The summer's Mont Pelerin Society meeting in Sweden featured some challenging papers, as you would expect. One of the most controversial suggested there is a trade-off between regulation and tax levels [pdf here]. Examining the countries on the basis of their economic freedoms, those high on the list also tended to have high levels of government spending as a proportion of GDP. This is not the expected result, and the claim was that the high 'freedom' score is gained despite this, with the other factors outweighing it. Furthermore, figures were presented which showed that high government tax share correlates positively with GDP per head and with GDP growth.
This runs counter to the general free market assumption that economic growth is hindered when government takes a large share of the revenues that could otherwise be driving innovation and expansion. The explanation offered was also challenging. It was that politicians want to run things; that's what they do. They can do this by high spending programmes or by regulation. The suggestion was that high regulation is more damaging to economic growth than is high government share of spending. Governments which regulate less are more likely to preside over higher growth, and will therefore have more to spend. In a sense they 'protect' their tax revenues by minimizing the regulation that would reduce them.
The view that regulation is an alternative to high government spending is certainly a challenging one, and might go some way to explaining why it is that some high tax economies are so prosperous. On the other hand, it does not seem to fit with recent trends in the UK, where an increased proportion spent by government has been accompanied by massive increases in regulation as well. If the thesis is sustained however, it will raise the prospect of governments being bribed to deregulate by the prospect of having more cash to spend…