We often hear in the media and from politicians that tax cuts stimulate economic growth.

The theory would probably be that less taxes give people more money in theri pockets. With this money they can consume more, which leads to growth. Another argument is that a tax on income reduces the incentive to work, therefore leading to less output and lower GDP growth.

On the other hand, historically there have been times when taxes and GDP growth were much higher. In the US top income tax was 90% for most of the 1950s and 1960s. Furthermore, the arguments above are theoretical arguments. They seem plausible, but would need to be backed up by empirical evidence.

Is there empirical evidence that tax rates (either sales tax or income tax) affect medium or long term GDP growth?


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