Taxation and economic development: a comparative econometric study of fiscal policies

Abstract

In the general opinion, taxation is currently regarded as a barrier to growth and is a very much exploited theme in political debate. Countries have dramatically increased the level of taxation as well as have changed the way in which taxes are raised. Key role for administrative studies and the political motives for fiscal capacity, there are some aspects of economic development that are related to tax systems’ evolution, such as the size of firms, financial transactions, but also tax systems and their evolution have had a feedback on economic development. It is true that as taxes increase, the burden on private individuals and corporations can increase, but it is also true that the higher is tax collection, the more governments can actively intervene with investments that enhance the population’s well-being and standards of living. This double and reverse relationship is therefore also influenced by political institutions as far as fostering fiscal capacity and enlarging tax collection is in the interests of governments. At the core of the relationship between citizens and the government is the issue of whether taxation is beneficial or not. But is taxation actually intertwined with economic development? What role does it play as far as the rate of growth and development of a country are concerned? From the early works of Adam Smith and Malthus to the present day researchers have tried to find the most important determinants that influence the development of a country by formulating new and improved theories and economic models. This thesis will try to offer a new point of view in the evolution of the main factors that have an impact on economic growth. In particular, it will delve into old and new research and also reveal areas in which knowledge is lacking. Through a combination of theory and empirical work, prior research and analysis will be presented and new paths of knowledge will be explored for the first time. Using the R software, new econometric models will be studied in order to improve and test previous studies and to assess new causal relationships. First of all Barro’s growth relationships will be studied by increasing geographical coverage using as standard point of analysis the base year; then, the research will be implemented by also extending coverage up to nowadays using panel growth regressions divided in three main time sections. In addition to this, the work will delve in the field of growth accounting, through an intense analysis of the most significant variables affecting economic development both at the world and OECD level. Then, the impact of different types of tax structures on growth will be assessed and finally, a new model of taxation, through the minimization of differences across the world will be created and analysed.