The fiscal policy debate over how to stimulate the economy and reduce the budget deficits has been resolved – at least among academic economists. The way forward lies in reducing tax rates – especially on corporations and high-income individuals – and reducing spending. The way backward lies in pursuing President Barack Obama’s call for more taxes and increased government spending.
That is the conclusion of a survey of the academic literature published in peer review journals since 1983 by William McBride of the Tax Foundation.
While there are a variety of methods and data sources, the results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions, and monetary policy. In this review of the literature, I find twenty-six such studies going back to 1983, and all but three of those studies, and every study in the last fifteen years, find a negative effect of taxes on growth. Of those studies that distinguish between types of taxes, corporate income taxes are found to be most harmful, followed by personal income taxes, consumption taxes and property taxes.
In addition, several of the studies found reducing government spending has no significant affect on economic growth.
The studies surveyed include those conducted by the first Chair of President Barack Obama’s Council of Economic Advisors, Christina Romer and her husband, U. C. Berkeley Professor David Romer; Robert Barro and C.J. Redick of Harvard, as well as studies done by economists in such hotbeds of Keynesian, demand side economics as the International Monetary Fund and the Organization of Economic Cooperation and Development (OECD). These studies examine the experience of individual countries, including the U.S. and Canada, multiple countries, and also cross-country analyses in reaching their conclusions.
McBride’s survey also demolishes the credibility of the Congressional Research Service (CRS) study published last December which found:
No conclusive evidence, however, to substantiate a clear relationship between the 65-year reduction in the top statutory tax rates and economic growth. Analysis of such data conducted for this report suggests the reduction in the top tax rates has had little association with saving, investment, or productivity growth. It is reasonable to assume that a tax rate change limited to a small group of taxpayers at the top of the income distribution would have a negligible effect on economic growth. For instance, the tax revenue projected from allowing the top tax rates to rise to their pre- 2001 levels is $49 billion for 2013 or 0.3% of projected 2013 gross domestic product.
The CRS study is often referenced directly and indirectly by those who favor higher tax rates as part of the overall solution to federal deficits. But, McBride explains:
Their study ignores the most basic problems with this sort of statistical analysis, including: the variation in the tax base to which the individual income tax applies; the variation in other taxes, particularly the corporate tax; the short-term versus long-term effects of tax policy; and reverse causality, whereby economic growth affects tax rates. These problems are all well known in the academic literature and have been dealt with in various ways, making the CRS study unpublishable in any peer-reviewed academic journal.
The implications of this new, emerging consensus among economists is clear for the fiscal policy debate.
Read More at forbes.com . By Charles Kadlec.