Government: BAD? — Part 4: Higher Taxes, More Prosperity
January 7th, 2008
This one came as quite a surprise even to me.
In general, among developed countries, those with higher taxes over the last thirty years have higher GDP per capita today than lower-taxing countries.
I think the graph speaks for itself.
This may just be a result of the fact that government is a normal good. The richer people get the more government they demand.
In other words, the causation is going in the other way from what you’re suggesting. Higher incomes cause higher government expenditures which in turn cause higher taxes (and the positive relationship you plot in your graph).
*Very* good point. Post hoc and all that. I’m going to think very hard about this.
BTW, I’ve been pulling these scatter plots for different types of taxes as a % of total tax burden, building scatter plots like this one comparing those numbers to countries’ GDP growth. Early results, higher corp taxes, cap gain taxes, seem to correlate with higher growth. Are those taxes “inferior goods”?
Again early results, higher labor taxes correlate with lower growth.
I think the higher taxes is an indication of a social safety net which, in turn, indicates a prosperous and “abundant” middle class with discretionary income. There’s where the GDP increases come from.
Tim: agreed, though I think of it as much as a platform or springboard as a safety net. By all the evidence, it appears that that platform is a necessary condition to long-term, stable prosperity.
http://www.asymptosis.com/why-prosperity-requires-a-welfare-state.html