Taxes, growth and the tax burden

Executive summary

  • The tax burden is at the highest level since the 1940s and growth has been lacklustre.

  • Growth can refer to a change between one steady state and another, any change between two levels of output or a change that occurs over a period longer than a business cycle.

  • Tax reduces the incentive to invest in skills and technology, both by individuals and corporate entities, which in turn reduces productivity and then growth.

  • Public expenditure, however, can enhance growth, via items such as defence, justice, education, public health and infrastructure.

  • Rather than taxation being always harmful or always detrimental to growth, there are instead optimal levels.

  • Estimates for optimal levels can be as high as 40 per cent, but cluster around the low 20s.

  • Evidence on the optimal structure is mixed but usually suggests recurrent taxes on immovable property, especially land, are least damaging and transactions and business profits taxes are most damaging. Estimates usually find taxes on income to be more damaging than taxes on expenditure.



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