When I write about the economics of fiscal policy and need to give people an easy-to-understand explanation on how government spending affects growth, I share my four-part video series.
But. other than a much-too-short primer on growth and taxation from 2016, I don’t have something similar for tax policy. So I have to direct people to various columns about marginal tax rates, double taxation, tax favoritism, tax reform, corporate taxation, and tax competition.
Today’s column isn’t going to be a comprehensive analysis of taxes and growth, but it is going to augment the 2016 primer by taking a close look at how some taxes are more destructive than others.
And what makes today’s column noteworthy is that I’ll be citing the work of left-leaning international bureaucracies.
Let’s look at a study from the OECD.
…taxes…affect the decisions of households to save, supply labour and invest in human capital, the decisions of firms to produce, create jobs, invest and innovate, as well as the choice of savings channels and assets by investors.
What matters for these decisions is not only the level of taxes but also the way in which different tax instruments are designed and combined to generate revenues…investigating how tax structures could best be designed to promote economic growth is a key issue for tax policy making. … this study looks at consequences of taxes for both GDP per capita levels and their transitional growth rates.
For all intents and purposes, the economists at the OECD wanted to learn more about how taxes distort the quantity and quality of labor and capital, as illustrated by this flowchart from the report.
Here are the main findings (some of which I cited, in an incidental fashion, back in 2014).
The reviewed evidence and the empirical work suggests a “tax and growth ranking” with recurrent taxes on immovable property being the least distortive tax instrument in terms of reducing long-run GDP per capita, followed by consumption taxes (and other property taxes), personal income taxes and corporate income taxes. …relying less on corporate income relative to personal income taxes could increase efficiency. …Focusing on personal income taxation, there is also evidence that flattening the tax schedule could be beneficial for GDP per capita, notably by favouring entrepreneurship. …Estimates in this study point to adverse effects of highly progressive income tax schedules on GDP per capita through both lower labour utilisation and lower productivity… a reduction in the top marginal tax rate is found to raise productivity in industries with potentially high rates of enterprise creation. …Corporate income taxes appear to have a particularly negative impact on GDP per capita.”
Here’s how the study presented the findings. I might quibble with some of the conclusions, but it’s worth noting all the minuses in the columns for marginal tax, progressivity, top rates, dividends, capital gains, and corporate tax.
This is all based on data from relatively prosperous countries.
A new study from the International Monetary Fund, which looks at low-income nations rather than high-income nations, reaches the same conclusion.
The average tax to GDP ratio in low-income countries is 15% compared to that of 30% in advanced economies. Meanwhile, these countries are also those that are in most need of fiscal space for sustainable and inclusive growth.
In the past two decades, low-income countries have made substantial efforts in strengthening revenue mobilization. …what is the most desirable tax instrument for fiscal consolidation that balances the efficiency and equity concerns. In this paper, we study quantitatively the macroeconomic and distributional impacts of different tax instruments for low-income countries.
It’s galling that the IMF report implies that there’s a “need for fiscal space” and refers to higher tax burdens as “strengthening revenue mobilization.”
But I assume some of that rhetoric was added at the direction of the political types.
The economists who crunched the numbers produced results that confirm some of the essential principles of supply-side economics.
…we conduct steady state comparison across revenue mobilization schemes where an additional tax revenues equal to 2% GDP in the benchmark economy are raised by VAT, PIT, and CIT respectively. Our quantitative results show that across the three taxes, VAT leads to the least output and consumption losses of respectively 1.8% and 4% due to its non-distorting feature… Overall, we find that among the three taxes, VAT incurs the lowest efficiency costs in terms of aggregate output and consumption, but it could be very regressive… CIT, on the other hand, though causes larger efficiency costs, but has considerable better inequality implications. PIT, however, deteriorates both the economic efficiency and equity, thus is the most detrimental instrument.
Here’s the most important chart from the study. It shows that all taxes undermine prosperity, but that personal income taxes (grey bar) and corporate income tax (white bar) do the most damage.
I’ll close with two observations.
First, these two studies are further confirmation of my observation that many – perhaps most – economists at international bureaucracies generate sensible analysis. They must be very frustrated that their advice is so frequently ignored by the political appointees who push for statist policies.
Second, some well-meaning people look at this type of research and conclude that it would be okay if politicians in America imposed a value-added tax. They overlook that a VAT is bad for growth and are naive if they think a VAT somehow will lead to lower income tax burdens.
[…] And if the study included an estimate of what would happen if there were higher income taxes on saving and investment, there would be another line showing even more economic damage. […]
[…] And if the study included an estimate of what would happen if there were higher income taxes on saving and investment, there would be another line showing even more economic damage. […]
[…] And if the study included an estimate of what would happen if there were higher income taxes on saving and investment, there would be another line showing even more economic damage. […]
[…] And if the study included an estimate of what would happen if there were higher income taxes on saving and investment, there would be another line showing even more economic damage. […]
[…] And if the study included an estimate of what would happen if there were higher income taxes on saving and investment, there would be another line showing even more economic damage. […]
[…] And if the study included an estimate of what would happen if there were higher income taxes on saving and investment, there would be another line showing even more economic damage. […]
[…] And if the study included an estimate of what would happen if there were higher income taxes on saving and investment, there would be another line showing even more economic damage. […]
[…] the obvious lesson is that you can’t punish capital without simultaneously punishing labor. Sadly, I’m not holding […]
[…] the obvious lesson is that you can’t punish capital without simultaneously punishing labor. Sadly, I’m not […]
[…] And if the study included an estimate of what would happen if there were higher income taxes on saving and investment, there would be another line showing even more economic damage. […]
[…] who work at the IMF and they often produce high-quality research (see here, here, here, here, here, here, here, here, here, and here). Sadly, their sensible analyses doesn’t seem to have any […]
[…] (unfortunately) not a rich person, but that doesn’t stop me from opposing punitive taxes on successful entrepreneurs, investors, and small business […]
[…] who work of the IMF and they often produce high-quality research (see here, here, here, here, here, here, here, here, here, and here). Sadly, their sensible analysis doesn’t seem to have any […]
[…] (unfortunately) not a rich person, but that doesn’t stop me from opposing punitive taxes on successful entrepreneurs, investors, and small business […]
[…] (unfortunately) not a rich person, but that doesn’t stop me from opposing punitive taxes on successful entrepreneurs, investors, and small business […]
[…] “equitable treatment means we all end up at the same place.” In other words, lots of class-warfare taxation to finance lots of means-tested […]
[…] In regular English, this simply means that class-warfare tax policy (ever-higher tax rates on the so-called rich) causes the most economic damage. Even the left-leaning OECD agrees with this analysis. […]
[…] In regular English, this simply means that class-warfare tax policy (ever-higher tax rates on the so-called rich) causes the most economic damage. Even the left-leaning OECD agrees with this analysis. […]
[…] but if they think tax increases are going to happen, it’s quite likely that they will support the most economically damaging types of class-warfare […]
[…] (unfortunately) not a rich person, but that doesn’t stop me from opposing punitive taxes on successful entrepreneurs, investors, and small business […]
[…] tax increases are going to happen, it’s quite likely that they will support the most economically damaging types of class-warfare […]
[…] tax increases are going to happen, it’s quite likely that they will support the most economically damaging types of class-warfare […]
[…] but if they think tax increases are going to happen, it’s quite likely that they will support the most economically damaging types of class-warfare […]
[…] if they think tax increases are going to happen, it’s quite likely that they will support the most economically damaging types of class-warfare […]
[…] And if the study included an estimate of what would happen if there were higher income taxes on saving and investment, there would be another line showing even more economic damage. […]
[…] (unfortunately) not a rich person, but that doesn’t stop me from opposing punitive taxes on successful entrepreneurs, investors, and small business […]
[…] (unfortunately) not a rich person, but that doesn’t stop me from opposing punitive taxes on successful entrepreneurs, investors, and small business […]
[…] basically admitting a VAT would be accompanied by class-warfare tax hikes on companies and households – thus undermining the usual argument that the VAT is needed to […]
[…] elaborate, I’m trying to help people understand why it is a mistake to impose class-warfare taxes on high-income […]
[…] elaborate, I’m trying to help people understand why it is a mistake to impose class-warfare taxes on high-income […]
[…] And if the study included an estimate of what would happen if there were higher income taxes on saving and investment, there would be another line showing even more economic damage. […]
[…] “equitable treatment means we all end up at the same place.” In other words, lots of class-warfare taxation to finance lots of means-tested […]
[…] caused by random luck, such as looks and height, then why would we want politicians to impose taxes and redistribution to deal with inequalities that are the result of attributes over which we have […]
[…] And if the study included an estimate of what would happen if there were higher income taxes on saving and investment, there would be another line showing even more economic damage. […]
[…] And if the study included an estimate of what would happen if there were higher income taxes on saving and investment, there would be another line showing even more economic damage. […]
[…] (unfortunately) not a rich person, but that doesn’t stop me from opposing punitive taxes on successful entrepreneurs, investors, and small business […]
[…] “equitable treatment means we all end up at the same place.” In other words, lots of class-warfare taxation to finance lots of means-tested […]
[…] that “equitable treatment means we all end up at the same place.” In other words, lots of class-warfare taxation to finance lots of means-tested […]
[…] (unfortunately) not a rich person, but that doesn’t stop me from opposing punitive taxes on successful entrepreneurs, investors, and small business […]
[…] (unfortunately) not a rich person, but that doesn’t stop me from opposing punitive taxes on successful entrepreneurs, investors, and small business […]
[…] (unfortunately) not a rich person, but that doesn’t stop me from opposing punitive taxes on successful entrepreneurs, investors, and small business […]
[…] (unfortunately) not a rich person, but that doesn’t stop me from opposing punitive taxes on successful entrepreneurs, investors, and small business […]
[…] economists who have tried to justify extortionary tax rates. Simply stated, high tax rates hinder the economy, create deadweight loss, and don’t produce revenue […]
[…] P.S. My point about higher fines on the rich not helping the poor is the same an my argument that class-warfare taxes on upper-income taxpayers don’t do anything to help the less fortunate. Indeed, poor people actually suffer collateral damage because of diminished prosperity. […]
[…] And if the study included an estimate of what would happen if there were higher income taxes on saving and investment, there would be another line showing even more economic damage. […]
[…] let’s examine some empirical evidence. I’ve done that before (see here, here, here, here, here, here, here, here, and here), but it’s always good to expand the […]
[…] P.P.S. While I’m usually critical of the IMF because it has a statist policy agenda, it’s not uncommon for the professional economists who work there to produce good research. In the past, I’ve highlight some very good IMF studies on topics such as spending caps, the size of government, taxes and business vitality, fiscal decentralization, the Laffer Curve, and class-warfare taxation. […]
[…] maybe, just maybe, there’s a relationship between tax policy and economic […]
[…] taxes on the rich would affect the economy. I should have pointed out that class-warfare taxes are the most destructive, on a per-dollar-collected basis, because they impose heavy penalties on saving, investment, and […]
[…] The real danger is that we’ll wind up with a VAT because some folks on the right offer their support. These people don’t particularly want European-type levels of redistribution, but they think that’s going to happen. So one of their motives is to figure out ways to finance a large welfare state without completely tanking the economy. […]
[…] Let’s now shift to some economic analysis. The report makes (what should be) an obvious point that high tax rates have negative economic effects. […]
[…] economists who have tried to justify extortionary tax rates. Simply stated, high tax rates hinder the economy, create deadweight loss, and don’t produce revenue […]
[…] far as I’m concerned, the tax code shouldn’t punish people simply because they earn a lot of […]
[…] do respond to incentives. And when tax rates are too high, both money and people will escape high-tax […]
[…] do respond to incentives. And when tax rates are too high, both money and people will escape high-tax […]
[…] which obviously is more damaging than what many people think of today as socialism (i.e., punitive taxes and a big welfare […]
[…] there’s another arrow in the class-warfare […]
[…] (y los nuevos gastos) sean financiados por más préstamos? ¿Imprimiendo dinero? ¿compensando los aumentos de impuestos de guerra de clases? ¿Alguna combinación de los tres? Cualquiera que sea la respuesta, el daño económico negativo […]
[…] want the tax cuts (and new spending) financed by more borrowing? By printing money? By offsetting class-warfare tax increases? Some combination of the three? Whatever the answer, the negative economic damage will be […]
[…] is the core economic reason why even left-leaning international bureaucracies agree that class-warfare taxes are so destructive. When you take a high tax rate and make it even higher, […]
[…] Some of my left-wing friends shrug their shoulders because they assume that rich people bear the burden. But remember that the reduction of “consumer surplus” is a measure of the loss to taxpayers. The deadweight loss is the foregone output to society. […]
[…] that’s been the biggest political issue (and oftentimes biggest economic issue) in every recent tax fight (the Trump tax reform and Obama’s fiscal cliff), as well as the […]
[…] Because the short-run benefits of buying votes will be offset by long-run damage to investment, competitiveness, and job […]
[…] other words, the bottom line is that tax rates should be as low as possible to produce as much prosperity as […]
[…] direct taxes” (i.e., levies that target the rich such as personal income tax) is the worst way to generate […]
[…] « Class-Warfare Taxes Are Most Harmful to Prosperity […]
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