Apr 2, 2012

Controversial paper of the day

Low tax rates can be seen as a desirable policy goal for a variety of reasons. Your views on justice and desert may require a system of taxation that allows people to keep as much as possible of what they earn. Or you may have strong opinions on property rights, self-property, self-reliance and the "undeserving poor". In this paper, however, I will examine the merits of another and prima facie more convincing rationale, namely that low levels of taxation - especially low levels of taxation on the income or wealth of the so-called productive segments of society - are beneficial for economic growth. I criticize both the theoretical underpinnings of this view and its factual basis. The paper has three parts: 1) a description of the view; 2) a theoretical criticism; and 3) a criticism based on statistical correlations.  
I believe this issue is of the utmost importance given the urgency with which many legislators and economists in various countries advocate tax cuts. This advocacy is regrettable because neither the theoretical nor the empirical grounds for it are sound. It may even be the case that low tax rates have unwanted harmful consequences instead of the assumed beneficial ones.
The paper is titled "There’s no There There: Low Tax Rates and Economic Growth" by Filip Spagnoli (March 2012). 
The author concludes:
Just as correlation does not imply causation, absence of correlation also does not imply absence of causation. It could be the case that low taxes or tax cuts do in fact promote economic growth, but that we don’t see the effect in the data because the growth is offset by other forces. Still, that sounds far-fetched. The data collected in this paper argue against the assumption that low taxes promote growth, and at least put the burden of proof on those wanting to defend that assumption.
A graph from the paper:

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