Measuring the Burden of High Taxes

Policy Reports | Taxes

No. 215
Wednesday, July 01, 1998
by Gerald W. Scully

Taxes and Growth in Other Countries

Table II - Growth-Maximizing Tax Rates and Economic Growth for Various Countries

Covering a spectrum of nations provides comparisons that are useful in making judgments about the relationship between taxation and economic growth in the United States. Is a tax rate above the growth-maximizing level peculiar to the United States, or is it common among industrial nations? Long-term data on GDP, including the period during World War II, are available for a number of European nations and New Zealand. Using the same economic method applied to the U.S. data, optimal tax rates for these nations have been estimated over a similar period. (The regressions appear in Appendix Table I.) The results, summarized in Table II, show that:

  • The optimal tax rates range from 16.6 percent for Sweden to 25.2 percent for the United Kingdom.
  • On the average, the growth-maximizing tax rate is about 20 percent of GDP, less than half of the current levels of taxation.
  • The marginal cost of taxation for each unit of local currency is 5.70 in Denmark, 3.34 in the United Kingdom, 1.59 in Italy, 4.20 in Sweden, 1.76 in Finland and 3.43 in New Zealand.

Tax rates as a percent of GDP are far above the optimal levels in all these countries. As Table I shows, they range from 34.1 percent in the United Kingdom to 51.6 percent in Denmark.

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