Institute for Research in Economic and Fiscal issues

IREF Europe - Institute for Research in Economic and Fiscal issues

Fiscal competition
and economic freedom


Taxation and Economic Growth

Taxation and Economic Growth: Reconciling Intuition and Theory - Dalibor Rohá?

Taxation, Individual Incentives and Economic Growth - Alex Robson

Taxation and Economic Growth: Reconciling Intuition and Theory - Dalibor Rohá?

Abstract: The present paper deals with the relationship between taxation and economic growth. After proposing a very general and theoretical discussion of the nature of taxation, we review the introduction of taxation into various models of economic growth, both exogenous and endogenous. In the simplest version of endogenous growth models we show how taxation affects growth rates. We examine the results of different empirical studies and simulations, compare the effects of various modes of taxation and offer a critical examination of fiscal role of government.

Taxation, Individual Incentives and Economic Growth - Alex Robson

Abstract : Economists have long recognized that high levels of taxation may have adverse consequences for individual economic incentives. Standard microeconomic measures of the welfare costs of wage taxation reveal that these adverse effects can be considerable. To the extent that economic growth is a sensible indicator of economic welfare, taxes which reduce welfare will also tend to reduce economic growth. Thus, as a general proposition, higher tax rates should tend to have negative consequences for economic growth, but certain kinds of tax structures may tend to favour economic growth more than others. Overall, existing empirical evidence tends to suggest that higher taxes are associated with lower economic growth, but since no econometric test can prove the direction of causation in the true sense of that term, the direction of causality remains unclear. Nevertheless, this paper finds that for the case of personal income taxes, a positive correlation between higher growth and higher personal income tax rates does not tend to show up in OECD data for the 1980-2000 period. Indeed, in economies where substantial tax cuts took place during this period, per capita economic growth rates were almost double those enjoyed by economies where no substantial tax cuts took place.

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