Impact of Direct Taxation on Economic Growth: Empirical Evidence Based on Panel Data Regression Analysis at the Level of Eu Countries

Narciz Balasoiu (), Iulian Chifu and Marian Oancea
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Narciz Balasoiu: Department of International Business and Economics, Bucharest University of Economic Studies, 010351 Bucharest, Romania
Iulian Chifu: Department of Security and Defense, National Defence University “Carol I”, 050662 Bucharest, Romania
Marian Oancea: Department of Public Policies, International Relations and Security Studies, University of Bucharest, 023997 Bucharest, Romania

Sustainability, 2023, vol. 15, issue 9, 1-32

Abstract: Through fiscal policy, the government can influence businesses and individuals in order to regulate their behaviour. The research used panel data from all 27 EU countries covering the period 2008–2020 to investigate the impact of direct taxation on economic growth at the level of two main clusters of countries concerning fiscal efficiency. Therefore, the analysis employed cluster methods to classify the main EU countries in both groups of countries with a high level of fiscal efficiency and those with a rather limited level of fiscal efficiency. The study employs fixed effect models and dynamic GMM methods to investigate the effect of direct taxation components (personal and corporate income taxes) on economic growth. The analysis also considers the informal economy’s role in relation to the official economy. The empirical results revealed that corporate income taxes significantly negatively impact economic growth for both clusters of high- and limited fiscal efficiency countries. Additionally, personal income tax was associated with lower economic growth for countries in the limited fiscal efficiency group. Thus, from the perspective of policymakers, lowering direct taxation can increase disposable income, stimulate consumption and economic growth, encourage investment leading to job creation, increase competitiveness, and reduce tax evasion and avoidance, thereby leading to a more efficient tax system.

Keywords: personal income tax; corporate income tax; economic growth; EU countries; panel data regression (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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