Evidence from 20 countries shows that those with lower taxes experienced more rapid expansion of investment, productivity, employment, and government services, and had better growth rates, without discriminating against the poor. This paper examines the mechanisms by which fiscal policies may have affected their performance. The evidence suggests that tax policy has affected economic performance via two basic mechanisms: (i) lower taxes have resulted in higher real returns to savings, investment, work, and innovation, and higher returns have stimulated a larger aggregate supply of these factors of production and thus raised total output, and (ii) the focus and types of fiscal incentives provided by low-tax countries appear to have shifted resources from less productive to more productive sectors and activities, thus increasing the overall efficiency of resource utilization. The findings do not imply that tax changes would bring immediate results. The timing and context of tax reform is probably critical.