The Moorish Wanderer

Tax Cuts. Yes, It Works, too

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on December 27, 2012

I was led to believe backing specific policies out of deliberate investigation was not about politics. Tax cuts are not particularly popular with those of my political persuasion down here in Morocco.

There is a lot to be discussed about the cognitive dissonance in electoral manifestos: low taxes, big social programs, no deficits, no debt, high growth, etc. and these are routinely enumerated regardless of ideological loyalties, with some nuances and priorities. You know how the alternate argument goes: electoral manifestos are window-dressing, there is a ‘permanent manifesto’ no one votes for, impervious to the weathercock of partisan politics, and based on solid McKinsey-made PowerPoint presentations. Yet even this perpetual grand design boast performing miracles at low costs, present, future, sunk, hidden or otherwise.

Tax Credit for investment do not have the same impact, but they are more persistent

Tax Credit for investment do not have the same impact on growth, but they are more persistent.

So what is new with tax cuts, and why would they be a better budget policy? First, because the stimulus effect delivered by a tax cut generates on average 8 times more growth than similar amounts engaged in a deficit-spending program; This is not a case against government spending, it is a reliable evidence that points to the inefficiencies of a one-sided stimulus program, which is usually favoured by the people I mentioned before. Targeted programs with prerequisite random experiments, smart regulation and rationality-based policies are the way to go (by the way, I have yet to read the results from testing programs launched under Mr Baraka when he was at MAGG, or Mr Boulif’s agenda)

And this leads me to the salient result from tax cut programs: not all tax cuts are created equal: Investment Tax Credits are by far the most effective policy, and the effect of a generic tax credit to investment produces on the long run a more persistent and net positive impact than any other exogenous shocks that boost productivity.

A caveat however: not all investment projects have these virtuous effects on growth. Expanding physical capital has some positive externalities, but not all physical capital generates it: building a research facility yes, banking on real estate development to create growth, not so much.

A quick look at the budget documents show tax credits allocated to the building sector amount to around 3Bn dirhams, and increased 4% in quarterly rate between 2011 and 2012 – so on the basis of these predictions, the expanded tax credit should have generated an additional .15 point to annual growth – a figure to compare with the sector’s growth, the lowest in positive sector growth. Of course, a rational explanation would state my model is not working. Another would assert tax credit are wasted on the building sector.

 

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