NCPA - National Center for Policy Analysis

Low Taxes Were the Key to Asia's Success

December 15, 1997

American liberals have long admired the so-called Asian development model. The key to Asia's success was said to be industrial policy, whereby the government channels national investment into manufacturing through the use of trade restrictions, tax incentives and credit subsidies.

But industrial policy had nothing to do with Asia's economic success. Economists have long argued that Asia's high growth rates were easily explainable as the result of high saving rates, good education and rapid growth of the labor force.

Another major factor in Asia's phenomenal growth during much of the postwar era was very low taxes (see figure)

  • In 1972, taxes amounted to just 12.6 percent of gross domestic product (GDP) in Korea and 20.7 percent in Japan, well below the 26.6 percent figure in the U.S.
  • But by 1995, taxes in Korea had virtually doubled to 22.3 percent of GDP and had risen to 28.5 percent in Japan, putting Japan's taxes above those of the United States.

This situation is likely to get worse as the International Monetary Fund demands still higher taxes as a condition for bailing out Asia from its current financial woes.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, December 15, 1997.


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