We spend an awful lot of time in the comment threads here on HA arguing about taxes. And at the heart of most of the antitax sentiment is the unchallenged assumption that taxes are bad for the economy.
There’s just one problem, though. Despite the widespread notion that taxes harm the economy, no one has actually been able to back that up. It’s not that taxes have no effect; they are a major part of the American economic system and affect planning and behavior in many ways. Taxes influence who wins and who loses in a competitive society. But over all, there is surprisingly little evidence that tax rates are an important factor in determining the nation’s economic prosperity.
Anna Bernasek writing in the New York Times explores the notion that taxes are bad for the economy, and discovers that it is exactly that: “a notion not backed by strong evidence.” The economic theory is that taxes have a negative effect on behavior by reducing the incentive to do whatever is taxed.
That’s the theory, anyway. In practice, how many Americans will work less if their taxes rise? With mortgage bills, college tuition and car payments looming, who can afford to work less? Relatively few have the option of cutting back without risking the loss of their jobs.
So just because taxes can discourage productive behavior doesn’t mean that they do. Too many other factors are involved – like social pressures, financial needs and a job market that isn’t entirely flexible.
And then there’s the evidence. Over the last 30 years, economists have undertaken hundreds of studies to determine whether taxes hurt the economy. So far, they’ve turned up little to convict taxes of the charge. After reviewing the literature on the topic in 1993, two economists, William Easterly of New York University and Sergio Rebelo of Northwestern, concluded in a joint paper that “the evidence that tax rates matter for growth is disturbingly fragile.”
As it turns out, history shows that throughout the 20th century, in the U.S. and other developed nations, a rising tax burden goes hand in hand with rising prosperity. In fact, between 1950 and 2002, the strongest productivity growth actually occurred when the top tax rates were the highest. And on average, the highest taxed countries are also the most affluent.
Nobody is making the case that high tax rates are a recipe for growth, although certainly the things taxes pay for — public investment in education, research, health and infrastructure — are essential to a prosperous and stable economy.
But as we continue to discuss tax reform in Washington state it is important to do so without being hindered by unscientific assumptions… no matter how intuitive they might at first appear. Taxes are not antithetical to prosperity. And we shouldn’t structure our tax system or our government based on a notion that experience simply doesn’t back up.