In the early 1980s, Ronald Reagan embraced the ideas of a small group of economists dubbed "supply-siders." They argued that lower taxes and slimmer government would stimulate growth, enterprise, harder work and higher levels of saving and investment. These views were widely ridiculed at the time, dismissed as "voodoo economics."
A quarter of a century later, many more countries have cut taxes and reined in heavy-handed government intervention. How far have they gone down this path, and with what success?
My study, "Big, Not Better?" (Centre for Policy Studies, 2008), looks at the performance of 20 countries over the past two decades. The first 10 have slimmer governments with revenue and expenditure levels below 40% of GDP. This group includes Australia, Canada, Estonia, Hong Kong, Ireland, South Korea, Latvia, Singapore, the Slovak Republic and the U.S.
I compared their records to the 10 higher-taxed, bigger-government economies: Austria, Belgium, Denmark, France, Germany, Italy, the Netherlands, Portugal, Sweden and the United Kingdom. Both groups cover a representative range of large, medium and small economies measured by their gross national incomes. The average incomes per capita of the two groups are similar ($27,046 and $30,426 respectively in 2005).
The early supply-siders were right (see chart above summarizing empirical findings). My findings firmly reject the widely held view that lower taxes inevitably result in cuts in public services, slower growth and widening income inequalities. Today's policy makers should take note of how tax cuts and the pruning of inefficient government programs can stimulate sluggish economies.
Bottom Line: The chart above clearly shows that: compared to the higher-taxed, bigger-government countries, the lower-taxed, smaller-government countries have higher growth rates of investment, exports, employment, output (GDP), and consumption; budget surpluses instead of deficits, and lower interest payments on government debt.