Forsyth for dummies: the effect of taxation on economic growth

The first in my series of articles explaining the report of the Conservative Party's Tax Reform Commission.

An interesting chart showing the corelationship between the tax burden and economic growth.

Interpretation: the higher the tax burden, the lower the economic growth.

High taxation affects:

1) labour supply. It reduces the incentive to work, as the more you work, the higher the tax. People (mainly higher income earners) then choose to work fewer hours. This is known as the 'substitution effect'. At the other extreme, people (mainly lower income earners) may decide to work longer hours just to earn the amount they were previously earning. This is the 'income effect'.

2) investments and saving. If the growth in value of an investment is subject to a high tax rate, it becomes an unattractive venture, and potential investors may decide not to bother. Similarly, if the tax rates on savings are high, people may decide that it is better to spend the money on themselves.

So far, so uncontentious.