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The Mysterious Taxes/Growth Relationship

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"The Mysterious Taxes/Growth Relationship"

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In his most recent NYT column, Greg Mankiw outlines a somewhat odd perspective on carbon pricing policy. As Ryan Avent lays out, Mankiw seems to think that there should be a carbon charge (whether through a carbon tax or auctioned permits) essentially exclusively as a matter of making the tax code more efficient. It’s definitely true that a revenue-neutral carbon charge should, according to standard theory, be a more efficient way of raising taxes than our current system.

But I think to a normal person accepting a certain amount of non-optimality in our tax system would be a small price to pay for finding a politically feasible path toward averting global ecological catastrophe. After all, for better or for worse the American Climate and Energy Security Act would hardly be the only element of non-optimal tax policy in the United States.

One issue in this neighborhood that I think is interesting is simply the fact that even though it seems like tax policy ought to be an important determinant of economic growth, it’s pretty hard to find evidence for this proposition. In general, the policy determinants of growth are hard to find. And I think this is particularly true with taxes. If you look across the main OECD countries, you see much more diversity in tax systems than you do in growth outcomes. The overall levels of revenue are quite different, and the design of the systems are different as well, but the outcomes are extremely similar. Or consider the long-run course of US per capita GDP:

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Tax policy has changed enormously over this period—indeed, it’s changed enormously several times just in the post-WWII era—and the impact is hard to see. There are various explanations one can come up with for the general lack of evidence around a tax-growth relationship, and I don’t think we should dismiss the theoretical case that tax efficiency matters out of hand, but it is striking that the evidence around all of this is extremely unclear. And not just striking, but unfortunate. Thanks to compound effects, a small interest in the trend growth rate, if sustained, would make people much better off over the course of several decades. But it’s not really clear how much we can learn about which decisions have which impacts.

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