NCPA - National Center for Policy Analysis

Tax Reform Could Spur Growth

April 12, 2000

In Policy Review last year I reviewed a number of public opinion polls and found no significant support for big tax cuts. However, that does not imply that people are satisfied with the tax system.

A large majority of taxpayers favor major changes in the Tax Code. A January CNN-Gallup poll found 26 percent of voters favoring a total overhaul of the Tax Code, 35 percent wanting major changes and 28 percent endorsing minor changes. Only 9 percent saw no need for change.

The benefits of tax reform can be enormous. For instance, Japan's generally excellent post-war tax system deserves far more credit for its economic success than its blundering industrial policy.

A few years ago, an academic study looked at how much faster major countries would have grown if they had adopted Japan's tax system in the 1950s.

  • Countries like France, Germany, Sweden and Great Britain would have grown almost one percent per year faster from the 1960s through the 1980s -- and would have added thousands of dollars to average incomes.
  • The U.S. growth rate during the 1960s and 1970s would have been 0.4 percent faster per year if we had Japan's tax system.

Ironically, Japan also shows how a bad tax system can destroy an economy. Since it adopted a value-added tax in 1989, Japan's growth rate has tanked. Throughout the 1990s, the nation has had virtually zero growth and is still mired in recession. This has made the tax system worse, as the government compensates for revenue shortfalls by raising taxes. The VAT was raised from 3 percent to 5 percent in 1997 and the Tokyo city government recently imposed an utterly absurd new tax on banks that will only exacerbate Japan's economic problems.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, April 12, 2000.


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