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On the effects of taxation on growth: an empirical assessment

Published online by Cambridge University Press:  06 June 2022

Marco Alfò ,
Lorenzo Carbonari  and
Giovanni Trovato
Marco Alfò
Affiliation:
Sapienza Università di Roma, Rome, Italy
Lorenzo Carbonari*
Affiliation:
Università degli Studi di Roma “Tor Vergata,” DEF and CEIS, Rome, Italy
Giovanni Trovato
Affiliation:
Università degli Studi di Roma “Tor Vergata,” DEF and CEIS, Rome, Italy
*
*Corresponding author. E-mail: lorenzo.carbonari@uniroma2.it. Phone: (+ 39) 06 7259 5708.
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Abstract

We study the effects of taxation on the growth rate of the real per capita GDP in a sample of 21 OECD countries, over the period 1965–2010. To do this, we estimate a version of the model proposed by Mankiw, Romer and Weil [(1992) Quarterly Journal of Economics 107, 407–437.] augmented to consider both direct and indirect effects of taxation on investment share parameters. We employ a semi-parametric technique—namely, a Finite Mixture Model—which combines features from mixed effect models for panel data and cluster analysis methods to account for country-specific unobserved heterogeneity. Our results suggest that taxes have a negative impact on growth: in the baseline model, the coefficient estimates indicate that a 10% cut in personal income tax rate (respectively corporate income tax rate) may raise the GDP growth rate by 0.6% (respectively 0.3%).

Keywords

Economic growthtaxationfinite mixture modelclassification
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 5 , July 2023 , pp. 1289 - 1318
Copyright
© The Author(s), 2022. Published by Cambridge University Press

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Footnotes

*

We thank two anonymous reviewers of this Journal for their valuable comments on the manuscript. We also thank Alberto Bucci and Pietro Peretto for their kind suggestions. The usual disclaimer applies.

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