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Tax or Not to Tax
There are different pros and cons of higher or lower tax rates, ...
17-10-2012 17:08
Economy
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There are different pros and cons of higher or lower tax rates, and there are different groups  expressing different views on that.  As an example, in U.S. the Republicans historically have mostly favoured lower taxes, especially on the rich. The rationale behind their views was higher income of richer taxpayers as a result of lower taxes, which would mean more hiring and more employment  and thus higher GDP and again more income, and again more hiring, etc. That strategy has worked with varying success. In 1980’s, the economic  team of the-then president Ronald Reagan supported the massive tax cut program, suggesting that by reducing taxes the government would facilitate higher growth. The experiment did not succeed and US saw higher taxes during Bush I administration and later in Clinton administration. In fact, a study made recently by Congressional Research Service, relying on the massive amount of U.S. data covering post-WWII to nowadays period, found that tax cuts on the rich have not been significantly related to GDP growth.  There may be several reasons why private sector sometimes, mostly in crises, falls short of government sector in creating jobs. Normally, in normal times, there is growth that leads investors to invest, start-ups to be started, companies to hire more. In crises, however, private sector has proven to be less willing to be active. That is when government was more instrumental in creating and stimulating job growth.
But I think we have to look at this problem a bit closer. It is often argued that tax cuts on companies lead to more workers being hired, which is not necessarily true if taken on the general scale. First thing one has to consider is whether these companies are capital or labour-intensive.  The tax cuts can certainly stimulate more job hiring for labour-intensive companies, which are decreasing in numbers in North America and moving abroad for the sake of cheap labour. It would be opposite for the capital-intensive companies good example would be Google, PotashCorp, Accenture and many others.  It is important, for our government, to focus the tax policies on the labour intensive companies, so we can keep those companies interested in us.
Understanding the difference between capital and labour intensive companies, one can argue that tax cuts do not necessarily benefit operational side of the business. Meaning, even though we provide the tax breaks for companies, they are not necessarily will be creating jobs. The cuts can be used for R&D or even in paying the dividends to shareholders. To be able to offset such problems, I recommend for governments to use tax credits. This way companies will be able to obtain the tax breaks only when they have fulfilled their promises to the public. Using tax credit method companies and the governments can benefit equally and without any drawbacks.

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Tax or Not to Tax -
17-10-2012 17:08
Economy
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