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Scant agreement on link between taxes and growth

Stephen Beard Aug 1, 2012

Scant agreement on link between taxes and growth

Stephen Beard Aug 1, 2012

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.

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