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48 Can. Tax J. 276 (2000)
Tax Cuts: The Implications for Growth and Productivity

handle is hein.journals/cdntj48 and id is 308 raw text is: Tax Cuts: The Implications for Growth and Productivity Andrew Jackson* ABSTRACT In current public debates over the allocation of budget surpluses, advocates of tax cuts typically emphasize a large economic efficiency payoff in the form of higher rates of long-term economic growth, while social advocates emphasize equity concerns. This paper reviews the mainstream economic and econometric literature on the relation between taxes and growth, and pays particular attention to recent work by the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund. The paper argues that the alleged negative microeconomic impacts of taxes on work effort, savings, and investment are not always well founded theoretically and that, even where such linkages are plausible, the impacts on long-term growth rates are modest. Furthermore, the mainstream literature indicates that public investment and social expenditures financed from taxes have positive impacts on growth, which suggests that any efficiency losses associated with such spending may be more than counterbalanced by efficiency and not just equity gains. The paper shows that there is no significant statistical relationship between overall tax levels as a share of gross domestic product (GDP) and growth rates of per capita GDP or productivity for OECD countries in the 1990s, which implies that tax levels are neutral in efficiency terms. In contrast, higher tax levels are associated, as expected, with lower levels of after-tax household income inequality. The paper concludes that in the choice of a combination of tax and spending measures as a share of GDP the supposed tradeoff between efficiency and equity does not exist; that the economic efficiency case for tax cuts is exaggerated; and that the debate over the roles of tax and spending measures in a long-term economic growth strategy needs to be more balanced. INTRODUCTION The current debate over the allocation of future federal budget surpluses to tax and/or spending measures has become highly polarized, not least in terms of the * Senior economist, Canadian Labour Congress. 276 (2000), Vol. 48, No. 2/no 2

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