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[[Category:Taxes And Growth]]
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4.8. Taxes and Economic Growth
One of the most obvious and readily quantified measures of government involvement in the economy is taxes. It is easy to write down models in which governments that tax heavily reduce the long-run success of their economies. The facts, however, are not so clear.
Figure 33 shows the growth rate of real GDP per person in the United States since 1980 as well as the total government tax revenues (including state and local) as a share of GDP, updating a graph first highlighted by Stokey and Rebelo (1995). The stunning fact that emerges from this graph is that taxes have increased enormously, from around 10 percent of GDP in 1929 to more than 30 percent of GDP at their peak in 2000. But as we already noted earlier, growth rates over the 20th century were remarkably stable — if anything, they were higher after 1950 than before.
Figure 34 shows a related fact by looking across the countries of the world: tax rev- enues as a share of GDP are positively correlated with economic success, not negatively correlated.
Of course, these are just simple correlations, and they have an obvious interpretation. Governments do not simply throw the tax revenue that they collect into the ocean. Instead, this revenue — at least to some extent — is used to fund the good purposes that governments serve: providing a stable rule of law, a judicial system, education, public health, highways, basic research, and so on.
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