Com m ents on Tax and Econom ic Grow th Bob Reed Bob Reed Department of Economics and Finance Department of Economics and Finance University of Canterbury University of Canterbury
Selected policy recommendations from “Tax and Economic Growth” 1 .Shift tax burden from incom e taxes to consum ption and property taxes 2 .Low er m arginal tax rates on incom e 3 .Cut corporate tax rates 4 .( By im plication from revenue neutrality) I ncrease consum ption and property taxes
What is the evidence underlying these policy recommendations? 1 . OECD Research on Fiscal Policy/ Taxation: - “Do Tax Structures Affect Aggregate Econom ic Grow th?” ( Arnold, 2 0 0 8 ) - “How do taxes affect investm ent and productivity?” ( Vartia, 2 0 0 8 ) - “Do corporate taxes reduce productivity and investm ent at the firm level?” ( Schw ellnus and Arnold, 2 0 0 8 ) 2 . Other Research
Which results have consensus support in the economics literature? FOREI GN DI RECT I NVESTMENT I S NEGATI VELY AFFECTED BY TAXES 1 . U.S. I nvestm ent Abroad - Altshuler, Grubert and New long ( NBER, 1 9 9 8 ) - Devereux and Griffith ( Journal of Public Econom ics, 1 9 9 8 ) - Grubert and Mutti ( National Tax Journal, 2 0 0 0 ) 2 . Foreign I nvestm ent in U.S. - Hines ( Am erican Econom ic Review , 1 9 9 6 ) 3 . Cross-country evidence - Devereaux and Freem an ( I nternational Tax and Public Finance, 1 9 9 5 ) - Stow hase ( Mim eo, 2 0 0 2 )
Which results have consensus support in the economics literature? ENTREPRENEURI AL ACTI VI TY I S NEGATI VELY AFFECTED BY TAXES ( though is it tax level or progressivity?) 1 . The decision to becom e an entrepreneur ( US data) - Gentry and Hubbard ( Am erican Econom ic Review , 2 0 0 0 ) 2 . The decision by entrepreneurs to invest in capital ( US data) - Carroll et al. ( NBER, 1 9 9 8 ) 3 . The decision by entrepreneurs to em ploy labor ( US data) - Carroll et al. ( Journal of Labor Econom ics, 2 0 0 0 ) Good overall survey: Rosen ( in “Venture Capital, Entrepreneurship, and Public Policy,” MI T Press, 2 0 0 4 )
Which results have consensus support in the economics literature? R&D ACTI VI TY I S RESPONSI VE TO TAX I NCENTI VES 1 . US data - Hall and Van Reenen ( Research Policy [ Review ] , 2 0 0 0 ) 2 . Cross-country and non-US data - Hall and Van Reenen ( Research Policy [ Review ] , 2 0 0 0 ) - Bloom , Griffith, and Van Reenen ( Journal of Public Econom ics, 2 0 0 2 ) - Australian Bureau of I ndustry Econom ics ( 1 9 9 3 )
Which results have consensus support in the economics literature? I NVESTMENT MAY BE SENSI TI VE TO TAXES ( depends on w hether one uses m icro- or m acrodata) From Backus, Henriksen, and Storesletten ( Journal of Monetary Econom ics, 2 0 0 8 ) : “ I n the investm ent literature, studies generally find little im pact of taxes w ith aggregate data, but substantial im pact w hen they use firm or industry data. See, for exam ple, Hassett and Hubbard’s ( 2 0 0 2 ) survey. Gordon and Hines ( 2 0 0 2 ) and Hines ( 1 9 9 9 ) describe a sim ilar difference betw een m acro and m icroevidence in the international tax literature .”
Which results have consensus support in the economics literature? SHI FTI NG TAXES AW AY FROM I NCOME TAXES TOW ARDS CONSUMPTI ON/ PROPERTY TAXES MAY I NCREASE ECONOMI C GROW TH 1 . Theoretical literature strongly suggests that shifting taxation from incom e to consum ption w ill increase grow th - Judd ( Journal of Public Econom ics, 1 9 8 5 ) - Stokey and Rebelo ( Journal of Political Econom y, 1 9 9 5 ) 2 . Em pirical literature is thin, but supportive - Kneller, Bleaney, and Gem m ell ( Journal of Public Econom ics, 1 9 9 9 ) - Bleaney, Gem m ell, and Kneller ( Canadian Journal of Econom ics, 2 0 0 1 )
Which results have consensus support in the economics literature? NOT SO CLEAR : EFFECT OF TAXES on LABOR SUPPLY ( participation, yes; hours w orked, no?) EFFECT OF TAXES on SAVI NGS EFFECT OF TAX PROGRESSI VI TY on ECONOMI C GROW TH ( difficulty in m easuring Marginal Tax Rates)
How do the OECD studies relate to the existing literature? THE FOLLOW I NG POLI CY RECOMMENDATI ONS HAVE SOME SUPPORT I N THE EXI STI NG LI TERATURE - Shift from incom e taxes to consum ption/ property taxes - Reduce tax progressivity ( related to entrepreneurship?) - Reduce the corporate tax rate below the top incom e tax rate
An overall tax structure prescription for NZ policy makers 1 . Low er corporate incom e tax rates to be in line w ith com petitor countries ( Australia) 2 . Adjust personal incom e tax rates so that the top personal incom e tax rate does not deviate substantially from the corporate incom e tax rate 3 . I ncrease consum ption and property taxes to m aintain revenue neutrality ( little need to w orry about cross- border effects) 4 . Change the m ix of public spending to better benefit low er incom e citizens as com pensation for regressive effects of tax structure changes
How confident can policy makers be that these policy recommendations will increase growth? MAJOR CONCERNS: 1 . I t is bothersom e that that m acro-level studies have difficulty finding significant tax effects 2 . The OECD studies provide a valuable em pirical com plem ent to existing studies. How ever, they are strangely silent on the estim ated size of the tax effects. This m atters w hen w eighing the benefits of tax reform against adjustm ent costs 3 . Tw o w ays that this research could be m ore useful to policy m akers: - provide country-specific estim ates of tax effects ( robustness) - m ake data available to other researchers
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