Future Tax Policies Should Maximize Economic Growth

NCPA Study Shows Lower Tax Burden Over Last 50 Years Would Have Led to Higher Government Revenue

DALLAS (November 21, 2006) – A new study from the National Center for Policy Analysis (NCPA) says conservatives and liberals should agree on one thing: tax policies should be structured to maximize economic growth. According to the study, tax policies that maximize economic growth will result in a government that is smaller in size relative to the economy, but will furnish the most possible government revenue in the long run.

"The goal of tax policy should be to maximize economic growth," said Gerald Scully, senior fellow with the NCPA and author of the study. "Tax policies that maximize growth would satisfy the stated goals of policy makers on both the right and the left."

Some activities of government contribute to economic growth. Yet when government becomes too large, it slows economic growth. The trick for policy makers is to find the point at which economic resources are allocated most productively between public and private uses. At this level of taxing and spending, the economy will grow at the fastest sustainable rate. According to the study:

  • To maximize economic growth, federal, state and local taxes combined should average about 23 percent of gross domestic product (GDP).
  • However, tax revenues as a share of GDP have not been at that level since 1950, and for years have averaged between 30 and 34 percent.

Would Americans have had to sacrifice important government programs to keep the overall tax rate down? Not at all, according to the study. At a lower rate of taxation, higher growth would have produced more government revenue than the amount the government actually collected. For example, between 1950 and 2004:

  • Had the combined tax rate been held to the optimum 23 percent, the economy would have grown at a clip of 5.8 percent per year, rather than the 3.5 percent that actually occurred.
  • As a result, real GDP would have been $37 trillion by 2004, more than three times greater than it was.
  • The average American family would have more than three times as much real income today than it actually has.
  • Government at all levels would have collected $61.9 trillion more in taxes.

"If we had just kept the tax burden at its optimum level, we would have had enough money to have funded all actual spending programs during that time without any public debt," said Scully. "If our concern is long-term economic health and equality, we need to think about policies that maximize growth."