The effect of a tax hike depends on the initial level of the tax burden

Recent studies 1 show that the negative effect of an increase in the tax burden on production depends on the initial level of this tax burden. If it is low, an increase in the tax burden has practically no negative effect on GDP; if it is high, the negative effect is large. This non-linearity of the effect of the tax burden on production has major implications for: Calculations of the return on additional public investment or spending; Public debt sustainability analysis; Economic policy recommendations. 1 S. Gunter, D. Riera-Crichton, C. Vegh, G. Vuletin, “Policy Implications of Non-Linear Effects of Tax Changes on Output”, NBER Working Paper no. 28646, April 2021.