In a campaign year in which the case for raising or lowering taxes no doubt will be an important issue, it is worth looking at the record about the relationship between the level of taxes on the one hand and the size and functions of government on the other.

In a recent report entitled, Big, Not Better? prepared for the London-based Centre for Policy Studies, economist Keith Marsden has looked at the fiscal effects resulting from “supply-side” tax cuts in ten countries (Australia, Canada, Estonia, Hong Kong, Ireland, South Korea, Latvia, Singapore, Slovakia, and the United States) over the last ten years.

Marsden compares these results with ten other countries (Austria, Belgium, Denmark, France, Germany, Italy, Netherlands, Portugal, Sweden and the United Kingdom) that were far less aggressive in cutting taxes during this same period.

The term “supply-side economics” was coined in the 1970s by those who argued that lowering taxes, especially marginal tax rates, would leave in the hands of income-earners more money out of each additional dollar they earned.

This increased net take-home pay would act as a stimulus for greater work, savings, and investment. Over time the amount of output in the economy would grow, and at the end of the day the increased wealth would generate more revenues for the government as well to fund its own activities.

In the countries that introduced more supply-side-oriented policies, the highest tax rate on personal income decreased, on average, from 36 percent to 30 percent; and the top rate on corporate taxes declined, on average, from 30 percent to 22 percent.

In the other countries that were less willing to lower taxes, the top rate on personal taxes declined from 49 percent to 45 percent, and the top corporate tax rate decreased from 36 percent to 29 percent.

In other words, in the first group of countries the top rates on personal and corporate taxes on average fell, respectively, by 17 percent and 27 percent. In the second group, personal and corporate top tax rates only decreased on average by 9 percent and 20 percent, respectively. Thus top rates on personal income were cut by twice as much and corporate top rates were cut by almost 50 percent more in the supply-side-oriented countries than in the other group.

What were the economic consequences for these two groups of nations? The first graph, below, summarizes some of the results.

In the lower tax countries both Gross Domestic Product (GDP) and export trade grew more than twice as fast than in the higher-tax nations. Investment growth was five times as fast in the first group. More of the governments in the supply-side-oriented countries had modest budget surpluses, in comparison to the significant budget deficits in more of the higher-tax nations. And interest payments on government debt (as a percentage of GDP) were dramatically lower in the countries following a more supply-side direction.

Finally, the second graph, below, captures some additional and significant differences between these two groups of countries.

In the more supply-side economies, real consumption rose more than three times as fast, employment increased almost twice as much, and government spending on various social services actually grew at double the rate as in the higher tax economies.

All of these positive results occurred in the supply-side-oriented economies even as the actual size of government spending as a percentage of GDP decreased far more than in the higher-tax nations.

In the first group government spending decreased, on average, from 40 percent of GDP to 32 percent; a 20 percent decline in government’s share of national income. In the higher tax countries government spending went down from 55 percent of GDP to 48 percent; only a 13 percent decline in government’s share of national income.

Of course, fiscal policy has not been the single factor in determining these results. Regulatory policy, monetary policy, and a variety of other factors have all had their influence. But taxation has most certainly played an important role in generating the two sets of outcomes.

These “experiments” in recent fiscal history around the world, therefore, should not be ignored in this year’s electoral debates over taxing policy in America.

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