10/08/2005 1:04:33 pm
High Taxes = Low Growth. It is often said by the defenders of the big state that there is no evidence that high taxes create low growth. On the contrary, however, evidence is vast and overwhelming; both theoretical and empirical. Numerous scientific studies have shown in which ways, and how much, tax increases do slow down growth. And the list of countries showing this - and the opposite; tax redouctions that increase growth - is just getting longer.

Dan Mitchell of the Heritage Foundation has compiled a thorough, yet fairly short, list of some 20 relevant studies on the matter. They come from the IMF, the European Commission, European Journal of Political Economy, European Economic Review, Journal of Macroeconomics, the OECD, NBER, Economic Inquiry and several others. They all agree that a big state with high taxes will decrease growth.

Mitchell describes, in eight bullet-points, the main negative effects of the government spending that follows high taxes. That is, why growth will decrease if taxes increase:
- Government spend­ing displaces private-sector activity.
- Government spending finances harmful intervention.
- Government spending requires costly financing choices.
- Government spending encourages destructive choices.
- Government spending discourages productive choices.
- Government spending distorts resource allocation.
- Government spending is a less effective way to deliver services.
- Government spending inhibits innovation.

Growth took us from the living standards of the Middle Ages. It is still the basis for all improvements of our living standards. High taxes and big government spending stops this process. The opposite claim, that taxes have no effect on growth, is a vicious myth.

Read the whole analysis - >