A tale of two taxes: State-dependency of tax policy

Kerim Arin, Emin Gahramanov, Tolga Omay and Mehmet Ulubasoglu

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: Previous literature provided mixed evidence regarding the effects of two major tax instruments, namely, labor income taxes and corporate taxes on economic growth. We hypothesize that the mixed evidence may be due to state-dependency of labor taxes. While corporate taxes retard economic growth by discouraging entrepreneurship in a linear fashion, the negative effect of labor taxes on growth may depend on the state of the economy, and may, thus, be non-linear. We provide a simple theoretical model which supports the latter hypothesis, and empirically test our predictions by using both statutory and average tax rates for a sample of 19 OECD countries over the 1981–2005 period. We also contribute to the literature by employing a newly developed Panel Smooth Transition (PSTR) model that controls for non-linearities in the tax structure-economic growth relationship. Our empirical findings suggest that while taxes on corporate income are distortionary for growth in both high- and low-growth regimes, taxes on labor income are harmful only during the high-growth regime.

Keywords: Panel Smooth Transition; Fiscal Policy; Tax Policy; Growth (search for similar items in EconPapers)
JEL-codes: H30 O23 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2019-09
New Economics Papers: this item is included in nep-ent, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: A tale of two taxes: State‐dependency of tax policy (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2019-68

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