ECONOMY

ECB paper: Tax hikes self-defeating when it comes to cutting debt

ecb-paper-tax-hikes-self-defeating-when-it-comes-to-cutting-debt

Raising taxes is “self-defeating” when a country tries to bring down the ratio between its public debt and economic output, according to a research paper published by the European Central Bank on Monday and based on the eurozone’s recent history.

The paper, authored by Maria Grazia Attinasi, a member of the ECB’s fiscal policies division, and Bank of Italy economist Luca Metelli, found that higher taxes fail to bring down the ratio between a country’s debt and its gross domestic product.

“When fiscal consolidation is implemented via an increase in taxation, the debt-to-GDP ratio reverts back to its pre-shock level only in the long run, thus failing to generate an improvement in the debt ratio, and producing what we call a self-defeating fiscal consolidation,” Attinasi and Metelli wrote in the paper.

Their findings were based on data from 11 eurozone countries, including bailout recipients Greece, Portugal and Ireland.

[Reuters]