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Impact of Taxes on Economic Growth: An Empirical Study in the Eurozone

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  • Alban Elshani
  • Leke Pula

Abstract

This paper analyzes the effects of types of taxes on economic growth in Eurozone countries. Three of the largest types of taxes are taken into analysis, namely personal income tax (PIT), corporate income tax (CIT), and value-added tax (VAT). The data for the independent variables (types of taxes) and the dependent variable (Gross Domestic Product – GDP) from 2002 (since the creation of the currency union) until 2019 have been taken into consideration. A total of 306 observations are entered into the panel model and analyzed using a fixed effect regression. The purpose of this paper is to highlight which types of taxes can affect growth and the magnitude of their effect. Results reveal that personal income tax, social security contribution, and customs duties and excises have a negative effect on GDP in the Eurozone countries. Whereas corporate income tax and value-added tax have a positive effect. We also find that as the share of tax income in GDP increases, their impact on economic growth deteriorates. Based on the empirical findings, we recommend that policymakers should focus on Value Added Tax and corporate income tax in order to have an impact on economic growth. Extra care should be taken in personal income tax revenues and customs and excise revenues, revenues that negatively affect economic growth.

Suggested Citation

  • Alban Elshani & Leke Pula, 2023. "Impact of Taxes on Economic Growth: An Empirical Study in the Eurozone," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 24-41.
    • Handle: RePEc:bas:econst:y:2023:i:2:p:24-41
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    More about this item

    JEL classification:

    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • P10 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - General

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