Tatton Teaser
Posted 29 May 2024
Managing Government debt with tax revenue is a balance, from James Sounders. With levels of Government debt increasing over the last few years across the world, and rival parties in the UK and US going back and forth on policies post the next election I thought a recent study in the Economics Observatory about (link) which taxes are best and worth for growth was timely.
In general, taxes have a negative impact on growth, at least in the short term, VAT disincentivises people to spend, and if not spent by the government (and instead used to reduce debt), GDP is directly reduced (you may recall GBP is C+I+G+X-M if you studied economics).
The article goes on do describe the modelled effects of income/corporation/indirect (like VAT) taxes on GDP and potential output using NIESRs model.
Corporation tax seems to be by far the worst option over time – which makes intuitive sense, the increase curtails company investment in the medium term which limits potential output in the longer term. The nuance between indirect taxes and direct ones like income tax come in who is taxed. Indirect taxes tend to be regressive, i.e. impact lower income earners more than higher, whereas income taxes tend to be borne more by those on higher incomes, especially when evidence on higher taxes leading reduced working from anyone is mixed at best.
The rub obviously comes in communications, the way these are received by the public has a huge impact on what will actually happen. The authors argue that land taxes may actually be the best way to approach revenue raising, but what matters most to those seeking election is what will win votes, not economic logic.
