tax structures, economic growth and development

Tax Structures, Economic Growth and Development: ICTD working paper No. 22

Kyle McNabb ([email protected]) & Philippe LeMay-Boucher Heriot-Watt University Edinburgh

9/9/2014 Tax Structures, Economic Growth and Development

9 / 9 / 2014

Motivation (1/2)

•  Ongoing shift away from reliance on trade taxes toward consumption taxes such as the VAT –  IMF “Policy Prescription” (IMF, 2011)

•  What are the implications of such structural shifts?

–  Baunsgaard & Keen (2010): Revenue recovery following liberalisation has been poor in low- and middle- income countries.

–  Effects on GDP growth rates are as yet unclear

•  GRD allows us to consider the effect revenue – neutral shifts in tax structure


Motivation (2/2)

•  The picture in low income / developing countries

–  Low tax ratio

– Reliance on indirect taxes


Tax/GDP (%) ’80 - ’89 ’90 -’99 ’00 -’09 Low-Income 13.4 11.7 13.7 Middle-Income 13.7 14.2 15.9 High-Income 23.2 22.6 23.5 OECD 25.7 25.1 25.5 Source: ICTD GRD (2014)

Trends in the data

•  Disaggregate tax components into shares of total revenue

–  Direct •  Personal and Corporate income tax + Property tax

–  Indirect •  Consumption •  Trade

•  Divide countries into ‘Low’, ‘Middle’, ‘High’ income.

•  Figures 2 & 3: 1980-2009


010

2030

4050

6070

8090

100

% o

f Tax

reve

nue

1981 1985 1989 1993 1997 2001 2005 2009Year

Direct Goods and Services Trade

NB: Mean values used

Tax Revenues, Low Income Countries

35 - 40% 20%

45%

~33%

Source: ICTD GRD (2014)

010

2030

4050

6070

8090

100

% o

f Tax

reve

nue

1981 1985 1989 1993 1997 2001 2005 2009Year



Tax Revenues, Middle Income Countries

30-35% 15%

30-35% 50%


010

2030

4050

6070

8090

100

% o

f Tax

reve

nue

1981 1985 1989 1993 1997 2001 2005 2009Year



Tax Revenues, High Income Countries

< 10 %


010

2030

4050

6070

8090

100

% o

f Tax

reve

nue

1990 1993 1996 1999 2002 2005 2008Year

PIT CIT Goods and Services Trade


Tax Revenues, Low and Middle Income Countries


010

2030

4050

6070

8090

100

% o

f Tax

reve

nue

1990 1993 1996 1999 2002 2005 2008Year

PIT CIT Goods and Services Trade


Tax Revenues, High Income Countries


•  Kneller et al. (1999): Increases in ‘distortionary’ taxes are harmful for growth (0.1% - 0.2%) –  (22 OECD countries, 25 years)

•  Arnold et al. (2011): Revenue-neutral %pt increase in income taxes, offset by reductions in consumption and property taxes, reduces GDP in levels by (0.25 – 1%) –  (21 OECD countries, 34 years)

•  Acosta-Ormaechea & Yoo (2012): Extend work of Arnold et al. –  Larger panel (69 countries, ≥20 years), including developing

countries –  RN Increase in income tax share, offset by reduction in

‘consumption and property taxes’ reduced LR GDP growth rates •  Results hold for ‘High’ and ‘Middle’ income countries

•  Little consideration of the shift away from trade taxes, yet this has been the greatest structural shift seen over past 30 years


Effects of tax structure on GDP growth

•  Dep. var: ∆ GDP growth; N=103; t ≥20 –  CCEMG estimation (Pesaran, 2006)

•  Revenue Neutral shift from Indirect -> Income taxes

–  Negative impact on LR GDP growth of ~ 0.13% following 1%

increase in income tax share

•  Revenue Neutral shift trade -> income; consumption

–  No evidence trade -> consumption positive for growth –  Potentially negative growth effects of Trade -> Income taxes

(between 0.2 and 0.3% following a 1% shift)


Findings (1/3)

Taxes on Income, Profits -0.0013*** & Capital Gains (0.0004)

Taxes on Income, Profits -0.0027*** & Capital Gains (0.0009) Indirect Taxes Consumption Taxes -0.00003 (0.0006)

•  Revenue – neutral shifts from trade or consumption toward PIT are more harmful to growth than those toward CIT (n=88)


Findings (2/3)

PIT -0.0045** -0.004*** (0.002) (0.001) CIT 0.001 -0.002** (0.002) (0.001)

Consumption 0.001 (0.002)

Trade -0.0003 (0.002)

Omitted Category Trade Consumption


Income Group: Low Middle High PIT -0.005** -0.005*** -0.001 (0.002) (0.002) (0.003) CIT 0.002 -0.002* 0.0005 (0.002) (0.001) (0.003) Consumption Taxes 0.000 -0.001 0.001 (0.001) (0.001) (0.002) No. of Countries 23 26 34 Omitted Category Trade taxes

Findings (3/3) •  Revenue Neutral shifts away from trade toward PIT harmful

for GDP growth in Low and Middle income economies

–  Again, no evidence to suggest that shifts toward consumption taxes have harmed GDP growth rates

Conclusions •  Revenue neutral shifts away from trade taxes -> consumption

taxes –  No negative effects on growth –  However RN shifts toward Income, specifically Personal Income,

taxes are potentially harmful to GDP growth rates.

•  Key findings hold –  Following the exclusion of resource-rich countries

•  Where non-tax revenue exceeds 10 per cent of GDP

–  After controlling for the degree of openness to trade


References •  Acosta- Ormaechea, S.L.E, & Yoo, J (2012). ‘Tax Composition and Growth: A Broad

Cross-Country Perspective’. No. 12-257. International Monetary Fund

•  Arnold, J. M., Brys, B., Heady, C., Johansson, Å., Schwellnus, C., & Vartia, L. (2011). ‘Tax Policy for Economic Recovery and Growth’. The Economic Journal, 121(550), F59-F80.

•  Baunsgaard, T. and Keen, M. (2010) ‘Tax revenue and (or?) trade liberalization’,

Journal of Public Economics 94(9): 563-577 •  IMF (2011), ‘Revenue Mobilization in Developing Countries’. International Monetary

Fund. Available at http://www.imf.org/external/np/pp/eng/2011/030811.pdf, Accessed 5/12/2013

•  Pesaran, M. H. (2006). Estimation and inference in large heterogeneous panels with

a multifactor error structure. Econometrica, 74(4), 967-1012.

•  Tanzi, V., & Zee, H. H. (2000). Tax policy for emerging markets: developing countries. National tax journal, 299-322.


tax structures, economic growth and development

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