For those interested, here’s some info on taxes and their effect on growth, in a global sense.
you have to be a subscriber to FT, but I’ll post text here:
The question [is whether high shares] of public spending in GDP prove economically harmful. Some think that no economy can tolerate taxes higher than those elsewhere if it is to sustain “competitiveness”. Others talk as if public spending disappears into a black hole from which nothing of value emerges. Is there anything in these crude arguments? Not much, is the answer. Citizens of the rich countries deserve a more subtle debate.
Start then with overall economic performance, particularly the growth in output per hour and GDP per head. The charts [see at the top of the post and below] show both between 1995 and 2004 against the share of general government spending in GDP in 2004. The share of government spending in GDP varies by a ratio of almost two to one, from Sweden on 58 per cent to Ireland on 34 per cent. There is a group of relatively low spenders: the English-speaking countries (except the UK), Switzerland, Japan and Spain. There is a group of extremely high spenders: Sweden, Denmark and France.
What, then, do the charts show about the link between government spending and economic performance? There is none, is the answer.
Ireland’s performance generates a small, but statistically insignificant, slope downwards to the right. But Ireland is an exceptional case. What is striking is the slow growth of GDP per head in low-spending Japan and Switzerland and the high growth in high-spending Finland and Sweden. The relatively poor performance of the US may surprise some readers. But remember that US GDP grows faster than those of European countries because its population of working age increased by 1.2 per cent a year, against 0.4 per cent in the European Union between 1994 and 2004.
I would not wish to push such crude data too far. Measurement of GDP and so of productivity is increasingly hard to do as output becomes less material. It is particularly hard to measure the output of government services. Yet one overriding point does emerge: the mere fact of a rising ratio of public spending in GDP does not spell doom for the UK (or any other) economy. This is consistent, surprisingly enough, with an analysis from impeccably conservative US sources: the Heritage Foundation and The Wall Street Journal. In the 2005 Index of Economic Freedom, which measures, however roughly, the underpinnings of market economies, Luxembourg (ranked 3rd) and Denmark (8th) are above the US (10th), as is the UK (7th). Sweden (14th), Finland (15th), the Netherlands (17th), Germany (18th) and Austria (19th) all fall in the global top 20.
What then of the idea that higher spending (and so taxes) must also spell a lack of global competitiveness? The short answer is that it is nonsense, for reasons elaborated in my book, Why Globalization Works (Yale University Press, 2004). The burden of higher taxation will be shifted on to owners of relatively immobile factors of production. Moreover, no link exists between the size of government spending and a lack of something one could reasonably define as “international competitiveness”.
What does indeed matter is the efficiency with which money is both raised and spent. But tax levels are only one of many determinants of economic performance. Far more important are: the quality of institutions, particularly of public administration and the judiciary; the security of property; the probity and public spiritedness of politicians; the soundness of money; the quality of education, health and infrastructure; and the extent of arbitrary regulation of economic activities. Monomania is usually a mistake. An exclusive focus on the tax burden is an example.
What we must abandon is a debate that takes the form of “public sector bad, private sector good”, or the other way round. It is particularly stupid when, as in the UK, the decision has already been made to pay for evidently high social priorities through the state. Health and education do not suddenly become far less important than holidays in Ibiza merely because they are financed through taxation.
In making the decision on what to put into the public sector and how much to spend on it, we have to place substantial weight on underlying social and political values. But we must also ask, first, what we must do through the government (defence and law and order, for example); second, what we want,for reasons of social solidarity, to do through government (provision of basic incomes for all, of universal education and of basic health services, for instance); third, whether we wish to pay for services through general taxation or user fees; fourth, what is the least costly way of raising revenue; and, finally, whether we want services to be paid for and provided by government or merely paid for by government and provided by competitive private suppliers.
These are the right questions. Labour’s higher spending will not destroy the British economy, just as Finland’s high spending has not destroyed Finland. What matters here, as elsewhere, is not what you do but the way that you do it."
In our own country we have enough empirical evidence to show that tax cuts and increases have caused the economy to both grow and slow down. This may not be “common sense” but it is still empirically true. This is not an argument for or against higher taxes.
And for Rainjack, here’s a treasury dept. report on taxes (are they liberal)
documenting your hero’s (Ronald Reagan) massive tax cut, and the following tax increases. Are they sniffing glue, or have you been wrong? It’s ok Reagan was wrong too, and you can see he tried to fix his 81 fiasco. Included above(hopefully) is a graphic adapted from the treasury dept. report.