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Changes in taxation and their impact on economic growth in the European Union

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  • Szarowska, Irena

Abstract

The aim of the paper is to analyze changes in taxation and their impact on economic growth in the European Union. The analysis is performed on adjusted annual panel data of 24 European Union countries in a period 1995–2008. Panel regression with fixed effects is used as a basic method of research. The panel regression is based on analysis the effect of total tax quota changes on GDP growth in model 1, of changes in its components (social contribution, direct and indirect tax quotas) in model 2 and of personal and corporate income tax quota changes in model 3. Results of empirical tests verify statistically significant negative effect of tax burden on GDP growth. Total tax quota increased by 1% decreases the GDP growth rate by 0.29% in the same year. Estimations confirm a statistically significant negative effect of direct taxes on GDP growth as well. A cut in the direct tax quota by 1% raises the GDP growth rate by 0.43%. The model also presents a high negative impact of an increase in the corporate income tax quota on GDP growth (a value of the regression coefficient is minus 1.28%) expresses the high negative. The effect of social contribution quota on GDP growth is not statistically significant in any estimation.

Suggested Citation

  • Szarowska, Irena, 2010. "Changes in taxation and their impact on economic growth in the European Union," MPRA Paper 32354, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:32354
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    File URL: https://mpra.ub.uni-muenchen.de/32354/1/MPRA_paper_32354.pdf
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    References listed on IDEAS

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    1. King, Robert G & Rebelo, Sergio, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 126-150, October.
    2. Georgios Karras & Davide Furceri, 2009. "Taxes and Growth in Europe," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 7(2), pages 181-204.
    3. Roderick Hill, 2008. "Optimal taxation and economic growth: a comment," Public Choice, Springer, vol. 134(3), pages 419-427, March.
    4. Timmer,Marcel P. & Inklaar,Robert & O'Mahony,Mary & Ark,Bart van, 2013. "Economic Growth in Europe," Cambridge Books, Cambridge University Press, number 9781107412446.
    5. Plosser, Charles I., 1992. "The search for growth," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 57-86.
    6. Lee, Young & Gordon, Roger H., 2005. "Tax structure and economic growth," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 1027-1043, June.
    7. Willi Leibfritz & John Thornton & Alexandra Bibbee, 1997. "Taxation and Economic Performance," OECD Economics Department Working Papers 176, OECD Publishing.
    8. Romero-Ávila, Diego & Strauch, Rolf, 2008. "Public finances and long-term growth in Europe: Evidence from a panel data analysis," European Journal of Political Economy, Elsevier, vol. 24(1), pages 172-191, March.
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    Cited by:

    1. Zuzana Machova & Igor Kotlan, 2013. "World Tax Index: New Methodology for OECD Countries, 2000-2010," DANUBE: Law and Economics Review, European Association Comenius - EACO, issue 2, pages 165-179, June.
    2. Igor Kotlan & Zuzana Machova, 2012. "World Tax Index: Methodology and Data," DANUBE: Law and Economics Review, European Association Comenius - EACO, issue 2, pages 19-33, June.

    More about this item

    Keywords

    taxation; tax burden; economic growth; panel regression;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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