Does Tax Policy Receive Too Much Emphasis?

In every electoral cycle, candidates parade about explaining why their tax policies will either stimulate rapid economic growth or, in the case of a tax increase, have no effect on economic activity other than to increase government revenue. For example, during last night’s Democratic debate, Sen. Clinton espoused the following view in response to raising taxes on those making over $250,000:

Yes. And here’s why: Number one, I do not believe that it will detrimentally affect the economy by doing that. As I recall, you know, we used that tool during the 1990s to very good effect and I think we can do so again.

I am not a public finance guy and I really cannot tell you the magnitude of the impact these tax increases, but I do not think that you can claim that it was the reason for the growth during the Clinton years (which I am assuming is what she meant by “very good effect”).

We seem to get to wrapped up in the tax policy of the candidates and the implications for growth when many of their proposals are only going to have effects at the margin. What often gets overlooked by the talking heads (and obviously the candidates themselves) is that the 1990s was a period of rapid productivity growth. In this light, I am reminded of a quote from Brad DeLong:

This story of positive structural changes in the American economy – the very rapid growth of potential output – is the big story about the economy during the past four years. It’s important both at the macro level – why is output-per-man-hour 20 percent higher than it was five years ago? – and at the micro level – how are people today doing their jobs and being 30 percent more productive than their predecessors of a decade ago? The news media aren’t covering this well. Yet it’s the really big story about the economy in the Twenty-First century.

Indeed the story in terms of economic growth of the last 15 or so years has been the story of productivity, not one of ingenious tinkering with tax policy.

One response to “Does Tax Policy Receive Too Much Emphasis?

  1. Perhaps fiscal policy is over-emphasized a bit, but I would hate to turn around and under-emphasize it.

    I’d claim that the bulk of productivity gains came from trade and technology. President Clinton aided both: NAFTA, GATT, MFN status and WTO membership for China on the trade side, and a cap gains cut helped provide capital to the tech boom.

    You cannot say that productivity gains would have been as large with advantageous tax policy on capital.

    Sadly, Senator Clinton seems poised to ignore both of us and turn her back on the effective achievements of the 1990s.

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