On the Effects of Taxation on Growth: An Empirical Assessment

32 Pages Posted: 11 May 2020

See all articles by Marco Alfò

Marco Alfò

Università degli Studi La Sapienza

Lorenzo Carbonari

Università di Roma "Tor Vergata"

Giovanni Trovato

University of Rome Tor Vergata - Faculty of Economics

Date Written: May 8, 2020

Abstract

Growth models predict that taxation may have permanent effects on per capita real GDP growth. We look at, and test this prediction for 21 OECD countries, over the period 1965-2010. We employ a semi-parametric technique - namely, a Finite Mixture model - to estimate an augmented version of the Barro (1990) model, in order to consider both direct and indirect effects of taxation on capital share parameters. The estimation technique allows to deal with unobserved heterogeneity and to perform a cluster analysis. Our results support the idea that taxes are generally harmful for growth. The coefficient estimates indicate that a cut in the corporate income tax rate by 10 % raises the GDP growth rate by 0.9% while a cut in the personal income tax rate by 10% raises the GDP growth rate by 1%.

Keywords: Economic growth, taxation, classification

JEL Classification: H30, O30, O40

Suggested Citation

Alfò, Marco and Carbonari, Lorenzo and Trovato, Giovanni, On the Effects of Taxation on Growth: An Empirical Assessment (May 8, 2020). CEIS Working Paper No. 480. Available at SSRN: https://ssrn.com/abstract=3596116 or http://dx.doi.org/10.2139/ssrn.3596116

Marco Alfò

Università degli Studi La Sapienza ( email )

Roma, I-00185
Italy

Lorenzo Carbonari

Università di Roma "Tor Vergata" ( email )

Via Columbia 2
Roma, Lazio 00133
Italy

Giovanni Trovato (Contact Author)

University of Rome Tor Vergata - Faculty of Economics ( email )

Via Columbia n.2
Rome, rome 00100
Italy

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