Tax Composition and Growth: A Broad Cross-country Perspective

Acosta-Ormaechea Santiago, Sola Sergio and Yoo Jiae
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Acosta-Ormaechea Santiago: International Monetary Fund,Washington, D.C., United States of America
Sola Sergio: International Monetary Fund,Washington, D.C., United States of America
Yoo Jiae: International Monetary Fund,Washington, D.C., United States of America

German Economic Review, 2019, vol. 20, issue 4, e70-e106

Abstract: We investigate how changes in the composition of tax revenue affect long-run growth in a broad cross-section of countries. To do this, we construct a new dataset that covers 70 countries (23 high-, 23 middle- and 24 low-income countries), with at least 20 years of observations during the period 1970-2009. In the context of revenue-neutral reallocations, we find that increasing consumption and property taxes while reducing income taxes boosts long-term growth. Among income taxes, we find that social security contributions and personal income taxes tend to have a stronger negative association with growth relative to corporate income taxes. Results, however, depend on countries’ development levels, suggesting nonlinearities in the relation between taxes and growth even after controlling for convergence effects. Although results are robust for high- and middle-income countries, these are generally not significant for low-income countries.

Keywords: Tax composition; fiscal policy; cross-country analysis; economic growth (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1111/geer.12156

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