Wednesday, May 30, 2012

Big Gummint, Small Growth: Sun Rises in the East

No surprise to anyone.

Using tax to GDP and spending to GDP ratios as a proxy for size of government, regression analysis can be used to estimate the effect of government size on GDP growth in a set of countries defined as advanced by the IMF between 1965 and 2010. …As supply-side economists would expect, the coefficients on the tax revenue to GDP and government spending to GDP ratios are negative and statistically significant. This suggests that, ceteris paribus, a larger tax burden results in a slower annual growth of real GDP per capita. Though it is unlikely that this effect would be linear (we might expect the effect to be larger for countries with huge tax burdens), the regressions suggest that an increase in the tax revenue to GDP ratio by 10 percentage points will, if the other variables do not change, lead to a decrease in the rate of economic growth per capita by 1.2 percentage points. The result is very similar for government outlays to GDP, where an increase by 10 percentage points is associated with a fall in the economic growth rate of 1.1 percentage points. This is in line with other findings in the academic literature. …The two small government economies with the lowest marginal tax rates, Singapore and Hong Kong, were also those which experienced the fastest average real GDP growth.  --Center for Policy Studies (England) quoted by Dan Mitchell

Mitchell has been saying the same thing (and demonstrating it) for years; his article has additional cites and links.

1 comment:

J. Strupp said...

It looks like the author makes the assumption that tax rates are going up in general (across income classes).

But what if we just tax the hell out of rich people? This won't have nearly the negative impact on GDP since the ultra rich have a low marginal utility of income.

Which is what we should do. The ultra rich will cry in their beer and whine like babies but this shouldn't impact growth all that much which is the important part.