Which taxes hurt growth the most?
No business enjoys paying taxes. The knock to a company’s bottom line, as well as the costs of compliance with a sprawling regulatory regime, can leave execs foaming at the mouth.
But some taxes are more damaging to growth than others. And, according to fresh research, some have virtually no negative economic impact at all.
Property taxes are the most likely taxes to hinder the growth of an economy, a new study has found.
In a survey of 10 Western developed countries, increasing property taxes cut into future GDP growth per capita by more than one per cent.
The second worst impact on growth came from value-added taxes (VAT), with a one per cent increase on the consumption tax stifling growth by 0.3 per cent per capita.
“That is much smaller than most people expect, simply because they ignore the way the money is spent by governments and that government expenditure creates additional growth that offsets some of the negative growth effect of the tax hikes,” explained Panmure Liberum analyst Joachim Klement.
Meanwhile, some taxes actually saw a slight increase to GDP growth when they were raised, including corporate income tax and labour tax.
The most significant of these was specific good taxes, which boosted GDP per capita growth by more than one per cent when raised by one per cent.
The boost to GDP from specific taxes on goods like alcohol or tobacco may actually be caused by ‘sin taxes‘ preventing unhealthy habits, saving money on healthcare costs in the long run.
The average tax revenue in low-income nations typically ranges from 10 to 20 per cent of GDP, whereas it exceeds 40 per cent in wealthy ones.
Following last year’s October Budget, the tax burden in the UK rose to its highest level in history, and is predicted to reach 38 per cent of GDP by the end of the decade.
Researchers also found no correlation between the size of the tax burden in developed countries and its growth.
Between 1995 and 2020, Sweden had the highest tax burden (close to 45 per cent of GDP), while the US had the lowest (23 per cent). However, both averaged almost identical growth rates, at 2.4 per cent and 2.3 per cent respectively.
Meanwhile, average GDP growth in Switzerland and Ireland, two other countries in the study with similarly low tax burdens as the US, came in at 1.7 per cent and 5.7 per cent respectively.
“We recommend policymakers consider the benefits of corporate income taxation and specific goods and services taxes for growth,” wrote the researchers.
“To reduce the adverse effect on growth, it is also useful to consider the unfavourable impacts of value-added tax and personal income tax.”