Taxes and Economic Growth in OECD Countries: A Meta-Analysis

This paper uses meta-analysis to evaluate the results of 42 studies and 641 individual estimates of the effect of taxes on economic growth in OECD countries. Our analysis addresses a number of difficult coding issues such as: implications of the government budget constraint for interpretations of tax effects; units of measurement for economic growth rates and tax rates; implications of equation specifications that measure short-run, medium-run, and long-run effects; length of time period (annual data versus multi-year periods); and other factors. Our main findings are: Estimates in the literature are characterized by significant (negative) publication bias. After controlling for publication bias, we find that tax policies predicted by growth theory to be growth-retarding, such as the use of distortionary taxes to fund unproductive expenditures, are significantly associated with lower economic growth. Tax polices predicted to be growth-enhancing, such as the use of non-distortionary taxes to fund productive expenditures, are significantly associated with higher economic growth. The estimated differences in these policies indicate that there is scope for tax policy to have a meaningful impact on economic growth. Finally, we find weak evidence that taxes on labour are particularly growth-inhibiting, while the evidence for other types of taxes is mixed.