Public Finance and Macroeconomic Policy (1991)

In a celebrated article in 1945 Colin Clark argued that when taxation reached 25 per cent or more of net national income it tended to cause inflation — not immediately, but over succeeding years.1 In 1964, and again in a revised form of the same essay in 1970, he returned to the theme and elaborated that argument.2 There he illustrated it with figures that he interpreted as implying that the countries with the highest tax ratios tended to have the highest rates of inflation. He pointed to the undoubted fact that inflation had been endemic in the period since the end of the Second World War — a period when the ratios of tax revenue to national income had in virtually all developed countries been well above the 25 per cent figure. More recently, in conversation with the present writer, he confirmed his view on this matter, saying that the positive relationship between high taxes and high inflation, though weak, was a clear one.3 It is probably to be regretted that he originally put such emphasis on the 25 per cent figure — which could easily be contested on both a priori and empirical grounds (though his use of it probably served to draw considerably more attention than it would otherwise have attracted).4