Do tax structures affect aggregate economic growth? Empirical evidence from a panel of OECD countries
This paper examines the relationship between tax structures and economic growth by entering indicators of the tax structure into a set of panel growth regressions for 21 OECD countries, in which both the accumulation of physical and human capital are taken into account.
The results of the analysis suggest that income taxes are generally associated with lower economic growth than taxes on consumption and property. More precisely, the findings allow the establishment of a ranking of tax instruments with respect to their relationship to economic growth. Property taxes, and particularly recurrent taxes on immovable property, seem to be the most growth-friendly, followed by consumption taxes and then by personal income taxes. Corporate income taxes appear to have the most negative effect on GDP per capita.
These findings suggest that a revenue-neutral growth-oriented tax reform would be to shift part of the revenue base towards recurrent property and consumption taxes and away from income taxes, especially corporate taxes. There is also evidence of a negative relationship between the progressivity of personal income taxes and growth.
All of the results are robust to a number of different specifications, including controlling for other determinants of economic growth and instrumenting tax indicators.
The full study, 28 pages, is at http://www.oecd.org/officialdocuments/displaydocumentpdf?cote=eco/wkp%282008%2951&doclanguage=en
Readers of this blog will know that I favor shifting to a tax on land value, and eliminating the portion of the conventional property tax which falls on buildings and other improvements to land. But I'm fascinated that their analysis shows that even taxing buildings and other improvements to land, along with land value, is superior to taxing consumption or personal income or corporate income, in terms of the effects on economic growth.
So I'll leave you with this question: if we know that income taxes and consumption taxes discourage growth more than the conventional property tax does, in whose interest is it that we not rely heavily on the property tax? Cui bono?
Go to the root of the problem. Recognize who benefits from the status quo. They like the current system just fine, and will fund heavily efforts to conserve it.
And when California (Proposition 13 forces reliance on wage and sales taxes to "protect" property owners) and other states, including soon Indiana, start complaining about a lack of economic growth, and when New York State's new Governor Cuomo starts talking about "property tax relief," understand that this is code for "we'll take care of our friends who own the choice urban sites, the ordinary man be damned!" This is called conservatism. Like Aleve, it works for them. Does "landed gentry" still resonate?
Notice that this study has been around for two years now. How many times have you heard about it? (It was news to me.) Even the "FairTax" (23%+ consumption tax) folks haven't mentioned it, as far as I know.