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Tax Composition and Growth

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  • Santiago Acosta Ormaechea
  • Jiae Yoo
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    Abstract

    We investigate the relation between changes in tax composition and long-run economic growth using a new dataset covering a broad cross-section of countries with different income levels. We specifically consider 69 countries with at least 20 years of observations on total tax revenue during the period 1970-2009—21 high-income, 23 middle-income and 25 low-income countries. To our knowledge this is the most comprehensive and up-to-date dataset on tax composition and growth. We find that increasing income taxes while reducing consumption and property taxes is associated with slower growth over the long run. We also find that: (1) among income taxes, social security contributions and personal income taxes have a stronger negative association with growth than corporate income taxes; (2) a shift from income taxes to property taxes has a strong positive association with growth; and (3) a reduction in income taxes while increasing value added and sales taxes is also associated with faster growth.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/257.

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    Length: 36
    Date of creation: 25 Oct 2012
    Date of revision:
    Handle: RePEc:imf:imfwpa:12/257

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    Related research

    Keywords: Tax structures; Economic growth; Tax revenues; Tax policy; Cross country analysis; Tax composition; fiscal policy; growth; income taxes; property taxes; consumption taxes; sales taxes; total tax revenue; trade taxes; tax burden; corporate income taxes; tax share; personal income taxes; taxation; general taxes; total tax burden; taxes on income; tax component; tax administration; tax changes; public finance; taxes on growth; direct taxes; income groups; indirect taxes; tax categories; fiscal affairs; fiscal affairs department; tax enforcement; taxes on international trade; revenue collection; tax collection; level of taxation; taxes on property; optimal taxation; public expenditure; fiscal variables; tax mix; direct taxation; composition of government expenditure; government spending; public expenditures; tax burdens; capital accumulation;

    References

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    1. Norman Gemmell & Richard Kneller & Ismael Sanz, 2011. "The Timing and Persistence of Fiscal Policy Impacts on Growth: Evidence from OECD Countries," Economic Journal, Royal Economic Society, vol. 121(550), pages F33-F58, February.
    2. Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
    3. Robert G. King & Sergio Rebelo, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," NBER Working Papers 3338, National Bureau of Economic Research, Inc.
    4. Jens Arnold & Andrea Bassanini & Stefano Scarpetta, 2007. "Solow or Lucas?: Testing Growth Models Using Panel Data from OECD Countries," OECD Economics Department Working Papers 592, OECD Publishing.
    5. Johansen, Soren, 1992. "Cointegration in partial systems and the efficiency of single-equation analysis," Journal of Econometrics, Elsevier, vol. 52(3), pages 389-402, June.
    6. Easterly, William & Rebelo, Sérgio, 1994. "Fiscal Policy and Economic Growth: An Empirical Investigation," CEPR Discussion Papers 885, C.E.P.R. Discussion Papers.
    7. Boswijk, H. Peter, 1995. "Efficient inference on cointegration parameters in structural error correction models," Journal of Econometrics, Elsevier, vol. 69(1), pages 133-158, September.
    8. Xing, Jing, 2012. "Tax structure and growth: How robust is the empirical evidence?," Economics Letters, Elsevier, vol. 117(1), pages 379-382.
    9. Barro, Robert J. & Lee, Jong Wha, 2013. "A new data set of educational attainment in the world, 1950–2010," Journal of Development Economics, Elsevier, vol. 104(C), pages 184-198.
    10. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 485-517, June.
    11. César Calderón & Enrique Moral-Benito & Luis Servén, 2011. "Is infrastructure capital productive? A dynamic heterogeneous approach," Banco de Espa�a Working Papers 1103, Banco de Espa�a.
    12. Michael Keen & Thomas Baunsgaard, 2005. "Tax Revenue and (or?) Trade Liberalization," IMF Working Papers 05/112, International Monetary Fund.
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    Cited by:
    1. Misch, Florian & Gemmell, Norman & Kneller, Richard, 2014. "Complementarity in Models of Public Finance and Endogenous Growth," Working Paper Series 3136, Victoria University of Wellington, Chair in Public Finance.

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