Economic Growth and Alternative Deficit-Reducing Tax Increases and Expenditure Cuts: A Cross-Sectional Study.

This paper assesses empirically the relative desirability of alternative deficit-reducing tax increases and expenditure cuts in terms of their individual impact on economic growth, using cross-sectional data for a sample of 21 developed countries for the period 1972-81. Property taxes are by far superior to deficit financing, and are the best choice for implementing deficit-reducing tax increases. Income taxes and domestic taxes on goods and services, which are as bad for growth as are deficits, rank second with no difference between them. Foreign trade taxes are even worse for growth than are deficits, rank second with no difference between them. Foreign trade taxes are even worse for growth than are deficits, and are the worst choice for reducing deficits. Classifying government expenditures into capital and current expenditures renders the latter as the best type for implementing a reduction in expenditures. Deficit-reducing cuts in capital expenditures are concommitant with lower growth, while such cuts in current expenditures have no net impact on growth. Copyright 1991 by Kluwer Academic Publishers