Scant agreement on link between taxes and growth

Presumptive Republican nominee Mitt Romney said recently: "We must have taxes that are competitive with other nations." Must we? Is there a link between low tax and high growth?

Jeff Horwich: Presumptive Republican nominee Mitt Romney recently said: "We have to have taxes that are competitive with other nations." Politicians frequently make the connection between tax rates and economic growth -- something the American economy badly needs.

But if we look at evidence around the world, how strong is the link between lower taxes and higher growth? We asked Marketplace's Stephen Beard to check into it.

Stephen Beard: Sweden taxes its citizens more heavily than any other country. The personal tax burden is about twice that in the U.S. There is an upside: Swedes don’t have to worry about high quality health care and education. Both are provided by the state.

But there is a downside too, says Pierre LeBlanc, a tax expert with the OECD in Paris.

Pierre LeBlanc: Countries raising a higher share of their revenues through personal income taxes and social security contributions tend to have – on average – lower rates of economic growth.

Take Denmark, another very high-tax country. In the first decade of this century, the Danish economy grew by only 4.5 percent over that whole period. Low taxes on the other hand seem to have the opposite effect.

Matthew Sinclair of the U.K.’s Taxpayers’ Alliance.

Matthew Sinclair: Lower taxes -- there’s a very strong academic, official literature showing that they are associated with higher economic growth.

Look at Australia and New Zealand. Personal taxes there are lower than in the U.S. and economic growth has been significantly higher.

But John Christensen who campaigns against tax evasion is not persuaded.

John Christensen: There isn’t a clear pattern as such.

He says there are too many exceptions: low-tax Portugal with its abysmal growth record. And what about the U.S.? A relatively low tax country which between 2000 and 2010 actually underperformed Sweden.

Christensen: So there’s no evidence that high taxes slow down rates of growth or that lo w taxes stimulate higher rates of growth.

Opinions are divided on this issue. But John Whiting of the Institute of Taxation says one thing is certain: high rates of personal tax can drive rich and talented individuals away.

John Whiting: The danger is that if you pluck too many feathers from the goose it may waddle off and lay its golden egg somewhere else.

In London, I’m Stephen Beard for Marketplace.

About the author

Stephen Beard is the European bureau chief and provides daily coverage of Europe’s business and economic developments for the entire Marketplace portfolio.
Log in to post1 Comment

The effective corporate tax rate in America fell to a 40 year low in 2011 of 12.1%.
Less than half the rate in the UK or Australia.
From what I've been reading on the web, many corporations actually pay nothing in corporate taxes.
Exxon, GE, Newscorp (owner of Fox news), Wells Fargo to name a few, pay nothing or next to nothing
back to the nation that makes their prosperity possible.
People in America who make minimum wage pay taxes while corporations like Exxon who
rake in about $5 million dollars per hour pay nothing. Furthermore indivdual Americans can only
contribute $2500 to a presidential election campaign. Corporations have no such limitations.
Over the past 30 years thanks to the Reagan and Bush tax cuts, income for the wealthiest 1% has
risen by over 300% while thier tax burden has been halved or eliminated. Meanwhile, the income of the rest of us
has remained stagnant. If trickle down economics were going to work we would be the most
prosperous nation in the world. We're not. And we lag drastically in health care and education.
The only thing we're number one at is defense spending. We should spend more improving the
quality of life and less on the power to end it. And Exxon should pay it's fair share. That 49% of our
budget is protecting big companies like Exxon. It's not protecting my home. There's a 7,000 mile
buffer zone between Indianapolis and Kabul. I'd rather my children have an education than a
nuclear submarine they'll never even see. If we spread religious tolerance and freedom half as
zealously as we spread our military power we might not even have to worry about extremists.
After all there isn't much difference between blood thirsty psycopaths in madrassas and bloodthirsty
psycopaths in Aurora Colorado or in Utoya Norway.

With Generous Support From...