Supply-Side Works
A typical Conservative argument in favor of low taxation is that lower taxes stimulate economic growth. Conservatives argue that while it is true that lower taxation means less government revenue for welfare and social programs, lower taxation also means fewer citizens need government aid. And that is a good thing.
To prove this point, take a look at these figures. We have picked out 10 industrialized nations and compared the tax burdens their governments place on their economies (tax revenue as a percentage of Gross Domestic Product) to the strength of their economies (measured in unemployment rates and GDP Growth). Our list includes five nations with tax burdens greater than 40%, and five nations with tax burdens lower than 36%.
Tax burden figures come from the Organisation for Economic Co-operation and Development (OECD). Unemployment and GDP growth figures come from the CIA World Factbook. Figures used are the most current as of publication.
Countries where tax revenue is 40% of GDP or higher:
Denmark Tax Burden: 48.9% Unemployment: 5.7% GDP Growth: 2.2%
France Tax Burden: 44.0% Unemployment: 10% GDP Growth: 1.5%
Austria Tax Burden: 44.0% Unemployment: 5.1% GDP Growth: 1.9%
Norway Tax Burden: 43.5% Unemployment: 4.2% GDP Growth: 3.8%
Italy Tax Burden: 42.6% Unemployment: 7.9% GDP Growth: 0.0%
Average unemployment rate: 6.58% (top three: 6.93%)
Average GDP Growth: 1.88% (top three: 1.86%)
Countries where tax revenue is 36% of GDP or lower:
UK Tax Burden: 35.8% Unemployment: 4.7% GDP Growth: 1.8%
Spain Tax Burden: 35.6% Unemployment: 10.1% GDP Growth: 3.3%
Australia Tax Burden: 31.5% Unemployment: 5.2% GDP Growth: 2.1%
US Tax Burden: 26.4% Unemployment: 5.1% GDP Growth: 3.5%
Japan Tax Burden: 25.8% Unemployment: 4.3% GDP Growth: 2.7%
Average unemployment rate: 5.88% (bottom three: 4.86%)
Average GDP Growth: 2.68% (bottom three: 2.76%)
As you can see, the countries with relatively low tax burdens enjoy an average unemployment rate that is .7 point lower than the countries with relatively high tax burdens. To narrow it down further, the bottom three nations in terms of tax burden have an average unemployment rate that is 2.07 points lower than the top three nations.
Likewise, GDP growth was .8 point greater in the low tax nations than in the high tax nations. Comparing the top three to the bottom three gives us a difference of .9 point in favor of low taxation.
In other words, proof that supply-side works.
© Copyright 2006, Jason E. Heath
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