How much growth do higher taxes cost?

In a week, the UK will release its new budget, and tax hikes are likely to be discussed. Corporate tax rates are a prominent area of consideration, although they may not be on the table this time. To assess the impact of corporate tax changes on economic growth, a comprehensive study has been conducted. This study examined fiscal multipliers for corporate income tax across various countries and developed its own model using empirical data.

The fiscal multiplier measures the change in economic output for every dollar of tax paid. If it exceeds 1.0, lowering taxes can stimulate so much growth that the lost revenue is offset by the additional tax income. However, if the fiscal multiplier is below 1.0, as seen in the US, cutting taxes results in insufficient growth to compensate for the lost revenue, leading to a higher deficit.

In countries with a fiscal multiplier close to 1.0, such as the UK, increasing corporate taxes may not reduce the deficit and could even make the government debt more sustainable. Conversely, reducing corporate taxes in countries with a multiplier larger than 1.0, like Canada, could help generate more tax revenue without increasing the deficit.

However, the study advises caution, as the median global fiscal multiplier for corporate tax changes is below 1.0, suggesting that generally, reducing corporate taxes does not lead to deficit reduction. Moreover, personal income tax changes may have varying effects across countries, so the findings should not be generalized to income tax scenarios.