Should taxes be reduced in order to achieve economic growth, thus increasing the pool of resources that are produced for distribution to the population, or should they grow first to be able to reduce taxes afterwards? This last point of view, which is consistent with what has existed for the past six years in Portugal, does not make sense in the current context, in fact it stifles growth and retards the country, as we have seen.
As the economic literature reveals, taxes, especially on corporate and individual income, impede economic growth, on the contrary, public spending financed by taxes that makes sense – to support equipment production, research and development, and the accumulation of human beings. Capital and birth promotion. This is how the generality of the neoclassical theory models of endogenous economic growth proposed by notable authors such as Daron Acemoglu, Philip Agion, Robert Barrow, Jane Grossman, Ilhanan Hellmann, or Peter Howitt.
In this sequence, also in empirical articles recently published in major economic journals and in worksheets Act National Bureau of Economic Research (NBER), there is practical consensus on the conclusion that the tax burden has negative effects on growth and that the strength of the effect depends on the level of taxation, and who and when it is punished.
Mertens and Olya (2018, Quarterly Journal of Economics) Use time series data from 1946 to 2012 to conclude that reductions in the tax burden increase real GDP and reduce unemployment. In the described context, a decrease in the tax rate by one percentage point would increase real GDP by 0.78 percent by the third year after the change, due to changes in incentives rather than increases in aggregate demand.
Cluyne, Dimsdale E. Postel-Vinay (2018, NBER WorksheetHe studied the United Kingdom in the interwar period 1918-1939, a period of high debt and low interest rates, in order to understand the impact of taxes on economic growth. The authors found that a 1 percentage point reduction in the tax share of GDP increased real GDP by 0.5 to 1 percent immediately and by 2 percent after one year. The data provides compelling evidence that taxes affect growth in environments of high debt and low interest rates.
Ljungvist e Smolyansky (2018, NBER Worksheet) analyzed 250 tax changes between 1970 and 2010 to assess the direct impact on income and employment. They observed that: (1) On average, a 1 percentage point reduction in the corporate income tax rate results in a 0.2% increase in employment and a 0.3% increase in wages; (ii) The positive effect associated with tax cuts is most severe in recessions and in the long run; (3) Tax increases are uniformly harmful.
Mason (2019, Journal of Political Economy) Examined the effect of the tax burden on growth and labor supply between 1950 and 2011. It found positive effects of tax cuts on growth up to two years after the policy change. Additionally, tax cuts for low- and middle-income taxpayers have the biggest impact on growth — a 1 percent income tax cut for low-income taxpayers increased real GDP by 6.6 percent, due to a large increase In the job offer by these taxpayers.
Gunter, Riera-Crichton, Vegh, and Vuletin (2019, NBER Worksheet) Data from 51 countries between 1970 and 2014 examining the effects of value-added tax on economic growth. They conclude that the effects are not linear, because the economic damage increases with the rate. Thus, increases in the VAT rate in countries such as Portugal, where the average rate is high, will have very significant negative effects. This nonlinearity is in line with the curve lover After a certain tax rate, additional increases reduce tax revenue. For industrialized European countries, the authors estimated the tax multiplier of -3.6 for two years after the tax change, so tax cuts strongly stimulate economic activity.
Nguyen, Onis and Rossi (2021, American Economic Journal: Economic Policy) studied the effects of individual, corporate and consumption taxes in the United Kingdom between 1973 and 2009. They found that cuts to income taxes (individuals and firms) had significant effects on real GDP, private consumption and investment; For example, a 0.78 percent reduction in the average income tax rate would increase real GDP by 0.78 percent. The effects of reductions in consumption taxes were relatively smaller and had no statistically significant effects. Thus, in order to promote growth, a shift from one based on income taxes to one based on consumption tax is justified. These are generally less discretionary because they do not have a significant impact on the incentives to work and invest necessary to ensure economic growth.
Finally, we have Alain Reed (2021, public finance review) A meta-analysis of the effects of taxes on growth in OECD countries. The sample included 979 estimates from 49 studies. They studied the effects of taxes and public spending (output) on growth, and divided policy changes into three categories: negative, positive, and ambiguous. Negative fiscal policies include tax increases to finance unproductive investments, or discretionary tax increases combined with nondiscretionary tax cuts, which only fuel addiction, distort private activism and foment corruption. Conversely, positive fiscal policies include tax increases to finance productive investments, discretionary tax cuts combined with nondiscretionary tax increases, or tax increases to reduce deficits. Ambiguous fiscal policies are those in which the overall economic impact is unclear. With this classification, they observed that the decrease in taxes associated with negative fiscal policies led to an increase in real GDP, in contrast to the decrease in taxes associated with positive fiscal policies, and therefore they concluded that taxes should finance productive investments.
In short, to improve the standard of living, it makes perfect sense to reduce taxes, especially on income, which are also more discretionary, and those associated with passive fiscal policies.
Oscar Afonso, Emeritus Professor at the Faculty of Economics of the University of Porto and co-founder of the Observatory for Economics and Fraud Management (OBEGEF)
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