Friday, December 09, 2005

tax and growth

Kiwipundit points out an article showing that high tax rates cause low GDP growth.

I am concerned however that this is for the joint economic committee in the USA and not really an academic paper. The problem is not that he has gotten the statistics wrong but instead that he is comparing the wrong things and not considering relevant differences. Because the literature as point seems to say there is no clear relationship and yet he is able to find a very clear one we are left considering
Why - in particular why his particular use of the term expenditure is appropriate.

He includes quiet a wide definition of public expenditure and measures it directly with GDP he then seems to imply that the tool growth rates of countries over various periods as different data points. To show how this might be problematic look below.

Imagine two countries -
A is in a poor economic situation or long cycle - they have low GDP growth and yet a growth in the cost of government services. They cut back on various things (pushing the country further into recession) but they don’t have the political power to cut it back to the huge degree required to keep their expenditure gdp constant particularly considering the rise in interest on loans as their dollar drops.

B (the second country) has good growth rates and a good govt - it is careful with spending in its overheating economy (because that would cause inflation) and as GDP grows spending reduces as a percentage of that GDP.

From a differnt point ofview there are of course many more ways to stupidly mis manage an economy than to get it right - ie there could be a "right" way to have high expenditure and yet on average spending a lot look bad due to to many stupid leaders.

Thus the data supports his theory but low tax/gdp might be an effect as opposed to a cause. I.e. dropping tax rates might not change the situation or countries may not do that just because it would be a bad idea in their situation.

Also I note from the other graphs in the presentation the graphs are massively distorted by places like Luxembourg and Ireland and other small countries as well as an uneven balance of developing and developed countries etc. for example the fact that eastern Europe grows fast from a low baize might be more an insult to communism than a compliment to low taxes or even worse it might be a comment on EU subsidies policies.


Post a Comment

<< Home