Paul L. Caron

Wednesday, June 24, 2020

An Empirical Assessment Of The Effects Of Taxation On Growth

Marco Alfò (Università degli Studi La Sapienza), Lorenzo Carbonari & Giovanni Trovato (Università di Roma Tor Vergata), On the Effects of Taxation on Growth: An Empirical Assessment:

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%.

Figure 3

Scholarship, Tax, Tax Scholarship | Permalink


This study is fundamentally flawed. Rates of growth should depend on rates of investment. Investment can be public or private. Public investment is financed by taxes, among other things. Whether taxes enhance or retard growth should therefore depend on what tax proceeds are spent on. The authors of this study fail to control for this crucial variable.

Posted by: Ted Seto | Jun 24, 2020 9:12:58 AM