The first link is to Greg Mankiw’s, Harvard economist, recent New York Times column, How to Make Business Want to Invest Again.
Advocates of traditional fiscal stimulus often view low levels of investment as a symptom, rather than a cause, of the weak recovery. Businesses are reluctant to invest, they argue, because they lack customers eager to spend. If the government can goose demand by handing out dollars to households short on cash, or by buying goods and services directly, businesses will respond by expanding their own spending as well.
Yet fluctuations in investment spending, rather than being only a passive response, are also one of the driving forces of the booms and busts of the business cycle. The great economist John Maynard Keynes suggested that investment spending is in part determined by the “animal spirits” of investors, which he described as “a spontaneous urge to action rather than inaction.” Recessions occur when optimism turns to pessimism, and businesses are reluctant to place bets on a prosperous future. Recovery occurs when investor confidence returns.
WHAT can policy makers do to stoke animal spirits and encourage businesses to invest?
One obvious step would be a cut in the taxation of income from corporate capital. According to a 2008 study by the Organization for Economic Cooperation and Development, “Corporate taxes are found to be most harmful for growth.” Tax reform that reduced the burden on capital income and shifted it toward consumption would improve prospects for long-run growth and, in so doing, encourage greater investment today.
The second is from a 2007 New York Times column, but is just as timely: Fair Taxes? Depends What You Mean by ‘Fair’. It’s a response to Buffett’s tax claims. I wonder if Buffett ever reads his critics?
The best source for objective data on the distribution of the tax burden is the Congressional Budget Office. The C.B.O. goes beyond anecdotes and bald assertions to provide hard data on who pays taxes. One can argue about the details of its methods, but there is no doubt that it is nonpartisan and that its tax analysts are some of the best in the business.
The C.B.O.’s most recent calculations of federal tax rates show a highly progressive system. (The numbers are based on 2004 data, but the tax code has not changed much since then.) The poorest fifth of the population, with average annual income of $15,400, pays only 4.5 percent of its income in federal taxes. The middle fifth, with income of $56,200, pays 13.9 percent. And the top fifth, with income of $207,200, pays 25.1 percent.
At the very top of the income distribution, the C.B.O. reports even higher tax rates. The richest 1 percent has average income of $1,259,700 and forks over 31.1 percent of its income to the federal government.
When the C.B.O. studies the tax burden, it includes all federal taxes, including individual income taxes, payroll taxes and corporate income taxes. In its analysis, payroll taxes are borne by workers, and corporate taxes by the owners of capital. For the richest 1 percent of the population, 9.3 percentage points of their 31.1 percent tax rate comes from the taxes that corporations have paid on their behalf. The corporate tax would undoubtedly loom large if the C.B.O. were to calculate Mr. Buffett’s effective tax rate.