Still don’t think tax rates affect human action? Oh sure, if they get too high, you say, then people will rebel.
But changes within a range have little effect, right? Wrong. Look at productivity.
Economists say that productivity – the output of workers divided by the hours worked – is a key reason for economic growth.
And it makes sense. If workers are more efficient, then more gets done in any given workday. More products are made at lower costs, more consumers buy the cheaper products, and economic growth results.
So what happens to productivity when tax rates are cut?
Take Ronald Reagan’s tax cuts of the early ‘80s. Congress passed his rate-slashing bill in 1981, but they did not take full effect until 1983.
In 1981 and 1982, productivity growth averaged a measly 0.4 percent. But in 1983, productivity jumped 4.5 percent. Moreover, it stayed above 1.7 percent for the next three years.
Now jump forward to George W. Bush’s tax cuts of 2001. They provided more rate cuts for people and firms, and, yes, more productivity gains ensued.
From 1998-2001, productivity growth averaged a healthy 2.4 percent.
In the two years following Bush’s tax cuts, productivity growth almost doubled to 4.6 percent.
This growth, which has left many economists shaking their heads in wonder, is largely responsible for the economic growth we now enjoy.
To be sure, more than just tax rates figure into productivity growth: burdensome red tape can hinder it; reducing regulations can encourage it. And innovations, such as the personal computer and the Internet, surely help it — which is why the U.S. should strive to remain the
world’s leader in defending intellectual property.
But low tax rates are just the flipside of higher productivity, because they encourage businesses to invest in productivity-enhancing innovations, and to become more efficient. And that leads to economic growth, higher incomes and lower unemployment.