. The paper is short and worth reading in its entirety.

Addendum: It looks as though the Obameconomists have decided to take the exact opposite course. Here is Christina Romer:

Instead, she said other smaller drivers would be critical. “It’s going to need to come from our exports. That’s why the president has been pushing his export initiative. It’s going to need to come from business investment, and that’s why measures like a zero capital gains for small businesses, or tax incentives for investment. I think those are the right policy to make sure we get a healthy kind of growth, going forward.”

Her reasoning is that consumers are intent on decreasing their credit exposure and won't spend income increments.

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