Economic growth can be stimulated by imposing higher taxes on capital, especially in wealthy countries

Taxes influence the behaviour of individuals and therefore also influence the economy as a whole. Economists and policymakers often assume that these effects are the same everywhere. If a certain tax influences the economy of one country positively, it is expected that this tax will have the same effect in another country.

In his PhD thesis, Fabian ten Kate concludes that this assumption is incorrect. The effects of fiscal policy strongly depend on local factors. Taxes on capital can for example influence economic growth positively in wealthy countries, but have a negative effect in developing countries.

Ongoing discussions

Ten Kate’s conclusions are relevant to the ongoing discussions about the Dutch tax system. ‘They touch on various current themes’, comments Ten Kate. ‘In the Netherlands, corporation tax frequently made the news over the past few months. I believe that taxes on capital, including taxes on operating profit, savings and dividend, can have a positive effect on economic growth in a high-income country such as the Netherlands. This contrasts with lower-income countries in the Global South, where these taxes can actually have a negative effect’.

Misleading

‘Due to the large economic and cultural differences between and within countries, it is unlikely that tax measures have the same effect everywhere’, says Ten Kate. ‘Tax policies cannot simply be copied from one country to another. General recommendations on taxes can be misleading, especially when the possible different effects are not acknowledged.’

More information

• Download the full PhD thesis: On Taxes and Taxpayers: Understanding the heterogeneous effects of taxation

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