How is GDP affected by higher taxes? Lower taxes?

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thanatassa eNotes educator| Certified Educator

There is no clear relationship between tax rates and Gross Domestic Product. One theory, often promulgated by the “tea party” movement in the United States, is that higher taxes stifle business production and therefore reduce GDP growth. The evidence for this theory is not particularly good, as many countries with high taxes have high GDP growth. The issue is more likely the use of tax money. In a kleptocracy, like some of the semi-failed nations in sub-Saharan Africa, where taxes simply go into the bank accounts of dictators, taxes have a negative impact on GDP. In Scandinavian countries and Brazil, where taxes have gone towards building infrastructure, supporting education, and paying for health care, high taxes help establish the preconditions for growth (infrastructure, rule of law, human capital.)