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An economic theory popular in the 1980s and again early in the 21st century is "trickle down". This theory holds that cutting taxes for the most affluent portion of our society will create prosperity. The taxes saved by those individuals will be invested in our economy to expand business and create jobs. Also, some of that money will be spent in ways that create more demand for goods and services, further spurring the growth of the economy.
The reality is that the affluent have the same short-term view of life as the rest of us. They tend not to invest the windfall created by tax cuts. And they do not buy more goods and services. Instead, they buy goods and services that are more luxurious — the same amount of cars, clothing, TV sets, and food as we all buy but more expensive items of each, which consumes the dollars that might otherwise be invested. None of this causes our national economy to grow.
My father owned his own business, an independent furniture store. He believed in a "trickle up" economic theory. He supported the concept of government welfare grants because he knew the money would help keep poor people from dropping out of the consumer class. If a person living on welfare did not come into my father's store to buy a toaster or lamp, that person might go into the haberdashery across the street and buy shoes or some shirts, thereby providing an income to the salesman in that store, who might then walk across the street and buy a TV set from my father.
In a consumer-driven economy such as ours, keeping the tax burden light on those least able to pay taxes must have a higher priority than lightening the burden on those who can easily afford to pay. And this principle must be implemented not in terms of absolute dollars but in relative terms.
Of course, anyone who pays taxes thinks he or she is paying too much. But are taxes in the United States really too high? Do lower taxes create a more robust economy?
Here is a chart of the overall tax burden in 11 nations, showing the burden relative to each nation's economy.
Note that the total tax burden in the U.S. is 25.4% of our gross domestic product. This includes all federal, state, and local taxes. This includes personal income taxes, corporate taxes, sales taxes, property taxes, excise taxes, even Social Security and Medicare taxes.
Germany, often seen as a model of a dynamic economy, has an overall tax burden 34.6%, a third higher than the U.S. Among nations with smaller tax burdens than the U.S. is Japan, whose economy has been stagnant for more than a decade, and Mexico, whose poor economy is a major cause of the hoards of illegal immigrants crossing the boarder into the U.S.
No. Compared with other industrialized nations, the U.S. does not have a high tax burden.
No. Lower taxes do not necessarily create a better economy.
31 March 2004
Updated 18 March 2007
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