Do revenue-neutral tax swaps boost growth?

ABSTRACT

Do revenue-neutral tax swaps boost growth? To answer this question, we use a panel data set of nine OECD countries for the period 1981-2017 and arrive at the following main results under revenue-neutral conditions: First, the most growth-damaging tax is the corporate income tax, followed by the personal income tax. Second, a shift from income taxes to consumption taxes is associated with higher growth, while a shift from social security contributions and property taxes to payroll & workforce taxes has significant negative effects on growth. Overall, our results confirm the view that revenue-neutral tax reforms focusing on a shift from income taxation to consumption and property taxation would promote growth.

KEYWORDS:

• Revenue-neutral tax swaps
• economic growth
• panel threshold model

JEL CLASSIFICATION:

• E60
• H27
• O40

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. For a comprehensive discussion of the role of taxes in endogenous growth theory models, see Şen and Kaya (2022).

2. We use the terms “tax swap” and “tax shift” interchangeably throughout this paper.

3. Throughout this paper, the term “overall tax burden” refers to the ratio of total tax revenues to GDP, however, the term “tax burden” refers to a share of revenues from individual tax forms in GDP.

4. A small book with 48 pages, in which Henry George argues that to destroy land monopoly, all taxes should be removed from labor and labor products and concentrated in a single tax on the value of land, regardless of improvements. He also mentions that the structure of taxation is more important than the level of taxation in explaining growth.

5. It is important to note here that the effects of the tax shift on income inequality are not the focus of this paper. For the distributional effects of a revenue-neutral tax shift, see Heer and Trede (2003), Pestel and Sommer (2017), and Paetzold and Tiefenbacher (2018).

6. See Barro’s growth-related paper series, including Barro (1990, 1991, 2003), and Barro and Sala-I-Martin (1992).

7. It is important to emphasize here that the dataset we use in this paper comes from another paper of ours published elsewhere, but in a heavily modified form. See Şen and Kaya (2022).

8. See, e.g. https://data.oecd.org/tax/tax-revenue.htm [Access date: 15.04.2023].

9. See Table A1 in the Appendix for the sources and descriptions of variables.

10. Our concern with respect to Models 1 through 6 is the possibility of biased results due to endogeneity issues, particularly regarding reverse causality. To remove this problem, we use a two-stage least squares method as a robustness check. The results of robustness tests are not reported due to space limitations. However, they are available from the authors upon request.