Can a Tax drive an Economy? That remains the essential Question, and the Answer must be Yes. Taxes, unlike almost all other economic stimuli, affect the economic participation of the entirety of the Population; simply due to the operational effect upon the manner of doing business. There remains a definite flow to Investment development, and Tax policy changes the direction of that Investment flow; ofttimes in an undesirable manner. This article helps indicate that alteration which was caused to the Housing sector since 1997.
China acts as a prime example of the above criteria, where Tax policy after 1978 was specifically directed to the development of Export trade. Huge Investment, domestic and foreign, was focused on Export manufacture due to Tax breaks and other political measures. Vast Wealth poured into the Country, but domestic markets were ignored. The Chinese Consumer developed a dependence on foreign Goods, the Chinese manufacturer became slave to Export sales. Foreign Investment became addicted to the Tax advantages, and started to flee even at suggestion of their elimination for other underdeveloped nations promising Tax and Political advantages. China now still lacks development of domestic markets, especially the distribution networks already developed by foreign Products; who are about to abandon China because of retreating Sales as China Workers face unemployment due to the retardation of purchase of Chinese Goods in the World Market. China must evolve, but economic circumstances retard that movement even worse than their initial position in the late 1970s, as they now possess a trained labor force which lacks Work.
I will let Dean Baker explain the entire argument better than I can without a whole lot of effort, though his concentration was on asset bubbles. What Dean does not do is enter the Suggestion that the basic rationale for the asset bubbles was that Taxes were too low. Business and Politician insisted that Government Spending must not decrease, but that Tax revenues had to drop. Business insisted that the Tax revenues canceled must favor Investment, so People could not get the Tax advantages without Investment; creating the necessary environment for asset bubbles. It was great for Business, until Everyone realized that Returns could never match the inflated level of Capitalization (inflated due to the massive resource demand). Could the Economists have forestalled this Condition by Warnings, some did but were completely ignored. Spokesmen for any economic policy last only if those policies are Popular; Treasury and Fed officials obtain their positions through providing no disturbance to the popular Status Quo, Whistle-Blowers never survive though they are typically Right. lgl