Tax Structures, Economic Growth and Development

The relationship between tax structures and economic growth is investigated in this paper within a panel of developed and developing countries. In order to raise revenue, low-income countries have historically relied more heavily on international trade taxes, whilst richer nations employ comparatively more consumption and income taxes. Using the new Government Revenue Dataset (GRD) from the (ICTD), the effects of revenue-neutral changes in tax structure on economic growth is considered, for a panel of over 100 countries with data covering the period 1980-2010. Results from the Common Correlated Effects Mean Group (CMG) estimator (Pesaran 2006) find that increases in income taxes (specifically personal income taxes) offset by reductions in trade or consumption taxes have had a negative impact on GDP growth rates. The paper also highlighted the fact that trade liberalization has not had any discernible positive effects on economic growth. Revenue-neutral increases in personal income taxes are found to be particularly harmful in middle- and low-income countries.