Tax structures, *economic growth and development

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Information about Tax structures, *economic growth and development
Economy & Finance

Published on September 25, 2014

Author: ICTDTax

Source: slideshare.net

Description

This paper investigates the relationship between tax structures and economic growth in a panel of developed and developing countries, using the new ICTD GRD. It sought to understand the effects of tax structure on GDP growth, since many previous studies have only focused on OECD countries.

It is also motivated by the IMF Policy prescription (IMF 2011), of on-going shift from reliance on trade taxes to VAT, especially in low income countries. It further sought to understand the implications of such structural shifts with studies showing that revenue recovery following trade liberalisation has been poor in low- and middle- income countries (Baunsgaard & Keen, 2010).

Results suggest that shifts away from trade and consumption toward income taxes have had a negative impact on GDP growth rates in developing countries. This negative effect is of greater magnitude through personal income taxes (PIC). Consequently, this study provides new evidence of potentially harmful effect of trade liberalisation on the GDP growth rates. The study also gives a clear picture of low tax reliance on indirect taxes between in low-income countries.

Revenue neutral shifts away from trade taxes to consumption taxes have no negative effect on growth. However, revenue neutral shifts towards income, specifically personal income taxes are potentially harmful to GDP growth rates. Key findings hold following the exclusion of resource-rich countries and after controlling for degree of openness.

Tax Structures, Economic Growth and Development: ICTD working paper No. 22 9 / 9 / 2014 Kyle McNabb (km133@hw.ac.uk) & Philippe LeMay-Boucher Heriot-Watt University Edinburgh 9/9/2014 Tax Structures, Economic Growth and Development

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

Motivation (2/2) • The picture in low income / developing countries – Low tax ratio – Reliance on indirect taxes 9/9/2014 Tax Structures, Economic Growth and Development 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 9/9/2014 Tax Structures, Economic Growth and Development

0 10 20 30 40 50 60 70 80 90 100 % of Tax revenue Tax Revenues, Low Income Countries 35 - 40% 45% 1981 1985 1989 1993 1997 2001 2005 2009 Year Direct Goods and Services Trade NB: Mean values used 20% ~33% Source: ICTD GRD (2014)

0 10 20 30 40 50 60 70 80 90 100 % of Tax revenue Tax Revenues, Middle Income Countries 30-35% 1981 1985 1989 1993 1997 2001 2005 2009 Year Direct Goods and Services Trade NB: Mean values used 15% 30-35% 50% Source: ICTD GRD (2014)

0 10 20 30 40 50 60 70 80 90 100 % of Tax revenue Tax Revenues, High Income Countries < 10 % 1981 1985 1989 1993 1997 2001 2005 2009 Year Direct Goods and Services Trade NB: Mean values used Source: ICTD GRD (2014)

0 10 20 30 40 50 60 70 80 90 100 % of Tax revenue Tax Revenues, Low and Middle Income Countries 1990 1993 1996 1999 2002 2005 2008 Year PIT CIT Goods and Services Trade NB: Mean values used Source: ICTD GRD (2014)

0 10 20 30 40 50 60 70 80 90 100 % of Tax revenue Tax Revenues, High Income Countries 1990 1993 1996 1999 2002 2005 2008 Year PIT CIT Goods and Services Trade NB: Mean values used Source: ICTD GRD (2014)

Effects of tax structure on GDP growth • 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 9/9/2014 Tax Structures, Economic Growth and Development

Findings (1/3) • Dep. var: Δ GDP growth; N=103; t ≥20 – CCEMG estimation (Pesaran, 2006) • Revenue Neutral shift from Indirect -> Income taxes Taxes on Income, Profits -0.0013*** & Capital Gains (0.0004) – Negative impact on LR GDP growth of ~ 0.13% following 1% increase in income tax share • Revenue Neutral shift trade -> income; consumption Taxes on Income, Profits -0.0027*** & Capital Gains (0.0009) Indirect Taxes Consumption Taxes -0.00003 (0.0006) – 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) 9/9/2014 Tax Structures, Economic Growth and Development

• Revenue – neutral shifts from trade or consumption toward PIT are more harmful to growth than those toward CIT (n=88) 9/9/2014 Tax Structures, Economic Growth and Development 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

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 9/9/2014 have harmed GDP growth rates 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 Tax Structures, Economic Growth and Development

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

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

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