European Central Bank: Excessive government taxation and spending harms economies. Who knew?

A brief piece from Thoughts on Freedom, the Libertarian blog hosted by our colleagues "down under":

[Before you read, to get the context right, you have to remember that "liberal" in Australian politics is much more accurately equated with "conservative" in an American context]

‘Big government is bad for economic growth.’

No shit, Sherlock, i hear you cry.

But this isn’t my view, nor one of a neo-liberal free market think tank.

It’s from that respected inflation-fighting institution, the European Central Bank, which has come to this conclusion all by itself. No surprise to readers of this blog but papers like this will help spread the gospel of smaller government.

The paper concludes that each additional 1% of government spending reduces growth by 0.13%.

One interesting finding. The taxes that have the least harmful effects on growth are income taxes. Those that hinder growth the most are consumption taxes and government subsidies.

Something to chew on.

So I went to the ECB report mentioned in the article, and found this:

Breaking up total revenue into direct taxes, indirect taxes and social contributions, our results suggest that among total revenue the variables that are most detrimental to growth, both in terms of size and volatility, are indirect taxes and social contributions. At the same time, analysing the components of total spending (transfers, subsidies, government consumption and government investment) the results suggest that, while for both set of countries both subsidies and government consumption have a significantly negative impact on growth, government investment does not significantly affect growth, and transfers have a positive and significant effect only for the EU countries [as opposed to OECD countries]. Moreover, for the EU countries, public consumption and investment volatility have a sizeable, negative and statistically significant effect on growth. These results are also in line with some available related empirical evidence pointing to the negative effects on growth of public spending, particularly in the case of developed countries.

There are relevant policy implications to be drawn from these results. It seems that revenue reductions that occur mainly in terms of indirect taxes and social contributions, and cuts in government consumption and subsidies may contribute positively to fostering economic growth in the country samples analysed. Moreover, public capital formation may indeed turn out to be less productive if devoted to inefficient projects, or if it crowds out private investment. These conclusions also provide useful indications to policy makers when deciding which components of public finances to adjust (namely by redirecting spending towards more growth enhancing activities, in a context of limited public resources and
fiscal constraints).

Direct taxes I understand--and so do you. Indirect taxes refer primarily to employer payroll taxes. I was stumped on social contributions, until Wiki brought me up to speed with this reference to Denmark:

All income originating from terms of employment or self-employment are levied a social contribution at 8% before income tax. This contribution is widely regarded as "gross tax". The highest total income tax is therefore 62.28%.

You've got to wonder what European political leaders are going to do with this, given that they have consciously pursued a high taxation strategy to provide social services.

As noted above, Denmark charges up to 62.28% in national income taxes, with local flat taxes from 20-26%.

In the Netherlands, the highest marginal income tax rate is 52%, but if your house increases in value (even if you don't sell it), that's considered income.

In Sweden, income taxes, mandatory pension contributions, and municipal taxes can rise above 72% of total income.

At what point does any government--even a European socialist government--realize that if you suck all the air out of the room, there's none left for anybody to breathe?

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