There’s No There There: Low Tax Rates and Economic Growth

Abstract:     
Low tax rates can be seen as a desirable policy goal for a variety of reasons. Your views on justice and desert may require a system of taxation that allows people to keep as much as possible of what they earn. Or you may have strong opinions on property rights, self-property, self-reliance and the "undeserving poor". In this paper, however, I will examine the merits of another and prima facie more convincing rationale, namely that low levels of taxation - especially low levels of taxation on the income or wealth of the so-called productive segments of society - are beneficial for economic growth. I criticize both the theoretical underpinnings of this view and its factual basis. The paper has three parts: 1) a description of the view; 2) a theoretical criticism; and 3) a criticism based on statistical correlations.

I believe this issue is of the utmost importance given the urgency with which many legislators and economists in various countries advocate tax cuts. This advocacy is regrettable because neither the theoretical nor the empirical grounds for it are sound. It may even be the case that low tax rates have unwanted harmful consequences instead of the assumed beneficial ones.

Number of Pages in PDF File: 15

Keywords: taxation, economic growth, incentives, GDP, tax rate, productivity

JEL Classification: D31, D63, E62, H11, H20, H21, H30, O40

working papers series