EMPIRICAL ANALYSIS OF EFFECTS OF INCOME TAX ON ECONOMIC GROWTH OF WESTERN BALKAN COUNTRIES

Abstract

The existing theoretical literature advocates that tax policy plays a vital role on the economic development, principally policy that include a reduction in the rate of taxation is a dominant incentive of economic growth. In this regard, almost all Western Balkan countries cut the income tax and move to a flat tax rate in order to stimulate the employment and investment which in turn will spur the economic growth. Thus, the purpose of this research paper is to empirically examine how changes of income tax affect the economic growth of Western Balkan countries. For analysing this issue, panel econometric models are employed using yearly data for the time period 2005-2016. The estimation results reveal that the personal income tax has positive and significant impact on growth. While corporate tax has negative impact on growth in almost all models, but the coefficient is statistically insignificant. This implies that the current corporate tax rates couldn’t endow with sustainable economic growth in the sample countries.