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SMI: Taxes and Government Spending Undermine Economic Growth

March 10th, 2010 by sclemons · No Comments

By John Payne

With stimulus spending one of the most contentious issues in a very contentious political year, politicians of all stripes have argued about whether government spending boosts or hinders economic growth. It is beyond debate, however, that the spending will have to be paid for by taxpayers either now or in the future. Those taxes cause the economy to grow slower, according to a new study released by the Show-Me Institute, “Taxes and Economic Growth: A Review of the Evidence.” Written by Mark Skidmore and Nicole Bradshaw — both professors at Michigan State University’s Department of Agricultural, Food, and Resource Economics — the study shows that stimulus spending may not prove to be very stimulating, because only spending on highly demanded government services appears to boost economic growth.

In a review of the academic literature, Skidmore and Bradshaw find a general agreement among researchers that higher taxes lead to lower economic growth, and therefore lower standards of living for American workers. The exact size of taxation’s effect on growth is not firmly established, but the consensus range is that for a 10-percent tax cut, there will be an additional rise in economic activity of 1.5 percent to 8.5 percent. When the bills for our current spending binge eventually come due, taxes will be raised and economic growth will fall. However, when confronted with these facts, supporters of the stimulus will likely argue that the economic growth generated by current spending will more than offset the drop in growth that will follow the tax hikes. This is theoretically possible, but Skidmore and Bradshaw provide good reasons to doubt the idea. Read more…

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