Peer-reviewed Academic Studies: More Taxes, Less Prosperity

Via International Liberty:  Studies indicate that higher taxes lead to less economic growth.  As Dan Mitchell puts it, the Tax Foundation

reviews the academic research on taxes and growth and doesn’t find a single study supporting the notion that higher tax rates are good for prosperity.

. . .

Twenty-three studies found a negative relationship between taxes and growth, by contrast, while three studies didn’t find any relationship.

For those keeping score at home, that’s a score of 0-23-3 . . . .

It is common in certain circles to claim that higher taxes (on the rich or otherwise) are actually good for the economy, and that the somewhat higher tax rates under President Clinton not only coincided with ’90s prosperity, but caused it.  (It is common in these circles to assume that the end of the Cold War; the dot-com boom; and the Republican Revolution in Congress, which resulted in significant welfare reform, did not cause it.)

There are perhaps two ways to try to evaluate whether more taxes, all other things being equal, lead to more prosperity or less.  The first is with abstract reason; the second is empirically.

Abstractly, we can think in terms of incentives.

• It is universally known in general that if you tax something, you get less of it.  Liberals are perfectly happy to acknowledge this fact when it suits them—e.g., they wanted “cap and trade” to tax carbon emissions so that we would get less of them; states tax cigarettes to discourage smoking; etc.

• Likewise if we tax work, earning, or wealth creation, naturally we’ll get less of it.

Alternatively, we can try to look at real-world tax rates and prosperity, and study whether there’s a relationship between them.  This is difficult to do, as “Professor Tevyeh” explains, because the world is complex and there are a lot of confounding variables.  Some would say that it’s so complex that it can’t soundly be done at all; others would say that it can be done, but should be done by scientists, rigorously trying to control for other variables, getting a large sample of data, checked by their peers, etc. (and still with a scientist’s humility about the limits of certainty).

Apparently the academic literature on taxes is much more unanimous than those who pine for the Clinton years would have you believe.  Last month William McBride at the Tax Foundation surveyed the literature:

Nearly every empirical study of taxes and economic growth published in a peer reviewed academic journal finds that tax increases harm economic growth. In my review, I examine twenty-six such studies going back to 1983, as shown in Table 1. All but three of those studies, and every study in the last fifteen years, find a negative effect of taxes on growth.

(Emphasis added.)  He explains further:

The idea that taxes affect economic growth has become politically contentious and the subject of much debate in the press and among advocacy groups. That is in part because there are competing theories about what drives economic growth. Some subscribe to Keynesian, demand-side factors, others Neo-classical, supply-side factors, while yet others subscribe to some mixture of the two or something entirely unique. The facts, historical and geographical variation in key parameters for example, should shed light on the debate.  However, the economy is sufficiently complex that virtually any theory can find some support in the data.

. . .

So what does the academic literature say about the empirical relationship between taxes and economic growth? While there are a variety of methods and data sources, the results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions, and monetary policy. In this review of the literature, I find twenty-six such studies going back to 1983, and all but three of those studies, and every study in the last fifteen years, find a negative effect of taxes on growth. Of those studies that distinguish between types of taxes, corporate income taxes are found to be most harmful, followed by personal income taxes, consumption taxes and property taxes.

. . .

In any case, the lesson from the studies conducted is that long-term economic growth is to a significant degree a function of tax policy. Our current economic doldrums are the result of many factors, but having the highest corporate rate in the industrialized world does not help. Nor does the prospect of higher taxes on shareholders and workers. If we intend to spur investment, we should lower taxes on the earnings of capital. If we intend to increase employment, we should lower taxes on workers and the businesses that hire them.

As I recall, John McCain, running for president in 2008, had a whole list of economists who endorsed his tax proposals as better than Obama’s.  I don’t recall that Obama was able to offer any such list—the arguments in his favor were of a different kind (Obama saying he wants to raise the capital-gains tax rate even if that will result in less tax revenue for the government, for the sake of “fairness”).  Now you know why, perhaps.

They say that everyone is conservative in his field of expertise.

If liberals want to maintain that raising taxes is good for the economy (or even just not bad for the economy), it seems to me that they have to choose one of the two epistemologies offered above, abstract reasoning or empiricism.

• If abstract reasoning, they have to explain either why they think the generally acknowledged rule (if you tax something, you get less of it) doesn’t apply here, or else why they don’t accept the general rule in the first place.

• If empiricism, they have to explain why their simplistic two-variable laymen’s analyses are more likely to be true than the hard work done by serious researchers subject to peer review.