On the Effects of Taxation on Growth: an Empirical Assessment

We study the effects of taxation on the growth rate of the real per capita GDP in a sample of 21 OECD countries, over the period 1965-2010. To do this we estimate a version of the model proposed by Mankiw, Romer and Weil (1992) augmented to consider both direct and indirect effects of taxation on investment share parameters. We employ a semi-parametric technique – namely, a Finite Mixture Model – which combines features from mixed effect models for panel data and cluster analysis methods to account for country-specific unobserved heterogeneity. Our results suggest that taxes have a negative impact on growth: in the baseline model the coefficient estimates indicate that a 10% cut in personal income tax rate (respectively corporate income tax rate) may raise the GDP growth rate by 0.6% (respectively 0.3%).