Do lower taxes mean faster economic growth, as is so often claimed by conservatives? I mentioned this question in the context of corporate taxes recently:
Although in general low taxes do not necessarily increase growth, corporate taxes are considered “the most harmful type of tax for economic growth”, according to the OECD. And researchhas found that decreases in the corporate tax rate spur investment, which in the U.S. has been surprisingly low in recent years.
I figured I’d post a few other resources here, along those lines. This is a review paper from Brookings on individual taxes and economic growth:
We find that, while there is no doubt that tax policy can influence economic choices, it is by no means obvious, on an ex ante basis, that tax rate cuts will ultimately lead to a larger economy in the long run. While rate cuts would raise the after-tax return to working, saving, and investing, they would also raise the after-tax income people receive from their current level of activities, which lessens their need to work, save, and invest. The first effect normally raises economic activity (through so-called substitution effects), while the second effect normally reduces it (through so-called income effects).
Here’s a Congressional Research Service report from 2012 that caused a lot of debate, and concluded that:
The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie.
Here’s a survey of economists. They’re asked if, “A cut in federal income tax rates in the US right now would lead to higher GDP within five years than without the tax cut.” They’re divided between Yes and Uncertain, with only a few No’s.
And here’s a couple good pieces by Noah Smith. On individual taxes:
the best evidence that economists can muster shows that income taxes — i.e., what Republicans are always trying to cut — don’t hurt the economy very much. Microeconomic estimates of something called the Frisch elasticity of labor supply — or the amount that taxes discourage people from working — are very low. That means that income taxes do only a very little to discourage people from working. The one exception is tax cuts for the poor and working class, which really do seem to encourage more work effort. But for the upper-middle class and rich, who bear most of the tax burden and who are usually the prime beneficiaries of Republican tax cuts, the effect is very small.