We know that high levels of taxation unquestionably undermine economic growth:1 Ergete Ferede & Bev Dahlby, The Impact of Tax Cuts on Economic Growth: Evidence from the Canadian Provinces, 65 National Tax Journal 563-594 (2012). Canadian provinces (1977-2006) Negative Reducing corporate income tax 1 percentage point raises annual growth by 0.1 to 0.2 points.
2 Karel Mertens & Morten Ravn, The dynamic effects of personal and corporate income tax changes in the United States, American Economic Review (forthcoming) (2012). U.S. Post-WWII exogenous changes in personal and corporate income taxes Negative A 1 percentage point cut in the average personal income tax rate raises real GDP per capita by 1.4 percent in the first quarter and by up to 1.8 percent after three quarters. A 1 percentage point cut in the average corporate income tax rate raises real GDP per capita by 0.4 percent in the first quarter and by 0.6 percent after one year.
3 Norman Gemmell, Richard Kneller, & Ismael Sanz, The Timing and Persistence of Fiscal Policy Impacts on Growth: Evidence from OECD Countries, 121 Economic Journal F33-F58 (2011). 17 OECD countries (Early 1970s to 2004) Negative Taxes on income and profit are most damaging to economic growth over the long run, followed by deficits, and then consumption taxes.
4 Jens Arnold, Bert Brys, Christopher Heady, Åsa Johansson, Cyrille Schwellnus, & Laura Vartia, Tax Policy For Economic Recovery and Growth, 121 Economic Journal F59-F80 (2011). 21 OECD countries (1971 to 2004) Negative Corporate taxes most harmful, followed by taxes on personal income, consumption, and property. Progressivity of PIT harms growth. A 1 percent shift of tax revenues from income taxes (both personal and corporate) to consumption and property taxes would increase GDP per capita by between 0.25 percent and 1 percent in the long run. Corporate taxes, both in terms of the statutory rate and depreciation allowances, reduce investment and productivity growth. Raising the top marginal rate on personal income reduces productivity growth.
5 Robert Barro & C.J. Redlick, Macroeconomic Effects of Government Purchases and Taxes, 126 Quarterly Journal of Economics 51-102 (2011). U.S (1912 to 2006) Negative Cut in the average marginal tax rate of one percentage point raises next year’s per capita GDP by around 0.5%.
6 Christina Romer & David Romer, The macroeconomic effects of tax changes: estimates based on a new measure of fiscal shocks, 100 American Economic Review 763-801 (2010). U.S. Post-WWII (104 tax changes, 65 exogenous)
Negative Tax (federal revenue) increase of 1% of GDP leads to a fall in output of 3% after about 2 years, mostly through negative effects on investment.
7 Alberto Alesina & Silvia Ardagna, Large changes in fiscal policy: taxes versus spending, in Tax Policy and the Economy, Vol. 24 (Univ. of Chicago Press, 2010). OECD countries (fiscal stimuli and fiscal adjustments, 1970 to 2007) Negative Fiscal stimuli based upon tax cuts more likely to increase growth than those based upon spending increases. Fiscal consolidations based upon spending cuts and no tax increases are more likely to succeed at reducing deficits and debt and less likely to create recessions.
8 International Monetary Fund, Will it hurt? Macroeconomic effects of fiscal consolidation, in World Economic Outlook: Recovery, Risk, and Rebalancing (2010). 15 advanced countries (170 fiscal consolidations over the last 30 years) Negative 1% tax increase reduces GDP by 1.3% after two years.
9 Robert Reed, The robust relationship between taxes and U.S. state income growth, 61 National Tax Journal 57-80 (2008). U.S. states (1970-1999, 5 year panels) Negative Robust negative effect of state and local tax burden. Multi-year panels mitigate misspecified lag effects, serial correlation, and measurement error.
10 N. Bania, J. A. Gray, & J. A. Stone, Growth, taxes, and government expenditures: growth hills for U.S. states, 60 National Tax Journal 193-204 (2007). U.S. states Negative Taxes directed towards public investments first add then subtract from GDP.
11 Young Lee & Roger Gordon, Tax Structure and Economic Growth, 89 Journal of Public Economics 1027-1043 (2005). 70 countries (1980 - 1997, cross-sectional and 5 year panels) Negative Reducing corporate income tax 1 percentage point raises annual growth by 0.1 to 0.2 points.
12 Randall Holcombe & Donald Lacombe, The effect of state income taxation on per capita income growth, 32 Public Finance Review 292-312 (2004). Counties separated by state borders (1960 to 1990) Negative States that raised income taxes averaged a 3.4% reduction in per capita income.
13 Marc Tomljanovich, The role of state fiscal policy in state economic growth, 22 Contemporary Economic Policy 318-330 (2004). U.S. states (1972 to 1998, multi-year panels) Negative Higher tax rates negatively affect short run growth, but not long run growth.
14 Olivier Blanchard & Robert Perotti, An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output, 107 Quarterly Journal of Economics 1329-1368 (2002). U.S. Post-WWII (VAR/event study) Negative Positive tax shocks, or unexpected increases in total revenue, negatively affect private investment and GDP.
15 F. Padovano & E. Galli, E., Tax rates and economic growth in the OECD countries (1950-1990), 39 Economic Inquiry 44-57 (2001). 23 OECD countries (1951 to 1990) Negative Effective marginal income tax rates negatively correlated with GDP growth.
16 Stefan Folster & Magnus Henrekson, Growth effects of government expenditure and taxation in rich countries, 45 European Economic Review 1501-1520 (2001). Rich countries (1970 to 1995) Negative Tax revenue as a share of GDP negatively correlated with GDP growth.
17 M. Bleaney, N. Gemmell & R. Kneller, Testing the endogenous growth model: public expenditure, taxation, and growth over the long run, 34 Canadian Journal of Economics 36-57 (2001). OECD countries (1970 to 1995) Negative Distortionary taxes reduce GDP growth. Consumption taxes are not distortionary.
18 R. Kneller, M. Bleaney & N. Gemmell, Fiscal Policy and Growth: Evidence from OECD Countries, 74 Journal of Public Economics 171-190 (1999). OECD countries (1970 to 1995) Negative Distortionary taxes reduce GDP growth.
19 Howard Chernick, Tax progressivity and state economic performance, 11 Economic Development Quarterly 249-267 (1997). U.S. states (1977 to 1993) Negative Progressivity of income taxes negatively affects GDP growth.
20 Enrique Mendoza, G. Milesi-Ferretti, & P. Asea, On the Effectiveness of Tax Policy in Altering Long-Run Growth: Harberger’s Superneutrality Conjecture, 66 Journal of Public Economics 99-126 (1997). 18 OECD countries (1965-1991, 5 year panels) None Estimated effective tax rates on labor and capital harm investment, but effect on growth is insignificant. Effective consumption taxes increase investment, but not growth. Overall tax burden levels have no effect on investment or growth.
21 Stephen Miller & Frank Russek, Fiscal structures and economic growth: international evidence, 35 Economic Inquiry 603-613 (1997). Developed and developing countries Negative Tax-financed spending reduces growth in developed countries, increases growth in developing countries.
22 John Mullen & Martin Williams, Marginal tax rates and state economic growth, 24 Regional Science and Urban Economics 687-705 (1994). U.S. states (1969 to 1986) Negative Higher marginal tax rates reduce GDP growth.
23 William Easterly & S. Rebelo, Fiscal Policy and Economic Growth: An Empirical Investigation, 32 Journal of Monetary Economics 417-458 (1993). Developed and developing countries None Effects of taxation difficult to isolate empirically.
24 Reinhard Koester & Roger Kormendi, Taxation, Aggregate Activity and Economic Growth: Cross-Country Evidence on Some Supply-Side Hypotheses, 27 Economic Inquiry 367-86 (1989). 63 countries Negative Controlling for average tax rates, increases in marginal tax rates reduce economic activity. Progressivity reduces growth.
25 Jay Helms, The effect of state and local taxes on economic growth: a time series-cross section approach, 67 Review of Economics and Statistics 574-582 (1985). U.S. states (1965 to 1979) Negative Revenue used to fund transfer payments retards growth.
26 Claudio J. Katz, Vincent A. Mahler & Michael G. Franz, The impact of taxes on growth and distribution in developed capitalist countries: a cross-national study, 77 American Political Science Review 871-886 (1983). 22 developed countries None Taxes reduce saving but not growth or investment.
Similarly, we know that high levels of public debt undermine economic growth:High debt appears to reduce growth mainly by lowering the efficiency of investment rather than its volume.
Failing to rapidly begin bending the long-run debt-GDP curve down risks a growth disaster, whose severity could be much worse even than the recent deep recession and tragically anemic recovery. Left unchecked, it eventually risks a lost generation of growth, a long-run growth depression
the evidence, as we read it, casts doubt on the view that soaring government debt does not matter when markets (and official players, notably central banks) seem willing to absorb it at low interest rates – as is the case of now.
Our results suggest that the positive short term economic stimulus from additional debt decreases drastically when the initial debt level is high, and might even become negative. The reverse would imply that when the debt ratio is very high, reducing it would have benefi cial eff ects for annual growth.
The results, based on a range of econometric techniques, suggest an inverse relationship between initial debt and subsequent growth, controlling for other determinants of growth: on average, a 10 percentage point increase in the initial debt-to-GDP ratio is associated with a slowdown in annual real per capita GDP growth of around 0.2 percentage points per year, with the impact being smaller (around 0.15) in advanced economies.
Historical data from the Index of Economic Freedom show a clear negative relationship between the accumulation of debt and economic freedom. In general, countries with lower levels of public debt as a percentage of GDP tend to enjoy high levels of economic freedom....Faced with such a loss of economic freedom and the negative economic impacts likely to accompany it, the temptation for future generations may be to borrow even more themselves to pay off past debts.
Our examination of debt and economic activity in industrial countries leads us to conclude that there is a clear linkage: high debt is bad for growth. When public debt is in the range of 85% of GDP, further increases in debt may have a significant impact on growth
In the current economic environment, the results represent an additional argument in favour of swiftly implementing ambitious strategies for debt reduction. If policy makers let high debt ratios linger for fear that fiscal consolidation measures will be unpopular with voters, this will undermine growth prospects and thus will put an additional burden on fiscal sustainability. This debt-based argument thus adds to the positive growth effects of fiscal reduction found in the literature for the long term and frequently also in the short term.
And here is the trifecta of research confirming that politically driven government spending crowds out economically driven private sector spending to the detriment of the economy:What we have found is that there appears to be no identifiable effect of R&D and other capital subsidies on growth but that there is an effect of taxation depressing growth. In this we join a growing literature that finds similar negative tax effects on growth. Negative (Minford and Wang, 2006, Institut de Recherches Economiques et Fiscales)
We find a sizable negative effect of public spending -- and in particular of its public wage component -- on business investment. This result is consistent with models in which government employment creates wage pressure for the private sector. Various types of taxes also have negative effects on profits, but, interestingly, the effects of government spending on investment are larger than the effect of taxes. Negative (Alesina, Ardagna, Perotti and Schiantarelli. 1999. National Bureau of Economic Research)
Our analysis of the 1983-2002 period supports three broad conclusions about the U.S.economy. First, growth in government stunts general economic growth. Increases in government spending or taxes lead to persistent decreases in the rate of job growth. Negative (Fu, Taylor, and Yucel. 2003. Dallas Federal Reserve)
If the specific project meets the economic efficiency criterion, it can help remove “growth bottlenecks” or mitigate consequences of market failures.But public spending is also subject to failure and society incurs costs because of spending. These derive mainly from the distortions arising from taxation or from the volatility induced to household consumption. Mixed to Positive (Herrera, 2007, World Bank)
One view of government fiscal policy is that it stifles dynamic economic growth through the distortionary effects of taxation and inefficient government spending. Negative (Engen and Skinner, 1992, National Bureau of Economic Research)
n the basis of the Granger causality tests, we also found that neither growth in income does have any effect on government size nor does public expenditure have any effect on economic growth. Neutral (Bagdigen & Cetintas, 2008, Journal of Economics and Social Research)
On the whole, there is no clear correlation for the industrialized countries between the size of government and institutional quality. But there is a modest to strong correlation between changes in public spending since the onset of reform and changes in institutional quality which implies that a reduction in public spending raises institutional quality. Mixed to Negative (Schuknecht and Tanzi, 2005, European Central Bank)
*In our analysis the evidence of a strong negative relationship between government spending and growth prospects was consistently confirmed with high significance in all 5 models. Negative. (Vlieghere & Vreymans, 2006, Institute for Economic Research)
Therefore, the main result of our panel analysis is that that government spending has essentially the same impact on economic growth with or without a financial crisis.This result holds throughout our sample, using a variation of controls, sub-samples andspecifications. Consequently, taking into account that larger spending programmes tend to be less targeted, this indicates that they may actually not be particularly helpful. Neutral (Afonso, Gruner and Kolerus. 2010. European Central Bank)
Report finds the following: (1) government spending is initially positive, but in the long-term, the lagged effect is sufficiently negative to counter the positive effect, (2) government investment in manufacturing on private investment is seen to be negative, and (3) public sector investment on infrastructure is positive on private investment. Negative consumption, Positive infrastructure (Karnik, 2002, Economic and Political Weekly)
The results show that public consumption affects growth negatively whereas public investment exerts a positive (but not always significant) effect on the productivity growth rate. Public investment in education has a positive impact on the dependent variable, while the opposite is true for public investment in health. Our findings also detect that taxes and social benefits are growth-impeding. Negative consumption spending, Positive education spending, Negative health spending, Negative social spending, Negative taxes. (Martinez-Lopez, 2005, Economic Issues)
we do find a tendency toward a more robust negative growth effect of large public expenditures in rich countries compared to many other studies where these econometric problems were ignored or treated more cursorily. Negative (Folster & Henrekson, 1998, European Journal of Political Economy)
we find that (1) distortionary taxation reduces growth, whilst non-distortionary taxation does not; and (2) productive government expenditure enhances growth, whilst non-productive expenditure does not. Neutral (Kneller, Bleaney, and Gemmell. 1999. Journal of Public Economics)
no consistent evidence is found that government spending can increase per capita output growth. Neither is there consistent support for the negative argument. Besides, for most of the countries under study, public spending is found to contribute at best a small proportion to the growth of an economy. Neutral (Hsieh & Lai, 2006. Applied Economics)
The major conclusions, which are quite robust, are that government transfers, consumption and total outlays have consistently negative effects, while educational expenditure has a positive effect, and government investment has no effect on private productivity growth. Negative overall, Positive education. (Hansson & Henrekson, 1994, Public Choice)
our model suggests that two-third of the secular rise in unemployment rates in OECD-Europe can be attributed to increases in government transfers and subsidies….Recent health care reform in the United States can be expected to raise the steady- state unemployment rate. While it is difficult to estimate to what extent the Patient Protection and Affordable Care Act of 2010 would increase government transfers and subsidies, as a thought experiment, should the program raise transfers as a percent of GDP by 5 percent, our model suggests a rise in the U.S. steady-state unemployment rate of approximately 2.8 percent. Since the U.S. “full employment” unemployment rate is currently estimated to be around 5 percent, the new steady-state unemployment rate would rise to 7.8 percent. This would put the U.S. close to Western Europe’s steady-state unemployment rate. Negative (Wang & Abrams, 2011, Public Choice)
This analysis validates the classical supply-side paradigm and shows that maximum productivity growth occurs when government spending represents about 20% of GNP, far less than the 35% which existed in 1986. Negative (Peden, 1991, Public Choice)
A simulation in which government expenditures increased permanently from 13.7 to 22.1 percent of GNP (as they did over the last four decades) led to a long-run decline in output of 2.1 percent….With deficit financing, output is higher in the short run because of the increase in labor supply induced by the inter temporal substitution effects of lower taxes earlier and higher taxes later. However, the long-run steady-state level of output is lower with deficit financing than without it. This occurs because of the higher tax rates necessary under deficit financing to service the accumulated debt. Negative (Carlstrom & Gokhale, 1991, Economic Review)
*We also find that, contrary to the casual association of government spending with the common view of the Keynesian legacy, government spending is not free and it does not guarantee prosperity. In fact, the record shows that government spending is generally associated with relative stagnation, not economic growth. We find a uniform pattern of higher spending linked with lower growth rates. It is generally the case that government spending is costly in terms of economic growth. Negative. (Connors & Norton, 2012, Hastert Public Policy Series)
tax-financed government expenditure, in general, crowds out investment more frequently than debt-financed government expenditure. That finding may suggest the existence of liquidity constraints within the economy. Finally, expenditure on social security and welfare crowds out investment for both tax- and debt-financed increases and in both developed and developing countries. That is the only category of government expenditure that had such a consistent (negative) effect on investment across all specifications. Neutral to Negative. (Miller & Ahmed, 2000, Contemporary Economic Policy)
The results of our paper suggest that government spending produces important crowding-out effects, by negatively affecting both private consumption and investment. Negative. (Furceri & Sousa, 2009, OECD)
An important lesson one can draw from the results is that while a deficit financed expenditure stimulus is possible, the eventual costs are likely to be much higher than the immediate benefits. Negative (Mountford & Uhlig, 2008, National Bureau of Economic Research)
We find that private consumption is consistently crowded out by taxation, and crowded in by government spending. The latter result is difficult to reconcile with a neoclassical model, regardless of the persistence of the spending shock, but it is consistent with a Keynesian model. We find that private investment is consistently crowded out by both government spending and, to a lesser degree by taxation. Neutral to Positive (Blanchard & Periotti, 1999, National Bureau of Economic Research)
Higher public capital accumulation raises the national investment rate above the level chosen by rational agents and induces an ex ante crowding out of private investment. However, an increase in the public capital stock also raises the return to private capital, which crowds in private capital accumulation. Positive. (Aschauer, 1989, Journal of Monetary Economics)
According to our model, there is a growth maximizing level of infrastructure above which the diversion of resources from other productive uses outweighs the gain from having more infrastructure. Below this level, increases in infrastructure provision increase long run income, while above this level an increase in infrastructure reduces long run income. Neutral. (Canning & Pedroni, 1999, Cornell University)
At the margin, however, road investments do not appear unusually productive. Intuitively, the interstate system was highly productive, but a second one would not be. Road-building thus explains much of the productivity slowdown through a one-time, unrepeatable productivity boost in the 1950s and 1960s. Neutral (Fernald, 1999, American Economic Review)
An increasing number of people are advocating increased government capital spending to raise private sector output, productivity and private capital formation. The evidence presented here, based on post-World War II experience, suggests that a rise in public capital spending would have no statistically significant effect on these measures. Earlier claims of a positive and significant effect of public capital on private sector output have arisen from spurious estimates. Negative (Tatom, 1993, Policy Studies Journal)
*Partisan, but worth a read for logical framework and peer reviewed citations not included in this list.
And we know that the government minimum wage laws have been found to undermine employment growth:http://www.epionline.org/studies/even_07-2010.pdf] Employment Policies Institute. This study found that the federal minimum wage hikes that drove the minimum wage from $5.15 to$7.25 between July 2007 and July 2009 led to significant employment losses for teens. In the 19 states where the effective minimum wage was increased by $2.10, we estimate that teen employment dropped by 6.9 percent, and approximately 98,000 jobs were lost
http://www-rohan.sdsu.edu/~jsabia/docs/ ... LR2012.pdf] Industrial and Labor Relations Review. we find robust evidence that raising the New York minimum wage from $5.15 to $6.75 per hour significantly reduced employment rates of less-skilled, less-educated New Yorkers.
http://www.epionline.org/study/minimum- ... t-effects/] Employment Policies Institute. The published research on the subject points overwhelmingly in one direction: A summary of the last two decades of literature on the minimum wage, co-authored by the lead economist on this study, concluded that most of the evidence points to job loss following wage hikes.
http://www.uh.edu/~adkugler/Neumark%26Wascher.pdf] Industrial and Labor Relations Review. A 10% increase in the minimum wage appears to be associated with a 1% to 2% decrease in employment of teenagers.
http://digitalcommons.ilr.cornell.edu/c ... =ilrreview] IRL Review. Effects on teenage employment appear to be considerably larger for local labor markets where the minimum wage is likely binding, suggesting that previous research using state panels produces average effects that understate the “true” effect of the minimum wage. While raising the minimum wage is ultimately a political choice, the results from this study suggest that the wage gains experienced by some low-wage workers are not a “free lunch” and need to be weighed against the decreased employment faced by some teenage workers.
http://www.epi.org/publication/epi_virl ... creasingt/] Economic Policy Institute. Small deleterious change in unemployment and inflation with a $3.35 to $4.65 increase in minimum wage law.
http://ideas.repec.org/p/nbr/nberwo/0790.html] Journal of Political Economy. Minimum wage has significant negative effective on teenage employment.
http://www.econ.ucsb.edu/~pjkuhn/Ec250A ... hwater.pdf] Federal Reserve Governor/University of California, Santa Barbara researcher. We explore the ability of these research designs (that show minimal disemployment effects) to isolate reliable identifying information and test the untested assumptions in this new research about the construction of better control groups. Our evidence points to serious problems with these research designs.
http://www.jstor.org/discover/10.2307/1 ... 2204807321] American Economic Review. Minimum wage laws benefit white workers at the expense of black workers.
http://connection.ebscohost.com/c/artic ... nimum-wage] Journal of Labor Research. Minimum wage laws encourages and increases illegal immigration in an attempt to circumvent the law.
http://www.epionline.org/study/r61/] Employment Policies Institute. Research shows that increases in the minimum wage had significant — and negative — effects on the work patterns of mothers receiving Aid to Families with Dependent Children (AFDC), the largest federal welfare program
http://onlinelibrary.wiley.com/doi/10.1 ... x/abstract] Economic Inquiry The expanded model is shown to better predict the effect of minimum wages on labor force participation, quit rates, and prices than previous models. An interesting result of the expanded model is that a covered worker may be worse off due to a minimum wage hike even if he retains his job.
References:
1. Even, William E., nd David A. Macpherson. 2010. “The Teen Employment Crisis: The Effects of the 2007-2009 Federal Minimum Wage Increases on Teen Employment”. Employment Policies Institute, Washington, DC.
2. Sabia, Joseph J., Burkhauser, Richard V., Hansen, Benjamin. 2012. “Are the Effects of Minimum Wage Increases Always Small?” Industrial and Labor Relations Review, Vol. 65, No. 2, April, pp.350-76.
3. Neumark, David and William Wascher. 2002. “State Level Estimates of Minimum Wage Effects: New Evidence and Interpretations of Disquilibrium Methods.” Journal of Human Resources, Vol. 37, No. 1 Winter, pp. 35-62.
4. Adams, F. Gerard. 1987. Increasing the Minimum Wage: The Macroeconomic Impacts. Briefing Paper, Economic Policy Institute (July).
5. Neumark, David; Salas, Ian. 2013. Minimum Wages: Evaluating New Evidence on Employment Effects. Employment Policies Institute.
6. Adie, Douglas K. 1973. Teen-Age Unemployment and Real Federal Minimum Wages. Journal of Political Economy, vol. 81 (March/April): 435-441.
7. Behrman, Jere R.; Sickles, Robin C.; and Taubman, Paul. 1983. The Impact of Minimum Wages on the Distributions of Earnings for Major Race-Sex Groups: A Dynamic Analysis. American Economic Review, vol. 73 (September): 766-778.
8. Beranek, William. 1982. The Illegal Alien Work Force, Demand for Unskilled Labor, and the Minimum Wage. Journal of Labor Research, vol. 3 (Winter): 89-99.
9. Brandon, Peter D. 1995. Jobs Taken by Mothers Moving from Welfare to Work and the Effects of Minimum Wages on this Transition. Washington: Employment Policies Institute Foundation.
10. Thompson, Jeffrey P. 2009. “Using Local Labor Market Data to Re-Examine the Employment Effects of the Minimum Wage” Industrial and Labor Relations Review, Vol. 62, No. 3, April, pp. 343-66.
11. WESSELS, W. J. (1980), THE EFFECT OF MINIMUM WAGES IN THE PRESENCE OF FRINGE BENEFITS: AN EXPANDED MODEL. Economic Inquiry, 18: 293–313.
So is excessive government interference in the economy really a desirable outcome for economic growth and living standards in the long term?
For example, we know that high taxes and high debt levels undermine growth -- the research confirms this -- so is it surprising that increases in government spending that must be financed by these twin evils undermine economic growth?