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What Is the Evidence on Taxes and
William McBride, PhD
The idea that taxes affect economic growth has become politically contentious and the subject of much
debate in the press and among advocacy groups. That is in part because there are competing theories about
what drives economic growth. Some subscribe to Keynesian, demand-side factors, others Neo-classical,
supply-side factors, while yet others subscribe to some mixture of the two or something entirely unique. The
facts, historical and geographical variation in key parameters for example, should shed light on the debate.
However, the economy is sufficiently complex that virtually any theory can find some support in the data.
For instance, the Congressional Research Service (CRS) has found support for the theory that taxes have no
effect on economic growth by looking at the U.S. experience since World War II and the dramatic variation
in the statutory top marginal rate on individual income.1 They find the fastest economic growth occurred in
the 1950s when the top rate was more than ninety percent.2 However, their study ignores the most basic
problems with this sort of statistical analysis, including: the variation in the tax base to which the individual
income tax applies; the variation in other taxes, particularly the corporate tax; the short-term versus long-
term effects of tax policy; and reverse causality, whereby economic growth affects tax rates. These problems
are all well known in the academic literature and have been dealt with in various ways, making the CRS
study unpublishable in any peer-reviewed academic journal.3
So what does the academic literature say about the empirical relationship between taxes and economic
growth? While there are a variety of methods and data sources, the results consistently point to significant
1 The top marginal tax rate is the rate that is paid on each additional dollar of income.