Question

Which of the following taxes, if lowered, would result in the greatest increase in the long run economic growth rate? Explain. Which of the following taxes, if raised, would result in the greatest increase in the long run economic growth rate? Explain. a) Sales tax b) Tax on investment income c) Tax on labor income

Answer 1

It depends in part on what Uncle Sam does with those tax revenues. One may be tempted to think that if taxes on investment income are increased, that may lead to long-term economic growth, but what happens if the investment income tax increase is large enouth to discourage additional investments? Suppose a major portion of all investments are shares in company stock or capital. If that declines because investment income tax is too high, would that not result in a shrinking economy in the long run? Long-term economic growth depends on many variables, so it's nearly impossible to determine how different types of taxes affect the economy, especially when those effects might not be felt for some time.

Answer 2

Umm, well, it's pretty much, I think, about which tax will bring an increase productivity, investment, increase in resources, and savings; all of which constitute a growing economy.

ie. Kinda like this:
a. Sales tax
-Reducing consumption taxes will lead to people having more money free. Some will be spent, some will be saved. The saved money will be available for investment. The spent money will stimulate the economy.

c.Tax on labor income
- There could be a slight advantage to reducing income taxes since it may stimulate more investment in business assets than reducing the consumption (sales) tax.

But, I'm not quite sure how to tackle this question.