WILLIAM Gale and Andy Samwick published a recent paper examining the relationship between taxes and growth, and find little correlation between the two. While there are some caveats noted in their work, Gale and Samwick strongly rebut the argument that tax rates are an impediment to economic growth.
A couple of highlights from the paper:
The fitted values suggest that higher tax rates are not associated with higher or lower real per-capita GDP growth rates to any significant degree. In multivariate regression analysis, neither the top income tax rate nor the top capital gains tax rate has a statistically significant association with real GDP growth rate.
. . .
[T]he evidence presented above at the very least discredits the argument that higher growth cannot take place during a period of higher tax rates.
Lastly, the authors succinctly conclude:
The argument that income tax cuts raise growth is repeated so often that it is sometimes taken as gospel. However, theory, evidence, and simulation studies tell a different and more complicated story. Tax cuts offer the potential to raise economic growth by improving incentives to work, save, and invest. But they also create income effects that reduce the need to engage in productive economic activity, and they may subsidize old capital, which provides windfall gains to asset holders that undermine incentives for new activity.