Tax Structures, Economic Growth And Development

ICTD Working Paper 22

40 Pages Posted: 18 Sep 2014

See all articles by Kyle McNabb

Kyle McNabb

Heriot-Watt University

Philippe LeMay-Boucher

Heriot-Watt University

Date Written: September 1, 2014

Abstract

This paper investigates the relationship between tax structures and economic growth in a panel of developed and developing countries. In order to raise revenue, low-income countries have historically relied more heavily on international trade taxes, whilst richer nations employ comparatively more consumption and income taxes. Using the new Government Revenue Dataset (GRD) from the International Centre for Tax and Development (ICTD), we consider the effects of revenue-neutral changes in tax structure on economic growth for a panel of over 100 countries with data covering the period 1980-2010. Results from the Common Correlated Effects Mean Group (CMG) estimator (Pesaran 2006) find that increases in income taxes (specifically personal income taxes) offset by reductions in trade or consumption taxes have had a negative impact on GDP growth rates. We also highlight the fact that trade liberalisation has not had any discernible positive effects on economic growth. Revenue-neutral increases in personal income taxes are found to be particularly harmful in middle- and low-income countries. Taken alongside the results of, for example, Baunsgaard and Keen (2010), this is a reminder of the difficulties of tax reform for developing countries.

Keywords: tax structure; fiscal policy; economic growth; development

Suggested Citation

McNabb, Kyle and LeMay-Boucher, Philippe, Tax Structures, Economic Growth And Development (September 1, 2014). ICTD Working Paper 22, Available at SSRN: https://ssrn.com/abstract=2496470 or http://dx.doi.org/10.2139/ssrn.2496470

Kyle McNabb (Contact Author)

Heriot-Watt University ( email )

Riccarton
Edinburgh EH14 4AS, Scotland EH14 1AS
United Kingdom

Philippe LeMay-Boucher

Heriot-Watt University ( email )

Riccarton
Edinburgh EH14 4AS, Scotland EH14 1AS
United Kingdom

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