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“If [Labour] had any idea about economics they would know that you can’t create growth by raising taxes.”
It’s a common claim in economic debates: raising taxes stifles growth.
In this instance, I received it from a commenter on X, as part of a discussion on Rachel Reeves’s current interest rate.
But it is a serious oversimplification.
A closer look at economic theory and evidence shows that taxes can, in fact, support growth — if used wisely.
1. MMT: Taxes Shape the Economy, They Don’t Fund It
Modern Monetary Theory (MMT) starts with a key insight: governments that issue their own currency don’t need taxes to fund spending. They can create money to pay for infrastructure, healthcare, education, and public services.
So why tax at all? According to MMT:
-
To control inflation: Taxes reduce excess spending power.
-
To redistribute wealth: Keeping demand stable by moderating inequality.
-
To influence behaviour: Incentivizing or discouraging certain economic activities.
From this perspective, taxes are a tool to guide real resources toward productive uses, which can directly support growth — even if the government isn’t “paying for” them in the traditional sense.
2. Keynesian Economics: Funding Investment to Boost Growth
Even outside MMT, mainstream Keynesian theory rejects the idea that taxes automatically harm growth:
-
Taxes fund public investment in infrastructure, research, education, and healthcare.
-
These investments increase productivity, create jobs, and stimulate consumer demand, producing long-term economic growth.
Keynesian studies also show that targeted tax increases on higher incomes can fund programmes that expand the economy’s productive capacity.
3. Evidence from High-Tax Economies
Real-world examples support this view:
-
Sweden, Denmark, and Finland maintain relatively high taxes yet achieve strong, sustainable growth, low inequality, and high social mobility.
-
Their governments invest tax revenues efficiently in education, innovation, and infrastructure, creating a highly productive workforce and dynamic economy.
4. Neoliberal Claims: Not the Whole Story
On the other hand, Neoliberal theory often argues that lower taxes drive growth:
-
The reasoning is supply-side: more money in private hands encourages investment and entrepreneurship.
-
But evidence shows that tax cuts, especially for the wealthy, rarely produce growth proportional to lost revenue.
-
Wealth concentration can reduce overall demand because high earners save more than they spend, limiting broader economic expansion.
Vox Political‘s verdict: Taxes Can Promote Growth
The claim that “you can’t create growth by raising taxes” is a myth.
-
Under MMT, taxes shape demand, behaviour, and resource allocation.
-
Keynesian theory shows taxes can fund investments that increase productivity.
-
Empirical evidence from high-tax economies proves that well-used taxes coexist with strong growth.
-
Even under neoliberal assumptions, history shows that tax cuts are not a guaranteed growth engine, whereas public investment often delivers higher returns.
Taxes are not inherently anti-growth.
They are a policy tool, and their effects depend on how they are structured and used.
Smart tax policy can expand an economy’s productive capacity, stabilize demand, and foster sustainable long-term growth.
Any questions?
Share this post:
Myths Debunked: “You can’t create growth by raising taxes”
Share this post:
It’s a common claim in economic debates: raising taxes stifles growth.
In this instance, I received it from a commenter on X, as part of a discussion on Rachel Reeves’s current interest rate.
But it is a serious oversimplification.
A closer look at economic theory and evidence shows that taxes can, in fact, support growth — if used wisely.
1. MMT: Taxes Shape the Economy, They Don’t Fund It
Modern Monetary Theory (MMT) starts with a key insight: governments that issue their own currency don’t need taxes to fund spending. They can create money to pay for infrastructure, healthcare, education, and public services.
So why tax at all? According to MMT:
To control inflation: Taxes reduce excess spending power.
To redistribute wealth: Keeping demand stable by moderating inequality.
To influence behaviour: Incentivizing or discouraging certain economic activities.
From this perspective, taxes are a tool to guide real resources toward productive uses, which can directly support growth — even if the government isn’t “paying for” them in the traditional sense.
2. Keynesian Economics: Funding Investment to Boost Growth
Even outside MMT, mainstream Keynesian theory rejects the idea that taxes automatically harm growth:
Taxes fund public investment in infrastructure, research, education, and healthcare.
These investments increase productivity, create jobs, and stimulate consumer demand, producing long-term economic growth.
Keynesian studies also show that targeted tax increases on higher incomes can fund programmes that expand the economy’s productive capacity.
3. Evidence from High-Tax Economies
Real-world examples support this view:
Sweden, Denmark, and Finland maintain relatively high taxes yet achieve strong, sustainable growth, low inequality, and high social mobility.
Their governments invest tax revenues efficiently in education, innovation, and infrastructure, creating a highly productive workforce and dynamic economy.
4. Neoliberal Claims: Not the Whole Story
On the other hand, Neoliberal theory often argues that lower taxes drive growth:
The reasoning is supply-side: more money in private hands encourages investment and entrepreneurship.
But evidence shows that tax cuts, especially for the wealthy, rarely produce growth proportional to lost revenue.
Wealth concentration can reduce overall demand because high earners save more than they spend, limiting broader economic expansion.
Vox Political‘s verdict: Taxes Can Promote Growth
The claim that “you can’t create growth by raising taxes” is a myth.
Under MMT, taxes shape demand, behaviour, and resource allocation.
Keynesian theory shows taxes can fund investments that increase productivity.
Empirical evidence from high-tax economies proves that well-used taxes coexist with strong growth.
Even under neoliberal assumptions, history shows that tax cuts are not a guaranteed growth engine, whereas public investment often delivers higher returns.
Taxes are not inherently anti-growth.
They are a policy tool, and their effects depend on how they are structured and used.
Smart tax policy can expand an economy’s productive capacity, stabilize demand, and foster sustainable long-term growth.
Any questions?
Share this post:
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