Working Paper: NBER ID: w2335
Authors: Jonathan Skinner
Abstract: There is considerable debate over the appropriate role for tax policy in developing economies. In one view, tax hikes reduce deficits and ease budgetary pressures, thereby encouraging long-term growth. An alternative view emphasizes the distortionary effects associated with increased taxation and the positive benefits of a carefully designed tax system. This paper tests these propositions by measuring the impact of government taxation and expenditure on aggregate output growth. A theoretical model is derived which shows that the impact of tax distortions on output growth is usually negative. The theoretical model is tested using a pooled cross-section time-series data set for 31 sub-Saharan African countries during 1965-73 and 1974-82. The regressions imply that the positive benefits of government investment during 1965-73 outweighed the distortionary effects of taxes necessary to finance them. By 1974-82, however, the marginal productivity of government investment had fallen; tax-financed public investment was predicted to have reduced output growth. The empirical results also imply that a revenue neutral shift from the import, corporate, and personal tax to a sales/excise (or consumption) tax will encourage output growth.
Keywords: tax policy; output growth; developing economies; Sub-Saharan Africa
JEL Codes: H2; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax hikes (H29) | reduced deficits (H62) |
| reduced deficits (H62) | eased budgetary pressures (H69) |
| eased budgetary pressures (H69) | encouraged long-term growth (O25) |
| high marginal tax rates (H31) | discouraged work effort (H31) |
| high marginal tax rates (H31) | limited foreign trade (F10) |
| government investment (1965-73) (H54) | increased output growth (O49) |
| government investment (1974-82) (H54) | reduced output growth (O49) |
| revenue-neutral shift from import, corporate, and personal taxes to sales, excise, or consumption taxes (H29) | enhanced output growth (O40) |
| personal and corporate taxes (H24) | significant negative direct effect on output growth (O40) |
| trade taxes (H29) | little direct impact on output growth (F62) |