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Taxation and Output Growth: Evidence from African Countries

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  • Jonathan S. Skinner

Abstract

There is considerable debate over the appropriate role for tax policy in developing economies. In one view, tax hikes reduce deficits and ease budgetary pressures, thereby encouraging long-term growth. An alternative view emphasizes the distortionary effects associated with increased taxation and the positive benefits of a carefully designed tax system. This paper tests these propositions by measuring the impact of government taxation and expenditure on aggregate output growth. A theoretical model is derived which shows that the impact of tax distortions on output growth is usually negative. The theoretical model is tested using a pooled cross-section time-series data set for 31 sub-Saharan African countries during 1965-73 and 1974-82. The regressions imply that the positive benefits of government investment during 1965-73 outweighed the distortionary effects of taxes necessary to finance them. By 1974-82, however, the marginal productivity of government investment had fallen; tax-financed public investment was predicted to have reduced output growth. The empirical results also imply that a revenue neutral shift from the import, corporate, and personal tax to a sales/excise (or consumption) tax will encourage output growth.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2335.

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Date of creation: Aug 1987
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Handle: RePEc:nbr:nberwo:2335

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  1. Auerbach, Alan J & Kotlikoff, Laurence J & Skinner, Jonathan, 1983. "The Efficiency Gains from Dynamic Tax Reform," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(1), pages 81-100, February.
  2. Stewart, Douglas B & Venieris, Yiannis P, 1985. "Sociopolitical Instability and the Behavior of Savings in Less-Developed Countries," The Review of Economics and Statistics, MIT Press, vol. 67(4), pages 557-63, November.
  3. Brent, Robert J., 1986. "Lagged reactions in short-run estimates of tax shifting of company income and sales taxes in Kenya," Journal of Development Economics, Elsevier, vol. 20(1), pages 15-32.
  4. David, Paul A., 1977. "Invention and accumulation in america's economic growth: A nineteenth-century parable," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 6(1), pages 179-228, January.
  5. Wheeler, David, 1984. "Sources of stagnation in sub-Saharan Africa," World Development, Elsevier, vol. 12(1), pages 1-23, January.
  6. Krueger, Anne O., 1984. "Trade policies in developing countries," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 1, chapter 11, pages 519-569 Elsevier.
  7. Fullerton, Don, et al, 1981. "Corporate Tax Integration in the United States: A General Equilibrium Approach," American Economic Review, American Economic Association, vol. 71(4), pages 677-91, September.
  8. Feder, Gershon, 1983. "On exports and economic growth," Journal of Development Economics, Elsevier, vol. 12(1-2), pages 59-73.
  9. Schneider, Friedrich & Frey, Bruno S., 1985. "Economic and political determinants of foreign direct investment," World Development, Elsevier, vol. 13(2), pages 161-175, February.
  10. Robinson, Sherman, 1971. "Sources of Growth in Less Developed Countries: A Cross-Section Study," The Quarterly Journal of Economics, MIT Press, vol. 85(3), pages 391-408, August.
  11. Bolnick, Bruce R., 1978. "Demographic effects on tax ratios in developing countries," Journal of Development Economics, Elsevier, vol. 5(3), pages 283-306, September.
  12. Taylor, Lance & Black, Stephen L., 1974. "Practical general equilibrium estimation of resource pulls under trade liberalization," Journal of International Economics, Elsevier, vol. 4(1), pages 37-58, April.
  13. James Henderson, 1982. "Optimal Factor Allocations for Thirteen Countries," NBER Chapters, in: Trade and Employment in Developing Countries, vol. 2: Factor Supply and Substitution, pages 1-82 National Bureau of Economic Research, Inc.
  14. Seidman, Laurence S, 1984. "Conversion to a Consumption Tax: The Transition in a Life-Cycle Growth Model," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 247-67, April.
  15. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  16. Kormendi, Roger C. & Meguire, Philip G., 1985. "Macroeconomic determinants of growth: Cross-country evidence," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 141-163, September.
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Cited by:
  1. Renelt, David, 1991. "Economic growth : a review of the theoretical and empirical literature," Policy Research Working Paper Series 678, The World Bank.
  2. Yaya KEHO, 2011. "Tax Structure and Economic Growth in Cote dIvoire: Are Some Taxes Better Than Others?," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 1(4), pages 226-235, December.
  3. Lindauer, David L., 1988. "The size and growth of government spending," Policy Research Working Paper Series 44, The World Bank.
  4. Gemmell, Norman, 2001. "Fiscal Policy in a Growth Framework," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  5. Augustin Kwasi Fosu, 2000. "The International Dimension of African Economic Growth," CID Working Papers 34, Center for International Development at Harvard University.
  6. Norman Gemmell & Richard Kneller, 2003. "Fiscal Policy, Growth and Convergence in Europe," Treasury Working Paper Series 03/14, New Zealand Treasury.
  7. Benedict J. Clements & Sanjeev Gupta & Emanuele Baldacci & Carlos Mulas-Granados, 2002. "Expenditure Composition, Fiscal Adjustment, and Growth in Low-Income Countries," IMF Working Papers 02/77, International Monetary Fund.
  8. Peter N. Ireland, 1994. "Two perspectives on growth and taxes," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 1-18.
  9. James P Walsh & Jiangyan Yu, 2012. "Inflation and Income Inequality," IMF Working Papers 12/147, International Monetary Fund.
  10. Levine, Ross & Renelt, David, 1991. "Cross-country studies of growth and policy : methodological, conceptual, and statistical problems," Policy Research Working Paper Series 608, The World Bank.

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