Taxes and Economic Growth

Studies | Economy | Taxes

No. 292
Tuesday, November 21, 2006
by Gerald W. Scully


Notes

  1. This study is based on Gerald W. Scully, "The 'Growth Tax' in the United States," Public Choice, Vol. 85, Nos. 1-2, 1995, pages 71-80, and a version of that study, Gerald W. Scully, "What Is the Optimal Size of Government in the United States?" National Center for Policy Analysis, Policy Report No. 188, November 1994. The numbers and discussion have been updated and projections added with the assistance of Pamela Villarreal, an NCPA graduate student fellow.
  2. Address to the Economic Club of New York, December 14, 1962, available at http://www.americanrhetoric.com/speeches/jfkeconomicclubaddress.html
  3. It should be noted that revenue fell when marginal tax rates were cut by one-fourth in 1981. However, tax compliance increased and 70 percent of the projected revenue losses were recovered by 1985. See Lawrence Lindsey, The Growth Experiment: How the New Tax Policy Is Transforming the U.S. Economy (New York: Basic Books, 1990). Lindsey began his research convinced that supply-side responses were negligible. After examining the evidence, he became one of the strongest proponents of supply-side policies.
  4. Some of the gains achieved by the Reagan tax cuts were reversed during the first Bush and Clinton administrations. Income tax rate cuts during the current Bush administration have restored some of the previous gains. Today, the top income tax rate is 35 percent and, when the phase-out of the standard deduction and the personal exemption are figured in, the marginal tax rate on income is even higher for some taxpayers.
  5. See, for example, Gerald W. Scully, "The Size of the State, Economic Growth and the Efficient Utilization of National Resources," Public Choice, Vol. 63, 1989, pages 149-64; Philip J. Grossman, "Government and Growth: Cross-Sectional Evidence," Public Choice, Vol. 65, 1990, pages 217-27; Edgar Peden, "Productivity in the United States and Its Relationship to Government Activity: An Analysis of 57 years, 1929-1986," Public Choice, Vol. 69, 1991, pages 153-73; James Gwartney, Robert Lawson and Randall Holcombe, "The Size and Functions of Government and Economic Growth," Joint Economic Committee, U.S. Congress, April 1998; Gary S. Becker and Casey B. Mulligan, "Deadweight Costs and the Size of Government," Journal of Law and Economics, Vol. 46, No. 2, October 2003, page 310; and Martin Feldstein, "Tax Avoidance and the Deadweight Loss of the Income Tax," Review of Economics and Statistics, Vol. 81, No. 4, November 1999, pages 674-80.
  6. Infrastructure and other goods may be privately provided or publicly provided. The fact that we provide it publicly does not imply that we would be without infrastructure had government not supplied it. Strictly speaking, "public goods" have the characteristics of being nonrivalrous and nonexclusive. Nonrivalous means that when one person consumes the good, it does not interfere with others' consumption of the good. An example of this is a scenic view. Nonexclusive means that it is quite difficult to provide the good for some people while excluding others. An example is national defense. If some individuals in the United States are protected, then all are protected due to the impossibility of excluding certain households from protection against foreign invaders. Because of these characteristics of public goods, they tend to be underprovided by the private sector.
  7. Statistical Abstract of the United States.
  8. In 1913, the 16th Amendment to the Constitution was ratified, granting Congress the power to levy taxes on individual and corporate income. Initially, Congress passed a law authorizing a 1 percent to 7 percent tax on top personal income earners ($3,000 a year for single earners, $4,000 a year for married earners), and a 1 percent tax on all corporate income. In 1916, personal income taxes were expanded to cover all income earners, with rates ranging from 2 percent to 15 percent. See "History of the U.S. Tax System," United States Department of the Treasury; and Tax Foundation, "U.S. Federal Income Tax Rates History, 1913-2004," April 19, 2005.
  9. With few exceptions, state and local governments use the federal definition of income and rely on the federal government as protagonist in litigating whether particular income is taxable.
  10. For example, see E. A. Peden and M. D. Bradley, "Government Size, Productivity and Economic Growth: The Post-War Experience," Public Choice, Vol. 61, 1989, pages 229-45.
  11. For some criticisms of the model and a rebuttal by the author see, respectively, Peter E. Kennedy, "On Measuring the Growth-Maximizing Tax Rate," Pacific Economic Review, Vol. 5, No. 1, pages 89-91, February 2000, and Gerald W. Scully, "The Growth-Maximizing Tax Rate," Pacific Economic Review, Vol. 5, No. 1, pages 93-96, February 2000.
  12. See Philip J. Grossman, "The Optimal Size of Government," Public Choice , Vol. 56, 1987, pages 193-200, and Edgar A. Peden, "Productivity in the United States and Its Relationship to Government Activity: An Analysis of 57 Years, 1929-1986," Public Choice, Vol. 69, 1991, pages 153-73.
  13. "Annual Summary of Food and Nutrition Service Programs," U.S. Department of Agriculture Food and Nutrition Service, August 24, 2006. This figure includes only food stamps and WIC, and does not include school lunch and breakfast programs, or special programs for elderly, day care and American Indian reservations.
  14. The cost of complying with federal regulation was estimated at $580 billion in 1993. See Thomas D. Hopkins, "The Cost of Federal Regulation," Journal of Regulation and Social Costs, Vol. 2, No. 1, March 1992, pages 5-31.
  15. Personal conversation with the author.

 


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