Tax structure and macroeconomic performance

Abstract

This paper reassesses the relationship between tax structure and long-run income, using as indicators of tax structure both a new series of implicit tax rates based on Mendoza et al. (J Public Econ 66:99–126, 1997) and tax ratios, adopting a dynamic panel estimation strategy, and explicitly accounting for cross-sectional dependence in the panel. When implicit tax rates are used, the paper shows that the link between tax structure and long-run income per capita is not robust to the adoption of different assumptions on observable and unobservable heterogeneity across countries. When tax ratios are used, there is some evidence of a negative impact of labour taxation on long-run income, but this result is shown to capture non-fiscal effects coming from the evolution of the labour share. Turning to the short run, the research presented here finds strong evidence of a positive effect on per capita income of a tax shift from labour and capital taxation towards consumption taxation, which provides support for fiscal devaluations.