Budget & Tax

Higher Tax Burdens Hinder Economic Growth

June 11, 2008

Dr. Barry Poulson

There is now a wealth of evidence showing that higher tax burdens have negative effects on economic growth.

Many studies have found this negative relationship at the national level. Studies at the state and local level have often found conflicting evidence on the impact of higher tax burdens on economic growth. However, more recent studies that standardize for other factors affecting economic growth reveal a significant negative impact of higher taxes on economic growth. Some of these studies show that states with higher tax burdens are less successful in attracting population. Other studies show a direct negative impact of higher taxes on the growth of output and output per capita.
Of particular interest are studies that isolate the impact of specific taxes on economic growth. A recent study shows that higher income tax rates have a significant negative impact on economic growth in the states. The states with the highest income tax rates tend to have the lowest rates of economic growth, whereas states with lower income tax burdens tend to have higher rates of economic growth.

At the local level high property taxes have the most damaging impact on economic growth. Recent studies reveal that some cities are actually on the wrong side of the Laffer curve. This means that property tax rates are so high that these cities can actually increase property tax revenues by decreasing property tax rates. The explanation for this finding is that businesses and people can vote with their feet.

Dr. Barry Poulson, in “Budgeting for Fiscal Discipline: A Tale of Two States,” Americans for Prosperity policy paper, March 2008