How Taxes Relate to Potential Welfare Gain and Appreciable Economic Growth

Sorana Vatavu, Oana-Ramona Lobont, Petru Stefea and Daniel Brindescu-Olariu
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Sorana Vatavu: Finance Department, Faculty of Economics and Business Administration, West University of Timisoara, 300115 Timisoara, Romania
Oana-Ramona Lobont: Finance Department, Faculty of Economics and Business Administration, West University of Timisoara, 300115 Timisoara, Romania
Petru Stefea: Management Department, Faculty of Economics and Business Administration, West University of Timisoara, 300115 Timisoara, Romania
Daniel Brindescu-Olariu: Management Department, Faculty of Economics and Business Administration, West University of Timisoara, 300115 Timisoara, Romania

Sustainability, 2019, vol. 11, issue 15, 1-16

Abstract: This paper investigates new insights into the effect taxation has on the welfare state, using Granger causality analysis, and focusing on both economic growth and human development as welfare components. Moreover, Granger causality allows us to determine whether or not there is a bidirectional causal relationship between taxes, growth, and human development. The analysis is based on a comparative study between part of the Central and Eastern Europe (CEE) countries and the richest European Countries, over the period 1995–2015. Taxes are illustrated by different types of tax revenues to GDP ratio, economic growth is defined by gross domestic product and gross national income, while the human development index (HDI) included in the analysis is a composite measure used to rank countries based on their social and economic development level. Results confirm the fact that taxes support economic growth, but their impact on human development is rather limited. However, in countries with higher HDI, an increase in tax revenues is expected, but over long-term. This study confirms that taxes are an important instrument for governments, and should be used in economic growth. In addition, taxes are closely related to well-being, as citizens from countries with large HDI values are more likely to pay higher taxes over time. Therefore, practical tax reforms should imply an equilibrium between equity and a decent standard of living that supports life expectancy, increased tax revenues, and efficiency.

Keywords: tax revenues; economic growth; Human Development Index; welfare; Granger causality (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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