Do Tax Structures Affect Aggregate Economic Growth?

This paper examines the relationship between tax structures and economic growth by entering indicators ofthe tax structure into a set of panel growth regressions for 21 OECD countries, in which both theaccumulation of physical and human capital are accounted for. The results of the analysis suggest thatincome taxes are generally associated with lower economic growth than taxes on consumption andproperty. More precisely, the findings allow the establishment of a ranking of tax instruments with respectto their relationship to economic growth. Property taxes, and particularly recurrent taxes on immovableproperty, seem to be the most growth-friendly, followed by consumption taxes and then by personalincome taxes. Corporate income taxes appear to have the most negative effect on GDP per capita. Thesefindings suggest that a revenue-neutral growth-oriented tax reform would be to shift part of the revenuebase towards recurrent property and consumption taxes and away from income taxes, especially corporatetaxes. There is also evidence of a negative relationship between the progressivity of personal income taxesand growth. All of the results are robust to a number of different specifications, including controlling forother determinants of economic growth and instrumenting tax indicators.