EBELING: Case for lower taxes

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COMMENTARY:

The Conference Board's Consumer Confidence Index declined in June to just 50 percent, its lowest in 16 years and about half of what it was a year ago. That's not surprising, given rising food costs, skyrocketing oil prices and home mortgage troubles.

It's tempting in such situations for voters to demand "action" from Washington. And the politicians, as we now see, usually are happy to oblige: witness the $300 billion housing bailout bill passed by Congress before it adjourns for the summer.

But government action costs. While government "rescue" programs may ease some of today's problems, they often make the situation worse in the long run, particularly when lawmakers look to tax increases to pay for the programs.

During this campaign season in particular, we all need to remember that the United States, despite occasional economic slowdowns, historically has had one of the world's strongest economies. One reason is America's comparatively low tax rates.

A recently released British study compared the economic performance of 10 high-tax countries and 10 low-tax countries and found a strong correlation between low taxes and high rates of economic growth. This should tell politicians that, if government needs additional revenues, it should cut taxes, not raise them.

Conducted by economist Keith Marsden for the London-based Center for Policy Studies, the tax-comparison study found that countries with lower tax rates outperform high-tax countries in several key areas, including economic growth rates, export growth, economic investment and job growth.

While "high" and "low" are somewhat subjective terms, Mr. Marsden identified Australia, Canada, Estonia, Hong Kong, Ireland, South Korea, Latvia, Singapore, Slovakia, and the United States as relatively low-tax countries. Austria, Belgium, Denmark, France, Germany, Italy, Netherlands, Portugal, Sweden and the United Kingdom were identified as high-tax countries.

Countries with lower tax rates had an average 30 percent top personal income-tax rate and an average 22 percent top business-tax rate. The high-tax countries had an average top personal income-tax rate of 45 percent, some 50 percent higher, and a top corporate tax rate of 29 percent, more than 30 percent higher.

Mr. Marsden's findings were dramatic, though not necessarily surprising. In the low-tax countries, he found, gross domestic product (GDP) increased on average 5.4 percent yearly during the period 1998-2007. By comparison, GDP increased in the higher-tax countries at an average annual rate of just 2.1 percent, less than half.

Low-tax countries also increased exports at more than double the rate of the high-tax countries: averaging 6.3 percent annual growth from 2000 to 2005, compared to 3.1 percent in the high-tax countries. Similarly, the low-tax countries were far better at new-job creation, averaging a 1.7 percent annual increase in employment from 1995 to 2005, twice the nine-tenths of 1 percent for higher-tax countries.

Unsurprisingly, investors were far more attracted to and far more willing to risk their money in the low-tax economies than the high-tax countries, with investment increases averaging 5.9 percent per year from 2000 to 2005 in the low-tax countries and just eight-tenths of 1 percent per year in the high-tax economies - a more than sevenfold difference.

The higher economic growth rates in the low-tax countries had another effect: They enabled the countries to increase government spending in real terms, while decreasing spending as a percentage of GDP. In fact, from 2000 to 2005, the low-tax countries increased spending on public services an average of 3.4 percent per year, while the high-tax countries increased spending 1.7 percent per year on average. Yet, spending as a percentage of GDP declined in the low-tax countries from 40 percent to 32 percent, while the average in high-tax countries was 48 percent.

Fiscal policy, of course, is not the only factor affecting GDP, job, investment and export growth. Regulatory policy, monetary policy and other factors are important.

Yet, at the end of the day, Mr. Marsden showed, a simple truth exists: If you want more of anything, whether it's government revenue or jobs, you tax it less. If you want less of anything you tax it more. It's a lesson this election season that Sen. Barack Obama and John McCain both should heed.

Richard Ebeling is a senior research fellow at the American Institute for Economic Research (AIER), Great Barrington, Mass. (www.aier.org), a nonprofit, nonpolitical economic research institute founded during the Great Depression.