Tuesday, 24 April 2012

High tax rates might not slow growth

In Diamond and Saez: High Tax Rates Won't Slow Growth Peter Diamond and Emmanuel Saez argue that countries that have reduced their top marginal tax rates have not seen any greater economic growth than those that have kept their top rates relatively high:
For example, from 1970 to 2010, real GDP annual growth per capita averaged 1.8% and 2.03% in the U.S. and the U.K., both of which dramatically lowered their top tax rates during that period, while it averaged 1.72% and 1.89% in France and Germany, which kept high top tax rates during the period. While in no way does this prove that higher top tax rates actually encourage growth, there is not good evidence from the aggregate data supporting the view that higher rates slow growth.  
However, what matters more is what is done with the extra revenue:
One cannot evaluate the ultimate growth effects of raising more revenue without identifying what is done with the revenue. If part of the revenue is used to reduce the federal debt, more of savings go into capital investment, enhancing growth. The fact that those paying higher taxes will reduce their savings somewhat does not fully offset this effect as some of their higher taxes would come out of consumption.

If some of the additional revenue is used for public investments with a high return, such as education, infrastructure and research, it raises growth further. The neglect of public investment over the last few decades suggests that the returns could be quite high.

Large losses in efficiency come when people are limited in their ability to finance good investment opportunities. Surveys show difficulty of borrowing as an issue for start-ups. And higher education is influenced by the finances of parents, and the earnings premium for higher education is very high. Access to investment financing is a much bigger issue for low earners than for high earners. By the time Bill Gates got rich, Microsoft was not likely to have trouble financing investments. Hence, increasing tax rates on the already rich might not hurt growth as much as increasing tax rates on the soon-to-be rich.

No comments:

Post a Comment