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The Growth Effects of Tax Rates in the OECD

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  • Gemmell, Norman
  • Kneller, Richard
  • Sanz, Ismael

Abstract

The literature testing for aggregate impacts of taxes on long-run growth rates in the OECD has generally used tax rate measures constructed from macroeconomic aggregates such as tax revenues. These have a number of advantages but two major disadvantages: they are typically average, rather than marginal, rates, and are constructed from endogenous tax revenues. Theory predicts a number of responses to both average and marginal tax rates, but empirical analogues of the latter tend to be at the micro level. In addition though most OECD economies are best regarded as small open economies, previous macroeconomic tests of OECD tax-growth relationships have implicitly been based on closed-economy models, focusing on domestic tax rates. This paper explores the relevance of these two aspects – "macro average‟ versus "micro marginal‟ tax rates, and open economy dimensions – for test of tax-growth effects in OECD countries. We use annual panel data on a number of average and marginal tax rate measures and find: (i) statistically small and/or non-robust effects of macro-based average tax rates on capital income and consumption but more evidence for average labor income tax effects; (ii) statistically robust GDP growth effects of modest size from changes in marginal income tax rates at both the personal and corporate levels; (iii) international tax competition, in which both domestic and foreign corporate tax rates play a role, is consistent with the data; (iv) tax effects on GDP growth appear to operate largely via impacts on factor productivity rather than factor accumulation.

Suggested Citation

  • Gemmell, Norman & Kneller, Richard & Sanz, Ismael, 2013. "The Growth Effects of Tax Rates in the OECD," Working Paper Series 2706, Victoria University of Wellington, Chair in Public Finance.
  • Handle: RePEc:vuw:vuwcpf:2706
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    Cited by:

    1. Richard Kneller & Florian Misch, 2017. "A Survey On The Output Effects Of Tax Reforms From A Policy Perspective," Contemporary Economic Policy, Western Economic Association International, vol. 35(1), pages 165-192, January.
    2. Gemmell Norman & Au Joey, 2013. "Do Smaller Governments Raise the Level or Growth of Output? A Review of Recent Evidence," Review of Economics, De Gruyter, vol. 64(2), pages 85-116, August.
    3. Norman Gemmell & Richard Kneller & Ismael Sanz, 2016. "Does the Composition of Government Expenditure Matter for Long-Run GDP Levels?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 78(4), pages 522-547, August.
    4. A. Minniti & F. Venturini, 2014. "R&D Policy and Schumpeterian Growth: Theory and Evidence," Working Papers wp945, Dipartimento Scienze Economiche, Universita' di Bologna.
    5. Boris Cournède & Jean-Marc Fournier & Peter Hoeller, 2018. "Public finance structure and inclusive growth," OECD Economic Policy Papers 25, OECD Publishing.
    6. Sanjeev Gupta & João Tovar Jalles, 2020. "Tax Revenue Reforms and Income Distribution in Developing Countries," Working Papers REM 2020/0137, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    7. Nazila Alinaghi & W. Robert Reed, 2021. "Taxes and Economic Growth in OECD Countries: A Meta-analysis," Public Finance Review, , vol. 49(1), pages 3-40, January.
    8. James Alm, 2017. "Is Economics Useful for Public Policy?," Southern Economic Journal, John Wiley & Sons, vol. 83(4), pages 835-854, April.
    9. Donatella Baiardi & Paola Profeta & Riccardo Puglisi & Simona Scabrosetti, 2019. "Tax policy and economic growth: does it really matter?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(2), pages 282-316, April.
    10. Oguzhan Akgun & Boris Cournède & Jean-Marc Fournier, 2017. "The effects of the tax mix on inequality and growth," OECD Economics Department Working Papers 1447, OECD Publishing.
    11. Kostarakos, Ilias & Varthalitis, Petros, 2020. "Effective tax rates in Ireland," Research Series, Economic and Social Research Institute (ESRI), number RS110.
    12. Arin, K. Peren & Braunfels, Elias & Doppelhofer, Gernot, 2019. "Revisiting the growth effects of fiscal policy: A Bayesian model averaging approach," Journal of Macroeconomics, Elsevier, vol. 62(C).
    13. Veronika Nálepová, 2017. "Affects Corporate Taxation Economic Growth? - Dynamic Approach for OECD Countries," European Journal of Business Science and Technology, Mendel University in Brno, Faculty of Business and Economics, vol. 3(2), pages 132-147.
    14. Kaisa Alavuotunki & Jukka Pirttilä, 2015. "The consequences of the value-added tax on inequality," WIDER Working Paper Series 111, World Institute for Development Economic Research (UNU-WIDER).
    15. Lagravinese, Raffaele & Liberati, Paolo & Sacchi, Agnese, 2020. "Tax buoyancy in OECD countries: New empirical evidence," Journal of Macroeconomics, Elsevier, vol. 63(C).
    16. Dima Bogdan & Dima Ştefana Maria, 2017. "Does Corporate Tax Burden Affect Growth? Evidences from OECD Countries," Journal of Heterodox Economics, Sciendo, vol. 4(2), pages 51-80, December.
    17. Karen Tumanyants, 2018. "Economic impact of the change in tax rate on small enterprises of manufacturing and construction sectors: Evidence from Russia 2006-2014," Business and Economic Horizons (BEH), Prague Development Center, vol. 14(3), pages 642-658, June.
    18. Kaisa Alavuotunki & Jukka Pirttilä, 2015. "The consequences of the value-added tax on inequality," WIDER Working Paper Series wp-2015-111, World Institute for Development Economic Research (UNU-WIDER).
    19. Colin Davis & Ken‐ichi Hashimoto, 2018. "Corporate Tax Policy And Industry Location With Fully Endogenous Productivity Growth," Economic Inquiry, Western Economic Association International, vol. 56(2), pages 1136-1148, April.
    20. Santiago Acosta-Ormaechea & Atsuyoshi Morozumi, 2021. "The value-added tax and growth: design matters," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(5), pages 1211-1241, October.
    21. Jakob B. Madsen & Antonio Minniti & Francesco Venturini, 2021. "The long-run investment effect of taxation in OECD countries," National Institute of Economic and Social Research (NIESR) Discussion Papers 527, National Institute of Economic and Social Research.
    22. Silvestro Sanzo & Mariano Bella & Giovanni Graziano, 2017. "Tax Structure and Economic Growth: A Panel Cointegrated VAR Analysis," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 3(2), pages 239-253, July.

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    More about this item

    Keywords

    marginal tax rates; average tax rates; personal tax; corporate tax; GDP growth;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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