> It's natural that if you don't optimise for GDP then GDP will probably not be maximised.
They're not unrelated though.
Suppose that at a 30% tax rate you long-term end up with a GDP per capita of $50,000, whereas at 20% it would be $80,000. Then in the first case you get $15,000 per capita to provide healthcare and things, whereas in the second case it's $16,000.
There is a point where that stops working. If a 15% tax rate would get you a GDP per capita of $100,000, 15% of $100k isn't more than 20% of $80k. Then whether the extra GDP is worth having lower government revenue becomes a more complicated question. But if the tax rate is too high, it isn't even a trade off, the higher rate is just a net loss to everyone.
I get the idea that small fractions of bigger pies can be more than a big fraction of a small pie. And I can assure you that Scandinavians are well aware of tax revenue optimisation.
I will even say that it is very likely that they are already near the optimum for their country. The reason is simply that if every time you increase taxes and notice revenue goes down, you will naturally reverse it. Society moves through incremental changes.
> The reason is simply that if every time you increase taxes and notice revenue goes down, you will naturally reverse it.
That isn't necessarily how it works.
Suppose you increase taxes and revenue goes up by 5%, but growth goes down. Now in ten years your economy has grown by 2.5%/year instead of 3.5%/year or more, so your tax base is >10% lower than it would have been in the alternative but at no point is is less than it was the year before.
That can just be a simple extension of my argument. Instead of using at the immediate revenue you apply the optimisation rule for the long term revenue by using the difference in observed GDP growth.
How do you measure the difference in observed GDP growth against a hypothetical alternative that wasn't adopted?
Notice also that the result will be confounded by the factors that affect government policy choices. If the economy starts to do better, politicians who want to spend money will see their chance because normally raising taxes triggers loss aversion in the population but the population is more likely to tolerate it if the economy is improving.
So you have a situation where GDP growth had been at 2%, politicians observe the start of an economic boom and use it as an excuse to raise taxes, and then the measured growth rate is 2.5%. Does that mean higher taxes didn't lower the growth rate, or is it that in the alternative it would have been 3.5%?
The point is that the answer is inherently speculation. There is no way to objectively measure it. Which allows the conclusion to be shaped by local political biases or the self-interest of politicians who would rather have more money to spend now than a long-term stronger economy.
They're not unrelated though.
Suppose that at a 30% tax rate you long-term end up with a GDP per capita of $50,000, whereas at 20% it would be $80,000. Then in the first case you get $15,000 per capita to provide healthcare and things, whereas in the second case it's $16,000.
There is a point where that stops working. If a 15% tax rate would get you a GDP per capita of $100,000, 15% of $100k isn't more than 20% of $80k. Then whether the extra GDP is worth having lower government revenue becomes a more complicated question. But if the tax rate is too high, it isn't even a trade off, the higher rate is just a net loss to everyone.