Friday, April 11, 2008

Supply side economics : An overview (II)

It is true that lower taxes reduces the incentives(benefit) of not paying them, which imply that tax payers have to pay higher cost for not paying lower taxes. As a result tax revenues increases because of better tax compliance. However, the question whether lower taxes really means increases in tax revenue , also becomes a practical matter concerning the management technology , the IRS or for this matter any tax authority, apply to the process of tax revenue collection. The better the technology support on management, applied to collect taxes, the higher should be tax revenues. Neither Laffer, nor Paap and Takats paper (IMF WP 8/07), give too much importance to such issue(technology and tax collection). In fact Paap´ s paper, works on the assumption that there is limited enforcement capacity , and auditing for tax payers randomly determined .-
The conclusion of that paper though, make clear the point about the ability of tax authorities to get tax payers on line, such that those cases with weak tax collection system, might benefit more from tax cuts than those with strong tax collection system. But there is no mention about technology applied on tax collection, let say throughout a transaction networks, which automatically get the proper tax with each transaction.-
The question about the real impact of lower taxes on economic growth, and the expected higher productivity level arising from private uses of resources , will also depend on the institutional framework ,which means that tax cut , requires complementary policies to get the best of its effect on welfare.-
Tax cuts might have a stronger impact on economic growth, when they are complemented with better incentives to tax exemption , better service for tax payers (customer profit approach ), and better allocation decisions for fewer resources , which should be focused on those areas with the stronger impact on growth.Tax cuts on its own, is just the minimum of the economic growth- incentives , equation.-

Friday, April 04, 2008

Supply side economics : An overview (I)

Supply side economics although controversial , it was supposedly to be a key development on macroeconomic policy design .Was it so ?. Most of the policies analysis and applications in the second half of the twenty century, has been a kind of solving aggregate demand problems. Keynes, Friedman, Tobin, among others XX th century economist, were all aggregate demand economist. The first two, focusing on the fiscal policy and monetary policy side respectively, of the problem. Tobin with his income policy approach, making supply side engineering.-
In the early eighties, following rational expectations macroeconomic revolution, came out Supply side economics as an alternative explanation for economic growth and market behaviour . The book “Wealth and Poverty” , (1983) by George Wilder, made popular the notion of markets driven by supply forces , as much as demand ones.
One of Its key arguments ,was about the importance of tax policies to modify incentives in the decision making process, specially labor supply and investment decision. Although there is evidence about the positive impact that lower taxes have upon economic growth in the long run (World Bank papers) ,there is not too much consensus about its short run implications .A recent paper (IMF, WP 08/7 Thomas Paap and Elòd Takâts :Tax rate cuts and tax compliance :The Laffer curve revisited, January 2008),analyzes how tax rate cuts can increase revenues. It apply the argument to Russia tax policy which cut income tax to a flat 13%, replacing a tier tax model of 12,20 and 30% previous rate. Tax exemption increases, reduced further down the tax burden. So, Personal income tax revenues grew by 46% in nominal terms , and 26% in real terms during the following year. Besides, Personal income tax(PIT) share to the GDP, increased from 2,4% up to 3,3%.Maybe it is not enough and conclusive empirical evidence, but it suggest some guidelines about microeconomic side of tax policies effects.- However, Supply side economics foundations; goes deeper than tax cuts. It says that private allocations of financial resources, get higher productivity than public allocation (Government) of the same resources, because the opportunity cost are different: Higher for the private than the public sector. Having said that, tax cuts might or might not increase revenues, because families and firms have different views about what the highest productivity of their financial resources are .Families and individuals, might save the additional resource into their pockets, such that the final impact on tax revenues, will depend upon the tax applying on saving .Business might decide to invest more, but the effect of additional investment on tax revenues ,will depend on where that investment goes to.