Thursday, December 01, 2005

The Cost Of Big Government

It is now firmly established that higher taxation depresses GDP growth by distorting economic incentives and penalising success. Studies show that a 10 percentage point increase in the tax/GDP ratio cuts trend growth by 0.5-1.0 per cent per annum, making the cake smaller for all of us (good overview here).

Neither does big government do particularly well in the field of welfare- dividing the cake up. Studies by the IMF, the ECB and elsewhere show that once government expands much beyond 30 per cent of GDP there is little further improvement in the major indicators of welfare other than crude income distribution. And the costs in terms of economic efficiency are high. (ECB paper here).


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