Do taxes affect economic growth

Is there any hard evidence that tax rates or tax cuts have positive or negative effects on economic growth? I can’t find hard evidence for either position

Try looking at an Introductory Macroeconomics text.

Briefly, during a recession, tax cuts (or increased government spending) can both stimulate the economy, by increasing total demand for goods and services.
When the economy is operating at full capacity, things get more complicated.

There are also “supply side” issues, which relate to Labor Economics. Here, the effects of tax cuts are theoretically ambiguous. Empirically, I understand the strongest effects are on married women, but I have no cite and have not googled for one.

The effects of taxes on savings are another aspect. Oddly enough, they may depend upon the inflation rate.

Taxes are obviously an expense and, like any expense, have a negative effect on a business.

On the other hand, money collected from taxes does not disappear. It gets spent by the government. So some businesses receive more money that was originally collected by taxes than they paid out in taxes.

In theory there’s something called the “Laffer Curve” which shows an “optimal” tax rate for revenue purposes. The problem is, nobody really knows what it looks like. All we can say is that the optimal rate lies somewhere between 0% taxes (no revenue because of no taxes) and 100% (no revenue because of no economic activity). From

Another problem with the Laffer curve is it is too simplistic a concept anyway. In reality, the entire tax code can’t be reduced to a one-dimensional graph. It is thus a very schematic representation for what is really a much more complicated concept…That is not to say it is completely useless, but one does have to keep in mind its being an extreme simplification.

I agree with that completely. The tax code IS complex, and you can’t make blanket statements like, “raising taxes cuts growth”, or “lowering taxes increases revenue”.

You can find situations were a small tax devastates an entire industry. For example, the luxury tax was a fiasco that severely damaged industries that build luxury goods, to the point where tax revenue did drop. On the other hand, if low taxes prevented funding a critical institution such as the military, the courts, or the police, and that had a chilling effect on the market, then raising taxes to fund them might actually increase economic output.

Another example might be when a country’s debt situation becomes so crushing that the market starts to react in an extremely negative way. In that case, raising taxes to pay off the deficit might stabilize the market and improve efficiency. Some might argue that this is the case today, but then they’ll be making the same arguments the supply siders do, only on the opposite side. Trying to prove whether the deficit is big enough for that to be the case is difficult.

Do you really need “hard evidence”? This seems like something you could figure out just using logic. I mean, either tax rates affect economic activity, or they don’t. If you assume they don’t, then you have to assume that economic activity would be the same (holding all other variables steady) under a tax rate of 100% or even higher, as under a tax rate of 0%.

This assumption leads directly into what economists call, in their highly specialized, technical terminology, “cloud cuckoo land”. The assumption is absurd, in other words, so it is therefor safe to assume that tax rates do affect economic activity.

The problem, of course, is that government spending tends to be more inefficient than private. Unlike most libertarians, I won’t say that government spending is neccessarily bad: spent well, goverment dollars going to education and infrastructure can be very good things.

But money lost to inefficiency doesn’t disappear either. It always ends up in somebody’s pocket – and usually it doesn’t stay there long.

That’s ridiculous. The federal government spends more money in a day than a private citizen can spend in a lifetime. The government is the most efficient money spending entity ever created.

I do need hard evidence because places like Sweden have almost double the US’s tax rate and they are not stuck in economic hell. If you take money from people from taxes instead of them buying goods & services the money still goes into the economy it just takes a different route to get there.

But surely that’s a non sequitir? Efficiency in spending (or lack of it) has absolutely nothing to do with how much is being spent.

I guess it’s also a non sequitur :smack:

But in the long run, it creates waste. It’s not about money; it’s about value. When the government gets involved, it often starts destroying value ihstead of creating it. Sure, the money doesn’t go anywhere on paper. But if the government doesn’t do something that helps the infrastructure, it’s usually creating economic distortions. If nothing else, quite a lot of the money will go to people who produce little to no value: bureaucrats.

This isn’t to say that bureaucracies are worthless. But an individual bureaucrat creates little to no value, and usch organizations tend to be significantly overstaffed.

As I understand it, Sweden has managed to become comfortable, but isn’t really growing. In addition, they have a sky-high real unemployment rate, apparently masked by pretending the unemployed are on government medical.

I hate to break the news to you, but there are large bureaucracies in the private sector to. I speak from personal experience.

Cite? [And, you might also want to consider other Scandinavian countries too.] In the U.S., by the way, the unemployment rate is masked by not counting those who have gotten frustrated and are no longer actively looking for work.

Sounds like a laffable concept to me.

Since you asked for a cite I’d like to see on that this is a statistically significantly percentage of those who are unemployed. I’ve seen this arguement made several times in these debates but I’ve never seen any hard data to back this claim up. If you don’t have hard numbers, what percentage of unemployed do you estimate are being masked by this effect?


You didn’t really address my point. Do you think that if Sweden raised it’s tax rate to 100% it’s economic activity would continue just as before?

Not wanting to join the fight. But, like X, I find this idea deserves some searching.

Here’s what I found:

From Z Magazine.

From The Concise Encyclopedia of Economics:

And an older piece from the Bureau of Labor Statistics. Warning: PDF.

So it sure looks, at first blush, as if there’s a significant number of ‘discouraged’ unemployed out there. From the BLS site we get (depending on how you crunch the numbers) between 10% and 50% of the ‘official’ unemployment rate. The other sites above seem to bear this out or may skew higher.

In some other economic thread (sorry, I forgot which), I was going to post something about how Norway/Scandinavian countries isn’t really that rich, but the hamsters ate my post, and I didn’t feel like fact checking the NY Times article (I still don’t). Anyway, here is the article, which one of my college friends originally sent me to discuss the $50 pizza it’s short and a good read.

If these numbers hold, and if the pace of growth is as slow as it is, I hypothesize that economically, these high tax states will keep these states stuck in the late 20th century (except for cell phones).

Whether that is economic hell or not (professionals tend to say yes, or eventually yes) is up to debate.