Tax Capacity and Growth: Is There a Tipping Point?

41 Pages Posted: 20 Jan 2017

See all articles by Vitor Gaspar

Vitor Gaspar

European Commission

Laura Jaramillo

International Monetary Fund (IMF)

Philippe Wingender

International Monetary Fund (IMF) - Fiscal Affairs Department

Date Written: December 2016

Abstract

Is there a minimum tax to GDP ratio associated with a significant acceleration in the process of growth and development? We give an empirical answer to this question by investigating the existence of a tipping point in tax-to-GDP levels. We use two separate databases: a novel contemporary database covering 139 countries from 1965 to 2011 and a historical database for 30 advanced economies from 1800 to 1980. We find that the answer to the question is yes. Estimated tipping points are similar at about 12¾ percent of GDP. For the contemporary dataset we find that a country just above the threshold will have GDP per capita 7.5 percent larger, after 10 years. The effect is tightly estimated and economically large.

Keywords: Taxation, Development, Tax revenues, Economic growth, Time series, Databases, income per capita, taxation, development, multiple equilibria

JEL Classification: H11, H26, O10, O43

Suggested Citation

Gaspar, Vitor and Jaramillo, Laura and Wingender, Philippe, Tax Capacity and Growth: Is There a Tipping Point? (December 2016). IMF Working Paper No. 16/234, Available at SSRN: https://ssrn.com/abstract=2902728

Vitor Gaspar (Contact Author)

European Commission ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 7200 (Phone)
+49 69 1344 6575 (Fax)

Laura Jaramillo

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Philippe Wingender

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States
202-623-9831 (Phone)
202-623-4199 (Fax)

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