Saturday, November 19, 2005

Tax Cuts

Long Ago and Not True Anyway has a surprisingly good post on treasury and its call for tax cuts for the top tax brackets.

I think he is a bit unfair on treasury, treasury comes to conclusions baised on the evidence that they have and the tools that they have - it is therefore rational that they would suggest the sort of things that they suggest. Other people use different tools and care about different things.

It is still smart for a government to take their advice under consideration since they represent the experts at using the tools that they have even if we decide we will ignore their data in the end.

On to the details LANTA's
he seems to mis-spell padovano's name -

Padovano, F. & Galli, E. (2001) "Tax Rates and Economic Growth in the OECD Countries", Economic Inquiry, 44 .

anyway there is quite a bit of evidence on the effect of tax on growth - although it is as he notes quite hard to study accuratly because as you will soon see the conclusion.

amongst others

Mueller, D. C. & Stratmann, T. (2003), "The Economic Effects of Democratic Participation", Journal of Public Economics 87, 9-10, 2129-2155.

Fölster, S. and Henrekson, M. (2001), ‘Growth Effects of Government Expenditure and Taxation in Rich Countries’,European Economic Review 45, 8, 1501-1520

find a negitive tax vs GDP assocaition - BUt one or ten articles do not a consensus make because there are a large numer of articles that show no significant relationship between tax and growth.

anyway here a review to start with

Zagler, M. and Dürnecker, G. (2003), "Fiscal Policy and Economic Growth", Journal of Economic Surveys 17, 3, 397-418

Anyway most literature finds that generally one can say that certain tyes of expenditure and certain actual expenditures improve growth and others reduce growth (which is really what one would expect).

More expenditure on education for example will probably raise growth while more tax just spent against existing projects is very situation dependant. Basically if someone says let's cut taxes to raise growth the academic question is almost identical to the question the public asks - what service will you cut?". If it is the right things then growth will increase.

Of curse as LANTA would say the bottom line is not htat they are wrong - the tax cut may well raise growth - it is that they are claiming to know things they dont know.

"according to the briefing, will have a “substantial [positive] growth impact”; a claim that is – supposedly – based on two things: economic theory and empirical evidence."

I think they can claim 1 but cant ake absolute statements on 2.


Post a Comment

<< Home