by Jon Sanders
Research Editor and Senior Fellow, Regulatory Studies, John Locke Foundation
You couldn’t write a paper that clashes more violently with the current climate than the one you wrote, if you were trying.
— Chad, from the 2009 movie In the Loop
The Tax Foundation has published a paper today. It’s a good paper. But that won’t matter; we live in a time where politicians get rewarded for pushing exceedingly counterproductive economic policies with media acclaim and, worse, voter ratification. Warnings based on the simple, inescapable fact that demand curves slope downwards — i.e., if you increase the cost of things, people buy less of them and the economy falters, no matter how godlike the leader — are either ignored or hooted down. If Cassandra were an economist, she’d feel no different.
Nevertheless, here’s an excerpt from the Tax Foundation’s press release:
High tax rates lead to lower economic growth, and high rates on personal and corporate income are especially damaging, according to a new study by the Tax Foundation. A review of 26 academic studies over the last 30 years confirms that lower-tax economies are more productive and that raising taxes has negative dynamic effects on revenue collection.
“Nearly every empirical study of taxes and economic growth published in a peer reviewed journal finds that tax increases harm economic growth,” said Tax Foundation chief economist William McBride.
The consensus among experts is that taxes on corporate and personal income are particularly harmful to economic growth, with consumption and property taxes less so. This is because economic growth ultimately comes from production, innovation, and risk-taking. By these standards, the U.S. has probably the most inefficient tax mix in the developed world.
The U.S. also has the highest corporate tax rate in the industrialized world. If that rate were to come down 10 points – still higher than most of our trading partners – it would add 1 to 2 points to GDP growth, and likely not lose revenue because the tax base would expand from in-flows of foreign capital as well increased domestic job growth and investment.