James d. Gwartney

Video:
The Economics of Tax Reform: Lessons from the Donut Shop

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Of course, low tax rates do not mean no taxes. As will be discussed in Part 3 below,
there are legitimate reasons for governments to provide some goods and services that it is hard
for the market to deliver. Societies are also free to decide, after considering the effects of
incentives and unintended consequences, that they want to use tax and spending policy to alter
the distribution of income. Finally, as will also be discussed in Part 3, many economists believe
that there is a role for taxes and government spending (so-called fiscal policy) to reduce the
inherent variations in economic activity.
Of course, the burdens of taxes extend far beyond the effect of the funds raised
(especially where those funds are used for productivity-increasing public investments). To the
extent that a high tax burden encourages firms to produce in the underground economy, they
are likely to remain inefficiently small in order to reduce the chance of being discovered by the
tax authorities. In addition, the more extensive and complex the tax system, the more time and
money that firms will have to spend in tax compliance.
While creating indices of complex matters is always hard and the results are subject to
challenge, the rankings of the burden of taxes compiled by the World Bank as a part of its
“Doing Business” index (which includes both tax rates and complexity) seem intuitively
correct.
(39)
For 2019, the most tax-friendly countries include some we would expect to find,
such as Hong Kong,
(40)
Singapore, New Zealand, Ireland, and Finland (plus some small
Persian Gulf states where oil revenues mean almost no taxes on firms). The worst performers
also seem about right and include Venezuela, Somalia, Bolivia, Chad, and the Central African
Republic. Among post-communist countries, the least-burdensome tax systems are found in
Estonia (ranked 12
th
), Georgia (14
th
), Latvia (16
th
), and Lithuania (18
th
). The average
transition economy ranked 67
th
, about the same as Greece, surely not a model to be emulated.
If post-communist countries could reduce their tax burdens to the level of the leaders in the
Baltics and Georgia, growth rates would clearly increase.

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