NEW EVIDENCE ON GOVERNMENT AND GROWTH
June 17, 2008
In his new study, "Big, Not Better?" Keith Marsden, a fellow of the Center for Policy Studies in London, compared the performance of 20 countries over the past two decades:
- The first 10 have slimmer governments with revenue and expenditure levels below 40 percent of gross domestic product (GDP); this group includes Australia, Canada, Estonia, Hong Kong, Ireland, South Korea, Latvia, Singapore, the Slovak Republic and the United States.
- The 10 higher-taxed, bigger-government economies include: Austria, Belgium, Denmark, France, Germany, Italy, the Netherlands, Portugal, Sweden and the United Kingdom.
Marsden found that slimmer governments have reduced their top tax rates at a faster pace, and to significantly lower levels:
- Their highest tax rate on personal income fell to 30 percent in 2006 from 36 percent in 1996, and top corporate rates were lowered to an average of 22 percent from 30 percent.
- Investment growth jumped to an average annual rate of 5.9 percent in 2000-2005, from 3.8 percent over the previous decade.
- Exports in these countries have risen by 6.3 percent annually since 2000.
- The International Monetary Fund (IMF) reports that GDP soared in the slimmer-government group at a 5.4 percent average annual rate from 1999-2008, up from a 4.6 percent rate over the previous decade.
- They have, on average, higher annual employment growth rates (1.7 percent compared to 0.9 percent from 1995-2005).
- They also have, on average, higher annual employment growth rates (1.7 percent compared to 0.9 percent from 1995-2005); increased real household consumption rates; and longer life expectancies for men and women.
Marsden concludes that the early supply-siders were right. His findings firmly reject the widely held view that lower taxes inevitably result in cuts in public services, slower growth and widening income inequalities. Today's policy makers should take note of how tax cuts and the pruning of inefficient government programs can stimulate sluggish economies.
Source: Keith Marsden, "New Evidence on Government and Growth," Wall Street Journal, June 16, 2008.
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