Tax Policy for Economic Recovery and Growth

Summary

"Tax Policy for Economic Recovery and Growth" is a 2011 article by Jens Matthias Arnold, Bert Brys, Christopher Heady, Åsa Johansson, Cyrille Schwellnus, and Laura Vartia — at the time economists at the OECD (Heady also of the University of Kent) — published in The Economic Journal, volume 121, issue 550, pages F59–F80 (DOI: 10.1111/j.1468-0297.2010.02415.x). The Economic Journal is one of the oldest and most respected general-interest economics journals (published for the Royal Economic Society), and publication there means this specific empirical result — unlike the OECD working paper it draws on — passed academic peer review. The paper is the peer-reviewed, article-length distillation of the same panel research programme behind OECD Economics Department Working Paper No. 620 (Johansson, Heady, Arnold, Brys & Vartia, 2008), extending it with a policy framing specific to the aftermath of the 2008–09 financial crisis: which tax changes could support short-run recovery without undermining the long-run "tax and growth" ranking the earlier work had identified. See research/oecd-taxation-economic-growth for the working-paper version and a fuller discussion of the shared econometric method; this page focuses on what is distinctive about the published Economic Journal article — its peer-reviewed status, its recovery-versus-growth framing, and its headline quantitative estimate.

The Core Argument and Findings

The paper opens from a policy dilemma: short-run recovery from a demand-side recession typically calls for tax cuts or stimulus that raise demand, while long-run growth calls for a tax structure that minimises distortion to supply-side decisions (investment, labour supply, saving). Because short-term tax concessions "can be hard to reverse," the authors argue that crisis-era tax policy risks locking in choices that compromise long-run growth if the two objectives are not reconciled explicitly.

To identify which tax changes serve both goals, the paper draws on the panel-growth evidence developed in the authors' related OECD work — in its own description, "a panel regression of GDP per capita covering 21 OECD countries over the period 1970 to 2005," deferring "for details" to Arnold (2008), i.e. OECD Economics Department Working Paper No. 643, the companion econometric paper whose error-correction / Pooled Mean Group (PMG) estimates use annual data for 21 OECD countries over 1971–2004 (see research/oecd-taxation-economic-growth for this attribution split). On that basis it re-states the "tax and growth" ranking, in the paper's words "a 'tax and growth ranking' with recurrent taxes on immovable property being the least harmful (or most beneficial) tax instrument in terms of its effect on long-run GDP per capita, followed by consumption taxes (and other property taxes), personal income taxes and corporate income taxes" — that is, from most to least harmful:

1. Corporate income taxes — most harmful to growth
2. Personal income taxes
3. Consumption taxes (and other property taxes)
4. Recurrent taxes on immovable property — least harmful to growth

On magnitude, the paper's estimates of a shift of 1% of tax revenues from income taxes to consumption and property taxes "suggest that such a revenue-neutral shift would increase GDP per capita by between a quarter of a percentage point and one percentage point in the long run depending on the empirical specification." The authors also report that "an increase in corporate income taxes (financed by an increase in consumption and property taxes) has a stronger negative effect on GDP per capita than a similar increase in personal income taxation." From this the paper draws its recovery-era policy recommendation (summarised by co-author Christopher Heady in a companion VoxEU/CEPR column, "Tax Policy to Aid Recovery and Growth"): "the best tax cut for increasing demand and promoting long-run growth is a reduction in personal income taxes and social security contributions on low-income households," while "the tax increases after the crisis should focus on taxes that have been shown to be least harmful to growth: particularly recurrent taxes on immovable property and general consumption taxes" — rather than corporate tax cuts or housing tax concessions that would need to be reversed later.

Relation to the Georgist Case

Because recurrent taxes on immovable property occupy the least harmful position in the ranking — directly opposite corporate income tax, the tax on capital most often proposed as a candidate for replacement by a land value tax — this paper is frequently cited as peer-reviewed, mainstream empirical support for the claim that land value tax can substitute for capital taxation without an efficiency loss. Its significance for the Georgist case rests less on new theory (the underlying mechanism — that a tax on an inelastically supplied base distorts behaviour less than a tax on a mobile or elastically supplied one — is the same textbook argument documented on this wiki's deadweight loss page) and more on institutional and academic authority: this is a peer-reviewed article in a top general-interest economics journal, published by OECD Secretariat economists, not an advocacy paper, and it has been widely cited across subsequent OECD, IMF, and national tax-reform literature (including the Mirrlees Review) as the canonical empirical basis for "growth-friendly tax structures."

Nuances and Limits

• Recurrent property tax is not land value tax. The paper's "recurrent taxes on immovable property" category follows the OECD Revenue Statistics classification, which covers the actual property tax regimes of the countries in the panel — taxes levied on the combined value of land and buildings/improvements, not a land-only base. None of the 21 countries in the sample used a pure land value tax during 1971–2004. The paper cannot separate how much of property tax's favourable ranking is attributable to the land component versus the improvements component, which is the same category-conflation flagged on the LVT is just a property tax objection page: the finding is suggestive, not direct, evidence for a land-only tax base.
• This is a peer-reviewed distillation of the same estimates as the 2008 OECD working paper, not an independent replication with a different sample — the paper explicitly defers to the OECD study "for details," and the panel estimates it reports are the same ones underlying Johansson, Heady, Arnold, Brys & Vartia (2008) and its companion econometric paper (Arnold, OECD WP No. 643: 21 OECD countries, annual data 1971–2004, PMG estimator). Readers should treat the two papers as reporting the same underlying evidence at different stages of publication and framing, not as two independent confirmations.
• Association, not clean causal identification. As with any cross-country macro panel, reverse causality (faster-growing, richer countries may choose particular tax mixes for reasons unrelated to growth) and omitted country-specific factors are standard concerns; the authors' own framing is in terms of statistical association within an error-correction model, not a randomised or quasi-experimental causal design.
• The ranking's robustness has been directly challenged. Jing Xing, "Tax structure and growth: How robust is the empirical evidence?" (Economics Letters 117(1), 2012), re-estimates the PMG specification used in this paper; per the published abstract, "the 'tax and growth ranking' suggested by some recent empirical studies is not robust under different assumptions about heterogeneity across countries of the long-run and short-run coefficients in the underlying econometric model." The fuller working-paper version of the same study (Oxford University Centre for Business Taxation WP 11/20, 2011, using 17 OECD countries over 1970–2004) spells out what survives and what does not: "we do not obtain compelling evidence favouring consumption taxes over income taxes, or favouring personal income taxes over corporate income taxes. The only robust result appears to be that shifts in tax revenue towards property taxes are associated with a higher level of income per capita in the long run." So Xing's critique overturns the ordering among corporate, personal, and consumption taxes while the pro-property-tax finding is the one result that survives — but with a sting for this paper's headline claim: when Xing disaggregates property taxes, the specific claim "that shifts in tax revenue towards recurrent taxes on immovable property are the most 'growth-friendly' ... is not supported by our results," because "[t]he estimated long-run coefficient on 'other property taxes' is not only larger in magnitude but also significantly larger than that on recurrent taxes on immovable property" (Wald test p = 0.000). In Xing's re-estimation, then, property taxes in aggregate keep their favourable position, but the recurrent-immovable-property sub-category does not robustly top the ranking.
• A later, larger replication is more skeptical of the tax-shift claim generally. Donatella Baiardi, Paola Profeta, Riccardo Puglisi & Simona Scabrosetti, "Tax policy and economic growth: does it really matter?" (International Tax and Public Finance 26(2), 2019), report that they could replicate the original finding on the same sample and time period, but not once more conservative standard errors are used or the sample is extended with additional countries and years — finding no robust relationship between revenue-neutral tax-mix shifts and growth in the extended data, while still finding a negative association between total tax revenue levels and growth.
• Scope is limited to high-income OECD economies, 1971–2004. The paper does not test the ranking's applicability to developing countries with weaker administrative capacity or different tax bases; see World Bank property tax determinants and property tax raises welfare in developing countries for evidence closer to that context.
• The paper is a positive empirical study, not a policy simulation of an LVT reform. It does not model the effect of any specific country replacing a corporate tax with a land value tax; the "shift capital taxes to land taxes" inference commonly drawn from its ranking is a conclusion readers draw from the ranking, not a scenario the paper itself simulates.

Bears On

• Outcome: LVT can replace capital taxes without efficiency loss — the paper's peer-reviewed ranking places corporate income tax as most harmful and recurrent property tax as least harmful to long-run GDP per capita, the headline mainstream cross-country evidence for shifting revenue from capital toward property/land taxation.
• Objection: LVT is just a property tax — the paper's own tax category (land plus improvements) is a real-world instance of the conflation this objection describes.
• Objection: Land value can't be assessed accurately — the paper's evidence concerns existing, assessed property tax regimes, so its favourable ranking is conditional on the valuation systems those countries already had in place.
• Concept: Deadweight Loss — the paper's empirical ranking is commonly read as real-world confirmation of the theoretical prediction that taxing an inelastically supplied base causes less distortion.
• Research: research/oecd-taxation-economic-growth — the working-paper version of the same research programme and estimates.
• Research: The Mirrlees Review — cites this tax-and-growth literature as part of the mainstream evidentiary basis for its own land/property tax recommendations.
• Research: Bonnet et al., "Land is Back" — an independent, theory-plus-data confirmation that a land tax dominates a capital tax on efficiency grounds.

See Also

• research/oecd-taxation-economic-growth
• The Mirrlees Review: Tax by Design
• Land is Back, It Should Be Taxed, It Can Be Taxed
• Deadweight Loss
• Objection: LVT is just a property tax
• Taxing Immovable Property: Revenue Potential and Implementation Challenges

Sources

1. Jens Matthias Arnold, Bert Brys, Christopher Heady, Åsa Johansson, Cyrille Schwellnus & Laura Vartia (2011), "Tax Policy for Economic Recovery and Growth," The Economic Journal, 121(550), F59–F80. DOI: 10.1111/j.1468-0297.2010.02415.x. Wiley abstract — used for the published authorship, venue, and page range. The article's full text was verified against the freely available pre-print: Christopher Heady, Åsa Johansson, Jens Arnold, Bert Brys & Laura Vartia (December 2009), "Tax Policy for Economic Recovery and Growth," University of Kent School of Economics Discussion Paper KDPE 0925 (PDF · RePEc listing), read directly for this page and the source of all quotations above (the "hard to reverse" framing, the panel description and its deferral to Arnold 2008, the tax-and-growth ranking, the quarter-point-to-one-point magnitude, the corporate-vs-personal comparison, and the recovery-era recommendations). Note the pre-print's author list and ordering differ from the published version (Heady listed first; Cyrille Schwellnus appears in the acknowledgements rather than as an author); the published Economic Journal text itself remained paywalled this session, so page-level details of the final version were not compared against the pre-print.
2. Christopher Heady, "Tax Policy to Aid Recovery and Growth," VoxEU / CEPR. CEPR — used for the plain-language summary of the paper's recovery-vs-growth policy recommendation (cut low-income taxes short-run; rely more on consumption and property taxes) and the finding that corporate tax increases harm growth more than equivalent personal income tax increases.
3. Åsa Johansson, Christopher Heady, Jens Arnold, Bert Brys & Laura Vartia (2008), "Taxation and Economic Growth," OECD Economics Department Working Papers No. 620. OECD — used to establish this article's relationship to the earlier working paper reporting the same underlying panel estimates; see research/oecd-taxation-economic-growth for a full treatment.
4. Jing Xing (2012), "Tax structure and growth: How robust is the empirical evidence?", Economics Letters, 117(1), 379–382. ScienceDirect — the published abstract is quoted for the headline non-robustness claim. The detailed results are quoted from the fuller working-paper version, read directly: Jing Xing (2011), "Does tax structure affect economic growth? Empirical evidence from OECD countries," Oxford University Centre for Business Taxation WP 11/20 — used for the finding that the aggregate property-tax result is "[t]he only robust result" and for the disaggregation showing recurrent taxes on immovable property do not robustly outperform other property taxes.
5. Donatella Baiardi, Paola Profeta, Riccardo Puglisi & Simona Scabrosetti (2019), "Tax policy and economic growth: does it really matter?", International Tax and Public Finance, 26(2), 282–316. SSRN — used for the later, more skeptical replication of the direct-to-indirect/property tax-shift and growth claim on an extended sample.
6. Institute for Fiscal Studies, Tax by Design: The Mirrlees Review (2011). IFS — used to establish this paper's downstream institutional citation; see research/mirrlees-review.