The Effect of Linear Taxation versus Progressive Taxation on Economic Growth - Empirical Evidence in European Countries

Today in the world there is a great political and academic debate as to which type of tax should be applied, linear or progressive taxation. In this paper, we will show which countries have the highest economic growth, the countries applying the linear taxation or those applying the progressive tax. A total of 35 European countries have been surveyed. On one side there are 20 European countries included, OECD members applying the progressive taxation and the other side includes 15 European countries applying linear taxation. For this study, 13 years have been taken into consideration from 2002 (the year when the Euro was introduced) until 2014. There are 456 observations in total. The main focus has been the economic growth in these European countries. Data on Gross Domestic Product (GDP) per capita are taken from the World Bank database, while other variables are obtained from the OECD database and the country's statistics agencies. Data on other variables are presented in % of Gross Domestic Product. Findings show that countries applying the linear tax experience the largest economic growth, whereas countries applying progressive tax have a smaller economic growth of 3.13% compared to countries applying linear taxation.