Every election cycle, I keep hearing that tax breaks stimulate the economy.
Are there any well-known studies or scientifically-backed examples from history that shed light on whether or not this claim is true or false?
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Taxes do affect economic growth, but not equally. From the OECD paper, Do tax structures affect aggregate economic growth? Empirical evidence from a panel of OECD countries:
The results of the analysis suggest that income taxes are generally associated with lower economic growth than taxes on consumption and property. ... Property taxes, and particularly recurrent taxes on immovable property, seem to be the most growth-friendly, followed by consumption taxes and then by personal income taxes. Corporate income taxes appear to have the most negative effect on GDP per capita. These findings suggest that a revenue-neutral growth-oriented tax reform would be to shift part of the revenue base towards recurrent property and consumption taxes and away from income taxes, especially corporate taxes.
However, upon doing a review of the economic growth literature in 2002 (15 Years of New Growth Economics: What Have We Learnt?), Xavier Sala-i-Martin concluded that:
The size of the government does not appear to matter much. What is important is the “quality of government” (governments that produce hyperinflations, distortions in foreign exchange markets, extreme deficits, inefficient bureaucracies, etc., are governments that are detrimental to an economy).
In other words, a government that focuses on the right tax mix (high consumption and property tax, low corporate income tax, and reasonable personal income tax), such as Sweden, will have a tax system that has little negative effect on the economy in spite of having a large public sector.