NCPA - National Center for Policy Analysis

The International Importance Of Low Tax Rates For Growth

November 11, 1998

During the 1980s more than 50 countries including the United States and the United Kingdom sharply reduced their highest tax rates, particularly on capital. In the early 1990s most of the largest economies reversed course and began raising rates on income and payroll taxes or both.

However, many of the fastest growing economies of Asia, Africa and Latin America continued to bring tax rates down -- including, among others, Argentina, Bolivia, Botswana, Brazil, Chile, Colombia, Hong Kong, India, South Korea, Malaysia, Mauritius, Mexico, New Zealand and Singapore.

A comparison of changes in the highest individual tax rates for the largest G-7 economies and for 19 other countries shows the growth of real gross domestic product has been far more rapid among countries with low and/or falling tax rates.

  • When most G-7 countries started putting tax rates back up, their economic growth slowed markedly, from an average of 2.9 percent in 1980-90 to an average of 1.7 percent in 1990-96.
  • Meanwhile, growth among the 19 tax-slashing economies generally accelerated, from an average of 4.5 percent in 1980-90 to an average of 5.8 percent in 1990-96.
  • Thus the gap between the average growth rates of these two groups widened from 1.6 percentage points in the 1980s to 4.1 percentage points from 1990 to 1996.

Although good tax policy alone does not ensure a good economy, world history offers no examples of economies that prospered with punitive tax rates. Countries in which the marginal cost of government is relatively high find it more difficult to attract and retain physical capital, financial capital and human capital.

Source: Alan Reynolds (Hudson Institute), "The International Importance of Low Tax Rates," NCPA Brief Analysis No. 283, November 11, 1998, National Center for Policy Analysis, 12655 N. Central Expy., Suite 720, Dallas, Texas 75251, (972) 386-6272.

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