Impacts of tax changes

Date posted: March 6, 2012

Whenever there’s a proposal for a tax increase or decrease, there’s debate about the proposal’s merits. But, says N.C. State University economist Mike Walden, it’s not sufficient to look at the impacts of such tax changes in isolation.

“This is really the challenge, because most tax changes are going to involve a corresponding change in spending. That is to say, if tax rates are moved up, spending is going to go up. If tax rates are moved down, spending is going to go down. There are some rare exceptions where you can actually reduce taxes and get more tax revenues. But those are very, very rare.

“So, what you have to ask — for example, if you’re contemplating increasing taxes – is, alright, if the government gets more tax revenues, where are they going to spend that? And what programs are going to be increased and what will be the economic impacts of those programs? And, of course, you could have a situation where you raise taxes and spend it on some public programs, which promotes even more economic growth than the adverse effects of the higher tax rates.

“And, of course, you have to do that also in reverse. If you’re going to lower tax rates, you’re going to have to look at what is the impact of that in terms of spending programs. So this becomes very, very difficult because … it’s often very hard to ascertain what is a direct economic impact of some particular spending program that the government does. Oftentimes those impacts are going to be long run. They won’t show up until years down the road.

“So, unfortunately, decision-makers don’t have all the information many times to make an assessed decision about the impact of the increased taxes versus the impact of, for example, increased spending.”

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