Saturday, June 12, 2010

Why a High Tax-To-GDP Rate Won't Spur Growth

From The

Responding to a question at the Brookings Institute, US Secretary of State Hillary Clinton remarked:

Brazil has the highest tax-to-GDP rate in the Western Hemisphere and guess what — it's growing like crazy. And the rich are getting richer, but they're pulling people out of poverty. There is a certain formula there that used to work for us until we abandoned it, to our regret in my opinion.

Socialists are always telling us such things. At some place, at some time, water is observed flowing upstream, at least it seems that way, and — voilĂ ! — the laws of economics are all thrown out the window.

First of all, one observation does not prove anything. Economics isn't that way. Mrs. Clinton is just revealing how ignorant she is of economic science. What is your theory, Madam Secretary, of the relationship between tax policy and economic growth, and what do all the data say? Economics isn't climatology. We don't get to hide the inconvenient data.

Second, economic theory doesn't say much about the ratio of "tax revenue" to GDP and economic growth. There are several reasons for this. I'll briefly list four reasons and then spend some time on a fifth.

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