Wednesday, September 15, 2010

High taxes and growth

We have commented several times in the past about the Golden Age of Capitalism, that quarter of a century post-war when growth was high and widely-spread, across the world - amid sometimes exceedingly high tax rates (and strongly controlled capital flows.) As we have also noted, correlation ain't causation - but this May 2010 piece, from Paul Krugman via Tax Research, gives a nice picture of it. Click for the graphic.

As Krugman puts it:
"Here’s a rough-cut version. The blue line, left scale, shows median family income in 2008 dollars; the red line, right scale, shows the top marginal tax rate, a rough indicator of the overall stance of policy. Basically, US postwar economic history falls into two parts: an era of high taxes on the rich and extensive regulation, during which living standards experienced extraordinary growth; and an era of low taxes on the rich and deregulation, during which living standards for most Americans rose fitfully at best."
All you can deduce from this is that high taxes, extensive regulation and capital controls don't have to destroy growth. Which is a pretty useful thing to know.

We've got something else on this subject that is pretty interesting, coming up soon enough.


Blogger Physiocrat said...

The trouble with taxes is that if the system is badly designed, they can have a damaging effect at the margin.

By margin I mean both the geographical margin, when tax can tip the balance of production into unprofitability, and the margin of labour. In the latter case, it is workers with low skills who are adversely affected: immigrants and young people, where the difference between net take home pay and gross labour costs is so great that they cannot produce enough added value through their work.

When that happens, workers get replaced by machines, or the jobs are exported, or not done at all.

Further objections to badly designed tax systems is the cost of collection and compliance, eg the tax avoidance industry, which ties down some of the best brains in the country in what is essentially an anti-social activity. It should also be remembered that each tax has a significant set-up and operating cost even if nothing at all is collected, so the number of different systems should be kept to a minimum.

10:51 pm  

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