Small Is Best: Lessons from Advanced Economies

Econometric analysis of advanced OECD countries for the period 1965-2010 finds that a higher tax to GDP ratio has a statistically significant, negative effect on growth. For example, an increase in the tax to GDP ratio of 10 percentage points is found to lower annual per capita GDP growth by 1.2 percentage points. A similarly statistically significant negative effect on growth is found with a higher spending to GDP ratio. For the last 10 years, advanced small government countries have, on average, seen significantly higher growth rates than advanced big government countries.

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