Republicans and Democrats Disagree Over Taxes – What’s Best for the Economy? Rachel Pappy, Tax Attorney Polston Tax Comparing the Main Economic Theories of the Republican and Democratic Parties Republicans: Democrats: -Laissez-Faire/Free Market -Keynesian Economics Economics -Combination of Private Sector -Supply Side Economics and Government Help -Tariffs -Control over the Money Supply and Federal Reserve Interest Rates Republican Party Economic Theories Opposes a government-run single- Laissez-faire economics is best. payer health care system and is in This includes less spending by the favor of a personal or employer- Free markets and individual government and eliminating based system of insurance, achievement are the primary factors government run welfare programs in supplemented by Medicare and behind economic prosperity. favor of private sector nonprofits and Medicaid. (With a mixed record of encouraging personal responsibility. supporting Social Security, Medicare, and Medicaid.) Laissez faire economics is the belief that economies and businesses function best when there is no interference by the government. The premise is that human beings are Laissez-Faire naturally motivated by self-interest, and when there is no interference in their Economics - economic activities, a natural and more Explained efficient balance in society exists. This economic theory believes that each individual's self-interest to do better, strong competition from others, and low taxes will lead to the strongest economy, and therefore, everyone will benefit as a result. In the 19th century, this philosophy became mainstream in many countries. However it didn’t take long before companies gained monopoly power which resulted in poor treatment of workers, and lack of safety in the workplace By the mid-19th century, governments in Laissez-Faire most advanced countries became more involved in protecting and representing the Economics – safety and concerns of workers, protecting the environment, and the general Problems population. This was the beginning of many of the laws, including consumer protection laws, that are still being established and modified today to protect against large inequality gaps, and boom and bust economic cycles. Supply-side economics believes that economic growth can be most effectively created by lowering taxes and decreasing regulation. Consumers will then benefit from a greater supply of goods and services at lower prices and employment will increase. Many Republicans consider the income tax system to be inherently inefficient and oppose Supply-Side graduated tax rates, which they believe are unfairly targeted at those who create jobs and Economics - wealth. Instead they support reducing high tax rates which they believe will result in economic growth, which in turn will increase government Explained revenue. Many Republicans believe private spending is usually more efficient than government spending. Studies of supply-side policies demonstrate the increase to federal deficits, income inequality and overall lack of growth for the economy. In the past several decades, tax cuts in the U.S. Supply-Side seldom result in more than a minimal impact on GDP growth, and have not recouped revenue Economics - losses. Problems Cutting marginal tax rates often primarily benefits the wealthy, so it is perceived as being politically motivated because the wealthy can contribute large sums to a political campaigns, both in dollars and public support. Tariffs - Explained • Tariffs have historically served a key role in US Foreign Trade Policy. Tariffs were one of the pillars that allowed the rapid development and industrialization of the United States. • Their purpose was to generate revenue for the federal government and to allow for import substitution industrialization (industrialization of a nation by replacing foreign imports with domestic production) by acting as a protective barrier around infant industries. • They also aimed to reduce the trade deficit and the pressure of foreign competition. The United States pursued a protectionist policy from the beginning of the 19th century until the middle of the 20th century.. After 1942 the U.S. promoted worldwide free trade. Tariffs - Problems • Economists generally agree that free trade leads to increased levels of economic output and income, and trade barriers such as tariffs reduce economic output and income. • Tariffs may be passed on to producers and consumers in the form of higher prices: • Tariffs can raise the cost of parts and materials, which would raise the price of goods using those inputs and reduce private sector output. This would result in lower incomes for both owners of capital and workers. • Similarly, higher consumer prices due to tariffs would reduce the after-tax value of both labor and capital income. • Because these higher prices would reduce the return to labor and capital, they would incentivize Americans to work and invest less, leading to lower output. • Although the U.S. dollar may appreciate in response to tariffs, the more valuable dollar would make it more difficult for exporters to sell their goods on the global market, resulting in lower revenues for exporters. This would also result in lower U.S. output and incomes for both workers and owners of capital, reducing incentives for work and investment and leading to a smaller total economy. Democratic Party Economic Theories Generally support a type of Support a progressive tax Keynesian economics which Support universal health care, includes infrastructure system, higher minimum wages, and social security, public education, and public development and government- housing, equal economic sponsored employment programs with occasional support for opportunity, a basic social in an effort to achieve economic cutting the size of government development and job creation, safety net, and strong labor and reducing market unions. while stimulating private sector job regulations. creation. Keynesian Economics is the belief that a well-functioning and flourishing economy may be created with a combination of the private sector and “government help”. This theory believes that the Keynesian government can create and fund public works projects such as fixing roads and Economics - bridges and other infrastructure needs Explained of the nation. These jobs would directly or indirectly go to unemployed people who would then have money to spend, and as they spent their money, private businesses could hire other workers, who are then able to spend, and so on. It is not possible to know how much demand needs to be increased to deal with output gap because the output gap can vary. It takes a long time to change aggregate demand by the time AD increases it may be too late and it leads to inflation. Keynesian Keynesian economics may encourages big government. In a recession governments increase spending, but, after recession Economics - government spending remains leading to Problems high tax and high spending. Government spending projects may be designed for the short-term, but once started it creates powerful political pressure groups who lobby the government to hold onto them. Democrats believe a progressive tax structure reduces economic inequality by making sure that the wealthiest Americans pay the highest amount in taxes to provide economic equality and opportunities to those who face difficult hurdles. They believe the increase in taxes can be spent on Progressive social services as an investment in job creation and the economy, while spending less on the military. They oppose cutting social services, such as Social Tax Structure- Security, as well as Medicare, Medicaid, and various other welfare programs, believing it to be harmful to Explained efficiency and social justice. Democrats believe the benefits of spending on social services, in monetary and non-monetary terms, are a more productive labor force and that the benefits of this are greater than any benefits that could be derived from lower taxes, especially on top earners, or cuts to social services. Critics of progressive taxes consider them to be discriminatory against wealthy people or high-income earners, and question if it disincentivizes productivity due to the higher tax burden. The U.S. progressive income tax is sometimes perceived as a means Progressive of income redistribution because nearly 20% of tax revenue is Tax allocated to social safety net programs. Structure- Problems There may be a trade-off between the degree of progressivity and economic efficiency such that it reduces the incentive to work and can lead to stagnation and inefficiency. Tax codes in all developed countries promote a substantial degree of progressivity. The tax code in the United States is considered less progressive than those in most other developed countries, while tax codes in the Scandinavian countries tend to be among the most progressive. Social Safety Nets - Explained • Research demonstrates that not only have anti-poverty programs successfully raised millions of families out of poverty, but they also increase the economic mobility of recipients and support broader economic growth. • Evidence demonstrates that safety nets do not provide the mythical “poverty trap”, but instead reduces poverty, increases economic mobility, and strengthens the national economy. • Studies show that many social safety net programs, especially those that target children, offer an excellent return on investment to taxpayers. There is also little evidence that the safety net reduces labor participation.