Taxes and economic growth

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    Yesterday, someone tried arguing with me that the gold standard was a 100% failure. Of course, he refused to listen, dismissing everything I said, claiming it was semantics, and “blah, blah, ‘blah.”, all while continually being quite hostile. He also tried telling me that high taxes, not low taxes spurs economic growth, and pointed me to this web article:

    Most of it doesn’t even make sense to me, but It appears that this article is desperately trying to prove a cause and effect relationship based on a few statistical correlations without a logical causal connection. The author claims that there is no correlation between lower taxes and economic growth, and dismisses it as, ‘its just a theory”. But of course, he offers no theory to back up his claim either. Merely looking at just a few variables, ignoring other major factors with historical context, and offering no theoretical explanation seems a little intellectually dishonest, or atleast lazy. But it ultimately seems that by saying that this “trickle down economics” doesn’t work, they justify coercive plunder.

    He also tried to claim that if wealthy individuals could keep more of their money, they would only hoard it and hide it overseas. ‘Hoarding’ money is itself a loaded term. How does one differentiate between hoarding and saving, and can they objectively quantify it? The claim seems to imply that the wealthy don’t have a right to their property based on a dubious graph that claims to “prove” that it wouldn’t grow the economy. Because I believe in property rights, whether or not they do,doesn’t matter, but I would think that entrepreneurs, capitalists, and businesses competing in the market place who did decide to hoard their money may well find their competition growing and bidding resources away from the ‘hoarders’.

    But regardless of their beloved statistical graphs, It doesn’t make sense that government extracting resources out of the private sector somehow causes it to be more productive than it otherwise would have been with more resources. Wouldn’t it make more sense that higher taxes would instead (ceteris paribus) penalize productivity, decrease incomes, lower the rate of capital accumulation, and reduce the ability to save?

    I’m curious what you think, and what Austrian literature deals with this issue?




    Perhaps your antagonist will accept the following line of argument. Effects in the social order are the result of a multiplicity of causes. Theory is the only way to determine what effect a particular cause will have. Empirical correlation cannot do so.

    For example, Paul Krugman was criticized that his advice that the government try massive fiscal and monetary stimulus to bring the economy out of the recent downturn had not worked by 2011. His response was not to concede that the correlation of massive stimulus and continuing depression demonstrate cause and effect, but to reply that the stimulus had not been big enough. But in doing so he was making a theoretical claim , not an empirical one, because he had no evidence to back him up.

    If your antagonist will accept this line of argument, as Krugman implicitly does, then perhaps you can reason with him about taxes. And, as you say, the main point is that entrepreneurs in the market can make efficient production decisions using economic calculation while bureaucrats in the state cannot. So, economic progress depends on the extent to which taxing transfers command over resources out of private hands into the hands of the state. Interestingly, this has little to do with tax rates. The portion of GDP controlled by the government has stayed remarkably consistent since the early 1950s regardless of tax rates. Here are two charts: the first taxes and the second expenditures.

    Since the early 1950s, federal government taxes as a percent of GDP have hovered between 15 and 20 percent.

    Since the early 1950s, federal government spending as a percent of GDP has been between 18 and 24 percent.

    The data are in Table 1.2 at the link below:


    “economic progress depends on the extent to which taxing transfers command over resources out of private hands into the hands of the state. Interestingly, this has little to do with tax rates”

    Can you elaborate on this?

    “The portion of GDP controlled by the government has stayed remarkably consistent since the early 1950s regardless of tax rates.”

    I’m still not quite clear what the implications of this is, and how it applies to the claim that high taxes causes economic growth.


    In the unhampered market, all resources would be directed by entrepreneurs who use economic calculations of profit to allocate resources into lines of production that people value more highly and economic calculations of equity to allocate investment into lines that produce goods that people value more highly. Taxes transfer control over resource away from entrepreneurs toward government officials who cannot use economic calculation to determine their use and thus, taxes detract from the efficiency of the market. The extent of the depredation of taxes on standards of living depend on the proportion of resources controlled by the state. If taxes give control of 1 percent of resources to the state, then the depredation is small. If taxes give control of 10 percent, then the depredations are larger. If 20 percent larger still and so on. Tax rates don’t matter much unless by changing them tax revenues change. So the claim of your antagonist that economic progress continued normally when tax rates where higher demonstrates that taxes are irrelevant to economic activity misses the point. If you look at the data, they show that regardless of tax rates, tax revenues stayed roughly the same. I such a case, economic theory concludes that the economy would perform roughly the same even though tax rates are higher.

    Put another way, your antagonist has made a category mistake. He has conflated tax rates with tax revenues. Economic theory shows that higher tax revenues will impair economic prosperity. Tax rates, on the other hand, have little to do with it (not nothing mind you, but little.) Regardless of tax rates, tax revenues stayed roughly the same and therefore, had no differential impact on economic activity at all.


    I think it’s beginning to make sense now.

    Is there an Austrian literature that deals with this subject?


    Ok, Thanks


    “The portion of GDP controlled by the government has stayed remarkably consistent since the early 1950s regardless of tax rates. Here are two charts: the first taxes and the second expenditures”

    Yes, I have heard of this graph but does this mean that it doesn’t matter one way or the other what has happened to taxes in the last 60 years? I’m assuming that where those 15-20% have come from has changed according to the change in different forms of tax rates so while the overall number has remained steady the extraction of taxes has come from changing sources or no?

    Also is this an American phenomenon or is there a similar upper limit for other western countries?


    It would matter if the shifts from one tax source to another were large enough. But even if this has happened it’s secondary to the main effect of taxation, which is transferring command over resources out of the realm of economic calculation and into the realm without economic calculation.

    Table 2.2 at the following link compiles the percentage composition of federal tax receipts by source from 1934 -2012. It shows that since 1947, Individual Income Taxes have made up between 39 and 50 percent of the total; Social Security Taxes (which are also individual income taxes) between 9 and 42 percent; Corporate Income Taxes between 6 and 32 percent; and Excise Taxes between 2.5 and 19 percent.

    Disparate tax rates on a given source also have consequences, but they too are secondary to the amount of tax revenue transferred to the state.

    The top rate on federal income tax in 1980 was 70 percent, in 1986 it was dropped to 50 percent, in 1991 it was down to 31 percent, then rose again in 2000 to 39.6 percent, and today stands at 35 percent. The following charts document that even though top income tax rates have fallen from the 1970 and 1980s, the percent of all income taxes paid by the highest quintile has increased from 65 percent in 1979 to 86 percent in 2007. That fact is more important than what the top rate happens to be.

    Murray Rothbard’s book Power and Market gives a thorough analysis of both primary and secondary effects of different tax regimes.

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