Policy Documents

The Impact of Tax Policy on Economic Growth, Income Distribution and Allocation of Taxes

James D. Gwartney and Robert A. Lawson –
January 1, 2006

There is considerable disagreement about how taxes, especially high marginal tax rates on those with high incomes, influence economic performance and the distribution of income. This essay uses cross-country data on changes in marginal tax rates since 1980 to examine this topic. Section II uses economic theory to analyze the linkage between marginal tax rates and economic performance and considers a number of factors that complicate the measurement of that impact. Section III presents data on the top marginal tax rates during 1980–2002 for seventy-seven countries with a personal income tax and analyzes how changes in these rates influenced economic growth during 1990–2002. Section IV focuses on how reductions in marginal tax rates, particularly the highest rates, influence income inequality and the share of the personal income tax paid by various income groups. The final section summarizes the findings of this study.