Higher Tax Rates Will Sabotage Economic Growth

December 18, 2012

Cutting the Corporate Rate Could Pay for Itself

Washington, D.C., December 18, 2012—High tax rates lead to lower economic growth, and high rates on personal and corporate income are especially damaging, according to a new study by the Tax Foundation. A review of 26 academic studies over the last 30 years confirms that lower-tax economies are more productive and that raising taxes has negative dynamic effects on revenue collection.

“Nearly every empirical study of taxes and economic growth published in a peer reviewed journal finds that tax increases harm economic growth,” said Tax Foundation chief economist William McBride.

The consensus among experts is that taxes on corporate and personal income are particularly harmful to economic growth, with consumption and property taxes less so. This is because economic growth ultimately comes from production, innovation, and risk-taking. By these standards, the U.S. has probably the most inefficient tax mix in the developed world.

The U.S. also has the highest corporate tax rate in the industrialized world. If that rate were to come down 10 points – still higher than most of our trading partners – it would add 1 to 2 points to GDP growth, and likely not lose revenue because the tax base would expand from in-flows of foreign capital as well increased domestic job growth and investment.

Rather than moving to lower rates, however, we are facing a fiscal cliff that would give us the highest dividend rate and nearly the highest capital gains rate in the industrialized world.  It would also push the combined top marginal rate on personal income to over 50 percent in some states, such as California, Hawaii, and New York – higher than all but a few of our trading partners.

Such steeply progressive taxation reduces productivity and economic growth.  Further, the U.S. is unique in that a majority of businesses and business income is taxed under these progressive individual rates, e.g. businesses such as sole-proprietors, partnerships, and S-corporations. All of these factors are a drag on the economy, slowing the nascent recovery and preventing a return to full employment.

Tax Foundation Special Report No. 207, “What Is the Evidence on Taxes and Economic Growth?” by William McBride is available here.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

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