Threshold effects of tax on economic growth: evidence from Africa

This study examines the threshold effects of tax on economic growth in 37 African countries between 1990 and 2021 using the panel smooth transition regression approach. The method captures both heterogeneity and smooth transition in regression coefficients between regimes. The approach accounts for the possibility that tax effects on growth may differ across countries and tax levels. The findings reveal a nonlinear, inverted-U relationship between tax and growth. The estimated tax threshold for the full sample ranges from 11.2% to 17.2%, suggesting an optimal tax level that maximizes growth. An optimal tax level is associated with higher growth, while tax beyond optimal levels reduces growth. The model also accounted for tax reforms implemented during the study period, yielding an estimated threshold range of 11.2% to 17.1%. The threshold effect remains consistent, indicating that tax reforms have a limited impact on the nonlinear relationship between tax and growth. Country-specific diversities also influence the tax threshold. The findings reveal an inverted-U relationship between tax and growth across different classifications with varying optimal tax levels. High-indebted countries have a higher threshold of 17.1%, compared to 9.7% for low-indebted countries. Middle-income and low-income countries show thresholds of 9.7% and 8.5%, respectively. Resource-intensive countries exhibit a threshold of 10.97%, while non-resource-intensive countries show a higher threshold of 28.22%. These findings suggest that a uniform tax policy may not be suitable for all African countries. Policymakers should consider country-specific factors when formulating tax policies to determine the optimal tax level needed to achieve long-run growth.