Tax structure and growth: evidence from the EU-27 during 1995 to 2007

Abstract

An empirical model of economic growth derived from endogenous growth models is used to produce evidence for a relationship between tax structure and economic growth for the EU-27 during 1995-2007. Three measures of the taxes are examined: 1) implicit tax rates, 2) top income tax rates, and 3) tax structure as measured by the amount of revenue raised relative to GDP by different types of economic income or activities controlling for the overall level of tax revenues. Higher top personal income tax rates are found to be correlated with lower rates of GDP per capita growth and with lower rates of potential GDP per capita growth. On the other hand, a greater dependence on consumption taxes and on environmental taxes is found to be correlated with higher rates of GDP per capita growth and with higher rates of potential GDP per capita growth. Sensitivity checks, such as controlling for other possible determinants of growth and changing the specifications, suggest that these findings are relatively robust.