Economic growth and alternative deficit-reducing tax increases and expenditure cuts: A cross-sectional study

Abstract

This paper assesses empirically the relative desirability of alternative deficit-reducing tax increases and expenditure cuts in terms of their individual impact on economic growth, using crosssectional data for a sample of 21 developed countries for the period 1972-81.Property taxes are by far superior to deficit financing, and are the best choice for implementing deficit-reducing tax increases. Income taxes and domestic taxes on goods and services, which are as bad for growth as are deficits, rank second with no difference between them. Foreign trade taxes are even worse for growth than are deficits, and are the worst choice for reducing deficits.Classifying government expenditures into capital and current expenditures renders the latter as the best type for implementing a reduction in expenditures. Deficit-reducing cuts in capital expenditures are concomittant with lower growth, while such cuts in current expenditures have no net impact on growth.

United Germany: The First Five Years: Performance and Policy Issues

“…On the basis of data for the United States for 1929 -86, Peden (1991) finds that government expenditure, when it exceeds a certain percentage of GNP, reduces economic growth. Fardmanesh (1991), in a cross-sectional study of 21 developed countries over the period 1972-81, obtains the result that foreign trade taxes have the most adverse effects on growth, followed by income taxes and domestic excises. He also finds that cuts in current expenditure have no lasting effect on growth.…”