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Tax increases always reduce economic activity by decreasing the profitability
of an activity. Marginal activity will be reduced. That does not mean that
other factors can not overwhelm the negative effects of taxes. A tax to
build roads would reduce economic activity. But the new transportation
possibilities create new profitable activities. The careful control of the
money supply since Volker and followed by Green span has systematically
reduced interest rates by reducing inflation premiums and the distortions
created by inflation. Declining interest rates reduce the profitability
threshold for many ventures, increasing economic activity.
Stuart
Richard C. Fredette wrote:
> This has been an extremely interesting discussion. Bruce, I tend to side
> with you on the issues. However, the comment you made on Bush's tax
> increase has me wondering how that tax on the upper 1% of the population
> negatively effected the economy. We had an extremely high national
> deficit at the time that was tending to drive up interest rates. That
> tax increase and the subsequent one that Clinton pushed through on the
> upper 2% of the population had the positive effect of helping to bring
> government borrowing down and thereby reduce interest rates. It's hard
> to refute the point that since both those tax increases the economy has
> been booming, much to the stern warnings of many at the time. If those
> tax increases were detrimental to the economy, where is the evidence? In
> my mind, to the extent they contributed to debt / deficit reduction, they
> were exactly what was needed. Yes, spending could have been reduced, but
> try doing that in the real world! And if we are going to spend, we
> should at least bring in the revenue to pay for it. To continue spending
> our way into debt as we were doing is not a viable prescription for a
> healthy economy in the long run.
>
> Otherwise, I thought your case was eloquent.
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