Monday, January 14, 2013

Studies Emphasizing Negative Effects of Taxes on Economic Growth

The Tax Foundation's Dr. William McBride published a Special Report in December titled "What is the Evidence on Taxes and Growth?McBride conducted an economic literature review of more than two-dozen peer reviewed academic journal articles from the last thirty years examining the empirical relationship between taxes and economic growth.
The Special Report contains a helpful table listing the referenced studies, summarizing their methodologies and findings.  McBride concluded that, "the results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions, and monetary policy." 
According to McBride, "a review of the empirical studies establishes some standards by which a tax system may be judged."  Applying those standards, McBride judged that "the U.S. has probably the most inefficient tax mix in the developed world."  Here, McBride pointed to U.S. tax policy regarding personal and corporate income taxes, including double taxation of corporate income through capital gains and dividend taxes.  As explained in the Special Report, these kinds of taxes can adversely affect production, innovation, and risk-taking, thereby harming economic growth.
But McBride also offers a way forward for U.S. tax policy:
Pro-growth tax reform that reduces the burden of corporate and personal income taxes would generate a more robust economic recovery and put the U.S. on a higher growth trajectory, with more investment, more employment, higher wages, and a higher standard of living.