Do Tax rises cause unemployment ?

AGP

Just wondering is there a proven economic link between raising taxes and increasing unemployment ? Is there a point at which raising taxes becomes counter-productive as the number of people it makes unemployed (in the private sector economy) costs the state more in unemployment than the tax itself raised.

thelankylad

Raising taxes reduces your disposable income and hence reduces demand for goods this can cause unemployment. In terms of when it starts to be counter productive , it would be where small reductions in demand lead to large increases in unemployment.

leninbenjamin

there's theory on it somewhere, although i can't remember where you'd find it...

revenue would look like a curve somewhere along these lines iirc...

(not exceptionally helpful i know, but the more you tax, the more money you withdraw from the economy, hence a reduction in demand).

cavedave

The laffer curve.
Basically the more you tax something the less incentive there is to do the act that gets taxed. It is believed by many that the laffer curve is over emphasised.

1huge1

cavedave wrote: »

The laffer curve.
Basically the more you tax something the less incentive there is to do the act that gets taxed. It is believed by many that the laffer curve is over emphasised.

Ya but its not easy to find the point were your earning the most revenue from taxes.

Kind of makes me wonder about this airport tax and if the government are getting more from it than they were before...

Time Magazine

Laffer is way too over-stated. Typically tax cuts only raise about 25% of their value "back", so the whole "lower taxes, people work more, you get more taxes" thing doesn't really hold much water -- you lose about 75% of what you'd expect to.

Do tax rises cause unemployment? I haven't looked at any figures but I imagine higher taxes now are not as bad as people think. Why? Well in the first instance people aren't spending money anyway, so taxing them doesn't take that much out of circulation. Secondly, with the way the labour market is, I don't think there's many people who are in a position to say to their boss "I'm taking time off because of these taxes", so I don't think people would work a lot less either.

silverharp

you have to add in other effects as well. If say a family is paying 2K extra in tax this year, thats means less money in savings or up to 2K not paid off their debts. Otherwise it means less money spent in their local economy.
It simply means that government jobs replace private sector jobs which reduces the productive base of the economy.

Time Magazine

silverharp wrote: »

you have to add in other effects as well. If say a family is paying 2K extra in tax this year, thats means less money in savings or up to 2K not paid off their debts. Otherwise it means less money spent in their local economy.
It simply means that government jobs replace private sector jobs which reduces the productive base of the economy.

Not as simple as that either. If that family were to save the 2k to spend in a few years' time, then that money wouldn't be put to use for a couple of years. If the government were to tax and spend it on building a road, then the money would be spent now, albeit with more waste than if the family were to spend it. So the govt/society can choose whether to spend now or in the future. I think our economic situation will be a lot friendlier in a couple of years so would generally support (obviously subject to the budget constraint and a cost-benefit analysis) government spending now.

leninbenjamin

The Economist wrote: »

I think our economic situation will be a lot friendlier in a couple of years so would generally support (obviously subject to the budget constraint and a cost-benefit analysis) government spending now.

I think our economic situation would be a lot friendlier if the government started spending now. Unfortunately that's not going to happen, but I just look around and see all the infrastructure this country still needs (particularly on the west), and all the construction workers on the dole and think "opportunity lost".

silverharp

The Economist wrote: »

Not as simple as that either. If that family were to save the 2k to spend in a few years' time, then that money wouldn't be put to use for a couple of years. If the government were to tax and spend it on building a road, then the money would be spent now, albeit with more waste than if the family were to spend it. So the govt/society can choose whether to spend now or in the future. I think our economic situation will be a lot friendlier in a couple of years so would generally support (obviously subject to the budget constraint and a cost-benefit analysis) government spending now.

If the money was saved would it not smarten up the balance sheets of the banks by having an increased savings base or reduced loan book. Another issue is the negetive psychological effects on taxpayers of being deprived of their savings?
Is it the governments job to "bet" on the market? the savers view may be correct from a macro point of view, also they will know their own circumstances better the the gov. does.

Time Magazine

silverharp wrote: »

If the money was saved would it not smarten up the balance sheets of the banks by having an increased savings base or reduced loan book.

Yes, at least temporarily. But it wouldn't "fix" the banks, they will have to be re-capitalised anyway. We're in at least two messes: a banking crisis and a deep recession. The banking crisis will take maybe ten years to settle, and will be very costly, but at least there's some breathing space because it will take so much time. The recession is affecting an awful lot of people immediately. There are plenty of people losing their jobs because of a structural shift in the economy (that's economics-lingo for these guys will probably need to be re-trained/find a new sector to work in) but the knock-on effects have also caused a serious decline in temporary demand. The stuff that I have read from the likes of Brad DeLong on this is that it's not the tax issue that's causing this (most of that money gets spent somehow anyway) but a savings issue as the banks are not lending what they're getting so that's just sitting idle. It's possible, though I haven't looked at numbers at this so I remain agnostic, that a tax-and-spend (that would have to be very focused) policy could keep employment levels until the economy adjusts and the temporary dearth in demand recovers.

Another issue is the negetive psychological effects on taxpayers of being deprived of their savings?

Decreased income of the orders of 5% or 10% have little impact on well-being. Especially if it's taxation rather than a paycut, as far as I know. Becoming unemployed, on the other hand, is a bigger hit than getting a divorce.

Is it the governments job to "bet" on the market?

No, but I do think they have a role in stabilising/dynamically optimising the economy. This is why they should have taxed housing at a greater level over the past ten years imho, essentially shorting the market.

the savers view may be correct from a macro point of view, also they will know their own circumstances better the the gov. does.

It's far more likely that they look out for their own private interests rather than the social interest. That's not to say that the government will definitely hit the socially optimal savings level or anything like it, but it is saying that fiscal policy is vital in the MV = PY framework when V [latex]\rightarrow[/latex] 0.

Hasschu

It depends on which taxes and how the taxes are deployed. VAT and variations of VAT have an immediate effect on consumption particularly if there is a time limitation. For example if there is an announcement that VAT will rise 5 points in 60 days it will stimulate spending for that period of time. If there is a sudden drop in VAT it has a small positive effect on sales volumes. If VAT is abolished on a specific commodity for a short period of time sales will zoom. Income taxes are not avoidable and have small ongoing effects, in the long term if they are spent on infrastructure and education it can make the country more competitive a la the Scandinavian model in particular and most of Europe. Inheritance taxes are also not avoidable except by tax evasion and gov't collusion, if spent properly they can add to competitiveness. A responsible government with vision is a crucial part of the formula, without that all is for nought. Some countries are governed by kleptocracies where taxes are high and poverty is widespread, other countries have high taxes combined with honest government and a high standard of living. Social cohesion is also a major factor Japan is a country where social cohesion is high and the pain and gain are spread evenly. Ireland is now lacking in social cohesion as evidenced by income disparities and the alacrity with which the gov't came to the aid of the banks and developers. The Ukraine is a country which is a good example of what happens when the ties that bind fray.