Discussion Paper No.217

Tax Structure and Economic Growth– A Survey of Empirical Analyses –Masahiro SHINOHARA
Faculty of Economics
Chuo University
February 2014I

INSTITUTE OF ECONOMIC RESEARCH
Chuo University
Tokyo, Japan

Tax Structure and Economic Growth– A Survey of Empirical Analyses –Masahiro SHINOHARA
Faculty of Economics
Chuo University742-1 Higashinakano, Hachioji, Tokyo, 192-0393, Japan
E-mail: mshino@tamacc.chuo-u.ac.jp

Abstract
The aim of this paper is to survey previous studies that empirically analyzed therelationship between tax structures and economic growth. We systematically organize
analytical methods and results of previous studies in preparation for an examination of thisrelationship in Japan.

Key words: Tax structure, Economic growth.
JEL Classification Codes: E62; H20; O40.

1

1. Introduction
This paper will survey prior studies that have empirically analyzed the relationshipbetween tax structures and economic growth as an introductory work for empiricallyexamining the ideal tax structure for Japan’s economic growth. Is there a relationshipbetween the tax structure and economic growth? If there is a relationship, what kind oftax structure is desirable for economic growth? The above questions form theunderlying issues of this paper.
The survey of prior research relating to tax structures and economic growth can beclassified into two groups, those that take a general view of theoretical research andthose that focus on organized empirical research.
Myles(2009a) and Johansson, et al.(2008), and OECD (2010) are examples of theformer. Myles (2009a) surveys theoretical research relating to the effect of tax policy
on economic growth. Myles (2009a) points out that ‘in an endogenous growth modelthat incorporates human capital, the relative dependence on income taxes is lowered
and the resulting increase of dependence on consumption taxes is connected to thepromotion of economic growth. 1 Johansson et al. (2008) and OECD (2010) consider
growth-orientated tax reform. From the viewpoint of the tax structure, corporate
income taxes, personal income taxes, consumption taxes, and recurrent taxes on
immovable property are the greatest impediments to economic growth, in that order. It
is clear that policies that include a reduction in the rate of taxation and a broadeningof the taxation base (BBLR: Broad Base-Low Rate Approach) as well as policies that
rectify externalities (e.g. assistance from the taxation system for investment inresearch and development) promote growth.
Myles (2009b), Prammer (2011), and McBride (2012) are examples of the latter.
Myles (2009b) focuses on research relating to a regression analysis of the relationshipbetween the level of tax burden and the tax structure on the one hand and economic
growth on the other. Kneller et al.(1999), Bleaney et al.(2001), and Widmalm (2001)
are introduced for the relationship between the tax structure and economic growth.
Surveying empirical research (simulations based on a macroeconomic model andregression analysis), Prammer (2011) explains theoretically how tax, interfering withthe decision-making of economic agents, affects economic growth. In relation tosimulations based on a macroeconomic model, the estimates of the European
Commission (European Commission (2008; 2010)) are introduced and the regression

1

Myles (2009a), p. 43 and p. 44.

2

analysis of the tax structure and economic growth by Arnold (2008), Johansen et al.
(2008), Arnold et al. (2011) and Xing (2011) are taken up. McBride (2012) surveys
research that has empirically analyzed the effect of tax policy on economic growth. Of
the 26 research papers dating from 1983, five relating to the tax structure andeconomic growth are taken up (Gemmell et al. (2011), Arnold et al. (2011), Bleaney etal. (2001), Kneller et al. (1999), Mendoza et al. (1997)).
This paper will explain the research trend of empirical research relating to the tax
structure and economic growth in a more detailed manner than that of the above priorresearch. The form of this paper is as follows. First, the distinctive features of the priorresearch will be made clear from the viewpoint of an analytical method. Furthermore,
the prior research will be classified based on government budget constraints, and theresults of the analysis will be studied.

2. Analytical method
2.1. Data and object of estimation

For the most part, the analysis used cross-country panel data. Furthermore, the main
objects of the analysis are countries of the OECD. However, in part, analysis including
developing countries can also be evidenced (Miller and Russek (1993; 1997), Lee andGordon (2005), Jorge et al. (2009), Santiago and Yoo (2012)).

2.2. Explained variables

The following are adopted as explained variables of growth regressions: GDP per
capita growth rate (Kneller et al.(1998; 1999), Bleaney et al.(2001), Mercedes andMehrez(2004), Angelopoulos et al. (2006)), real GDP per capita growth rate (Mendoza
et al. (1995; 1997), Miller and Russek (1993; 1997), Widmalm (2001), Lee and Gordon(2005), European Commission (2006), Jorge et al. (2009)), real GDP per capita growthrate as a trend (Shinohara(2012)) , changes in real GDP per head of the working-age
population (Arnold(2008), Arnold et al.(2011), Xing (2011; 2012)), changes in the GDP
growth rate (Gemmell et al.(2007; 2011)) and changes in the GDP per capita growthrate (Santiago and Yoo (2012)).

2.3. Explanatory variables

32.3.1. Classification of the tax structure
Explanatory variables can be categorized into financial variables and variables otherthan financial variables. Financial variables are separated into annual revenue (taxrevenue and revenue other than tax revenue), annual expenditure, and financial
surplus. The tax burden and tax structure are included in tax revenue.
The method of classification of the tax structure in prior research divided the tax
system into five broad categories: (1) income taxes, consumption taxes, and property
taxes; (2) direct taxes and indirect taxes; (3) labor income taxes, capital income taxes,
and consumption taxes; (4) distortionary taxation and non-distortionary taxation; (5)other forms of taxation. The numbers of classification correspond to those of the OECD
Revenue Statistics (as below).

(a) Income taxes, consumption taxes, and property taxes
The classification method is based on the classification of the OECD Revenue
Statistics. Widmalm (2001), Arnold (2008), Arnold et al. (2011), Xing (2011; 2012),
Santiago and Yoo (2012) adopt this kind of classification.
The following is included within each classification: income taxes (Taxes on income,profits, and capital gains: classification numbers 1000, 2000, 3000) include personal
income taxes, corporate income taxes, social security contributions, and payroll taxes(taxes on payroll and workforce); consumption taxes (Taxes on goods and services:classification

number5000)

includespecific

consumption

taxes

and

generalconsumption taxes (value added taxes and sales taxes); property taxes (Taxes onproperty:classification

number4000)

includewealthtransfertaxes(estate,inheritance and gift taxes, taxes on financial and capital transactions) and wealthholding taxes (recurrent taxes on immovable property and recurrent taxes on net
wealth).

(b) Direct taxes and indirect taxes
Direct taxes include income taxes, property taxes, social security contributions, andpayroll taxes. Indirect taxes include consumption taxes. Mercedes and Mehrez (2004),
European Commission (2006), and Jorge et al. (2009) base their research on this kindof classification.

(c) Labor income taxes, capital income taxes, and consumption taxes
Mendoza et al. (1995; 1997) and Angelopous et al. (2006) use this method ofclassification. Mendoza et al. (1994) and Martinez-Mongay (2000) provide a detailed

4explanation relating to the effective tax rate based on this classification.
Labor income tax is made up of taxes on income profits and capital gains ofindividuals (classification number 1100), social security contributions (classification
number 2000), and payroll taxes (classification number 3000).
Capital income taxes include taxes on income profits, capital gains of corporations(classification number 1200), recurrent taxes on immovable property (classification
number 4100), and taxes on financial and capital transactions (classification number
4400).
Consumption taxes consist of general taxes on goods and services (classification
number 5110) and excises (classification number 5121).

(d) Distortionary taxation and non-distortionary taxation
Kneller et al. (1998; 1999), Bleaney et al. (2001), and Gemmell et al. (2007; 2011) adopt
this method of classification.
Distortionary taxation is defined as taxation that affects economic growth byhindering the decision making of economic agents to save or invest. Income taxes,
social security contributions, payroll taxes, and property taxes fall within thiscategory.
Non-distortionary taxation is defined as taxation that does not hinder the decision
making of economic agents to save or invest and does not affect economic growth.

(e) Other forms of taxation
Lee and Gordon (2005) do not follow the above classifications and instead use
individual taxes, corporate taxes, value added taxes, and customs as explanatory
variables for taxation. Miller and Russek (1993; 1997) use tax revenue and revenue
other than tax revenue as explanatory variables. Tax revenue is classified as personal
income taxes, corporate income taxes, social security contributions, domestic
consumption taxes, customs, and other forms of taxation. Similarly, Shinohara (2012)
conducts an analysis from the viewpoint of Revenue Mix, including the issuance ofbonds and tax explanatory variables, which include personal income taxes, corporate
income taxes, social security contributions, and consumption taxes.

2.3.2. Explanatory variables other than financial variables
Explanatory variables other than financial variables include, among other things, theprior period GDP per head of population (or of the working-age population), priorperiod GDP per capita growth rate, initial GDP per capita, physical capital, human5capital, population (or labor force population) growth rate, and trade openness (exports
to GDP ratio, the total of exports and imports to GDP ratio). The other variables
include investment in research and development (R ＆ D), inflation rate, inflation
volatility, terms of trade, labor market instability, purchasing power parity, aging rate,economic freedom, sovereign credit risk, and corruption and quality of the bureaucrat.
It is presumed that of the above, physical capital, human capital, trade openness,investment in research and development, conditions of trade, economic freedom, andcorruption and quality of the bureaucrat have a positive correlation with the rate of
economic growth.
Contrarily, it is presumed that the prior period GDP per head of population (or of theworking-age population), prior period GDP per capita growth rate, initial GDP per
capita, population (or labor force population) growth rate, inflation rate, inflation
volatility, labor market instability, purchasing power parity, aging rate and sovereign
credit risk have a negative correlation with the rate of economic growth.

2.4. Method of estimation

For the most part, the estimation model is that of the pooling regression or the fixed
effects estimation. A dynamic panel model is also carried out in some research(Bleaney et al. (2001) and Gemmell et al. (2007; 2011)). The PMG (Pooled Mean Group)
estimation is adopted in an analysis distinguishing short-term effects and long-term
effects (Gemmell et al. (2007; 2011), Arnold (2008), Arnold et al. (2011), Xing (2011;2012), and Santiago and Yoo (2012)).
In both analyses, a check in relation to the selection of explanatory variables andendogeneity is carried out. In particular, Widmalm (2001) checks the robustness of the
explanatory variables through a sensitivity analysis. 2

2.5. Government budget constraints

It is possible to classify the prior research by whether or not government budget
constraints were considered for the empirical research. It is also possible to classify theprior research based on the premise of government budget constraints to those thatconsider tax revenue neutrality, annual revenue neutrality, annual revenue, andannual expenditure simultaneously.

2

See Levine and Renalt (1992).

6

(1) No government budget constraints
Mendoza et al. (1995; 1997), Lee and Gordon (2005), Angelopoulos et al. (2006),
European Commission (2006), and Jorge et al. (2009) do not consider government
budget constraints.

(2) Tax revenue neutrality
Widmalm (2001), Arnold (2008), Arnold et al. (2011), Xing (2011; 2012) and Santiago
and Yoo (2012) are analyses from the viewpoint of tax revenue neutrality. By adopting
the hypothesis of tax revenue neutrality, the influence of the tax structure on theeconomic growth becomes evident.
The hypothesis of tax revenue neutrality is shown in Equation (1), where 𝑇 is thetotal tax revenue and 𝑇! is an individual tax of the tax revenue. When the share ofeach individual tax, making up the total tax revenue, is added up, the result is 1.
!
!!! (𝑇!

(1)𝑇) = 1(3) Annual revenue neutrality
Shinohara(2012) conducts an analysis focusing on the potential national burden,
including public loan revenue within annual revenue. In Equation (2), 𝐺 is thepotential national burden and 𝑅! is the share of public loan revenue and eachindividual tax making up the potential national burden.
!
!!! (𝑅!

(2)

𝐺)(4) Consideration of annual expenditure
Analyses considering expenditure include Miller and Russek (1993; 1997), Kneller et al.
(1998; 1999), Bleaney et al. (2001), Mercedes and Mehrez (2004) and Gemmell et al.
(2007; 2011). These analyses are based on the judgment that as annual revenue andannual expenditure are in a mutual relationship affecting economic growth, theyshould be considered simultaneously.
Government budget constraints considering annual expenditure are expressed in
Equation (3). Miller and Russek (1993; 1997) maintain that so long as the relationshipin Equation (3) is formed, removal of one of the three variables (annual revenue,
annual expenditure, or fiscal surplus) is of no significance.

7

Annual Expenditure + Fiscal Surplus = Annual Revenue(3)

Furthermore, based on an endogenous growth model, Kneller, Bleaney et al. (1998;
1999) and Bleaney et al.(2001) develop a regression formula similar to that inEquation (4). However,     𝑔!,! signifies GDP growth rate per capita, 𝑌!,! signifies
variables other than fiscal variables and 𝑋!,! signifies financial variables (revenue,
expenditure, and fiscal surplus). Taking Equation (3) into account, Equation (5) isformed from a consideration of multicollinearity. Ultimately, Equation (4) becomesEquation (6). In the estimation, annual revenue is categorized into distortionary
taxation, non-distortionary taxation, and other; annual expenditure is categorized into
productive expenditure, non-productive expenditure, and other, based on whether or
not they are included as arguments in the private production function. The fiscal
variables excluded in Equation (6) are non-distortionary taxation and non-productive
expenditure, thought to be neutral to economic growth.
𝑔!,! = 𝛼 +!
!!! 𝛽! 𝑌!,! +!
!!! 𝛾! 𝑋!,! + 𝑢!,!

(4)!
!!! 𝑋!,! = 0

𝑔!,! = 𝛼 +!
!!! 𝛽! 𝑌!,! +(5)!!!
!!! (𝛾! − 𝛾! )𝑋!,! + 𝑢!,!

(6)

2.6. Short- and long-term effects

Fiscal policy has short- and long-term effects on economic growth. These effects aredemonstrated in Figure 1, in accordance with Myles (2009a).
Growth Path 1 demonstrates the growth pathway prior to the implementation of
fiscal policy. With time, output increases from ‘a’ to ‘b’. In Growth Path 2 and Growth
Path 3, the growth pathway following the implementation of fiscal policy isdemonstrated. In Growth Path 2, there is an increase in output from ‘a’ to ‘c’ as a resultof the implementation of fiscal policy. However, the economic growth rate is nodifferent from before the implementation of fiscal policy. In comparison, in Growth
Path 3, the output increases from ‘a’ to ‘e’ as a result of the implementation of fiscal
policy and the long-term rise in the economic growth rate.
Growth Path 2 demonstrates the level effect of fiscal policy, whereas Growth Path 3
demonstrates the growth effect. The level effect refers to the effect of temporarily
increasing the growth rate while the economy transitions to a new steady state. The

8

growth rate refers to the effect of increasing the rate of growth over the long-term.

Figure.1. The short-term and long-term effects of fiscal policy

OutputGrowth Path 3
Growth Path 2dc
Growth Path１

e

b
a

t1

t2

Time

Source: Myles(2009a), p.26.

Much of the prior research does not clearly distinguish between the short- andlong-term effects. The long-term growth pattern is estimated by excluding the effect ofshort-term economic fluctuations, based on data of a five-year mean.
In relation to this, Gemmell et al. (2007), Arnold (2008), Arnold et al. (2011), Xing
(2011; 2012), and Santiago and Yoo (2012) use annual data to clearly distinguish andestimate short- and long-term effects. In recent years, the synchronicity of theeconomic cycle in the OECD countries has fallen apart. For this reason, Arnold (2008)
doubts the method of excluding the effect of economic fluctuations from the five-year
mean. 3In this circumstance, a PMG estimation based on the panel data error correction
model is carried out. As demonstrated by Equation (7), in the error correction model
the increment of output (𝑦! ) is corrected only by a fixed proportion (𝜆) of the portion of
separation with the steady state (𝑦 ∗ ). Equation (8) is an example of the regression
model. The brackets in first line of Equation (8) represent the long-term effect, and thesecond line represents the short-term effect.

3

Arnold (2008), p. 9.

9

!"#!!
!"= −𝜆 𝑙𝑛𝑦! − 𝑙𝑛𝑦 ∗(7)!
𝑙𝑛𝑦!,! = −𝜙! (𝑙𝑛𝑦!,!!! − 𝑎! 𝑙𝑛𝑠!,!
− 𝑎! 𝑙𝑛ℎ!,! − 𝑎! 𝑛!,! −!
                                  +𝑏!! ∆𝑙𝑛𝑠!,!
+ 𝑏!! ∆𝑙𝑛ℎ!,! + 𝑏!! ∆𝑛!,! +!
!
!!! 𝑎! 𝑙𝑛𝑉!,! )

(8)

!
!
!!! 𝑏!,! Δ𝑙𝑛𝑉!,!

                                  +𝛾! 𝑡 + 𝜂! +𝜖!,!
𝑦!,! : output per head of the working-age population,    𝜙!   : convergence parameter,!
𝑦!,!!! : prior period output per head of the working-age population, 𝑠!,!
: investment

rate in physical capital, ℎ!,! : human capital stock,    𝑛!,! : growth rate of the working!

age population,  𝑉!,! : tax structure, 𝑡: time effects (indicating technical progress),𝜂! : country-specific intercept

3. Results of analysis
3.1. Scenario without government budget constraints(1) Mendoza et al. (1995; 1997) and Angelopoulos et al. (2006)
Based on data of the five-year mean, Mendoza et al. (1995; 1997) demonstrated that astatistically significant relationship between taxes (labor income taxes, capital income
taxes, and consumption taxes) and private investment. Labor income taxes and capitalincome taxes harm private investment, whereas consumption taxes promote it.
However, no significant relationship between taxes and economic growth waspresented. There is a statistically significant scenario when analyzing the annual data.
A positive correlation can be observed between consumption taxes and economic
growth, and a negative correlation can be observed between labor income taxes andcapital income taxes, on the one hand, and economic growth on the other.
In relation to this, Angelopoulos et al. (2006) make it clear that: (a) a negative
correlation exists between labor income taxes and economic growth, and (b) while notrobust, a significant positive relationship exists between the corporate income tax rateand economic growth; whereas, (c) a significant relationship between capital income
taxes and consumption taxes on the one hand, and economic growth on the other,cannot be evidenced.

(2) Lee and Gordon (2005)
Lee and Gordon (2005) demonstrated that: (a) the corporate income tax rate has anegative correlation with the economic growth rate and (b) no discernable significant

10relationship exists between income tax rate and the value added tax rate on the one
hand, and the economic growth rate on the other.

(3) European Commission (2006) and Jorge et al. (2009)
The European Commission (2006) and Jorge et al. (2009) examined the relationship of
the ratio between direct and indirect taxes and economic growth.
Using the OECD countries for its analysis, the European Commission (2006)
demonstrated a positive correlation between the ratio of indirect taxes and direct taxes(indirect tax revenue/direct tax revenue) and economic growth. Furthermore, Jorge etal. (2009) categorized 116 countries into the three categories of developed countries,
developing countries, and all countries (developed and developing countries). Jorge etal. (2009) presented a negative correlation (in the cases of developed countries,
developed, and developing countries) in the direct to indirect tax ratio and economic
growth.

3.2. Scenario with government budget constraints (including annual
expenditure)(1) Miller and Russek (1993; 1997)
Miller and Russek (1993; 1997) conducted an estimation of 39 countries, dividing thecountries into three groups, developed countries, developing countries, and all
countries (developed and developing countries). The estimation period was from 1975
to 1984. The results are shown below.
(a) In the case of all countries, a positive correlation exists between the corporate
income tax revenue to GDP ratio and economic growth. Furthermore, there was no
statistically significant relationship between the domestic consumption tax revenue to
GDP ratio and economic growth.
(b) In relation to developed countries, a negative correlation exists between personal
income tax revenue to GDP ratio and social security contributions to GDP ratio on the
one hand, and economic growth on the other.
(c) In relation to developing countries, a positive correlation between corporate income
tax revenue to GDP ratio and personal income tax revenue to GDP ratio on the one
hand, and economic growth on the other, could be evidenced.

(2) Kneller et al. (1998; 1999), Bleaney et al.(2001), Gemmell et al.(2007;
2011)

11

Kneller et al. (1998; 1999), Bleaney et al. (2001), Gemmell et al. (2007; 2011)
demonstrated that distortionary taxation has a negative correlation with the economic
growth rate.

(3) Mercedes and Mehrez (2004)
Mercedes and Mehrez (2004) examined what kind of effect government size, the tax
structure, and the structure of government expenditure have on economic growth,private investment, and employment. As a result, Mercedes and Mehrez (2004)
demonstrated that: (1) government size negatively correlates with economic growthand private investment; (2) economic growth, private investment, and employment
have a positive relationship with the level of dependence on indirect taxes in the tax
system; (3) the effect of corporate income taxes and social insurance contributions on
economic growth is the same as that of individual income taxes.

3.3. Scenario with government budget constraints (tax revenue neutral)(1) Widmalm (2001)
Widmalm (2001) made it clear that: (a) economic growth is constrained when the shareof personal income taxes making up tax revenue increases; (b) economic growth ispromoted when the share of consumption taxes making up tax revenue increases; (c)economic growth is constrained when there is a rise in the progressivity of taxation.

(2) Arnold (2008) and Arnold et al. (2011)
Arnold (2008) explains: (1) the order of taxes that have a harmful effect on the economy,
starting from those with the greatest effect, are: corporate income taxes, personal
income taxes, consumption taxes, and recurrent taxes on immovable property; (2) on
the premise of tax revenue neutrality, economic growth is promoted when income taxes
are reduced and consumption taxes and recurrent taxes on immovable property areraised. Furthermore, a theoretical explanation relating such a result is conducted(Arnold et al. (2011)).
Personal income taxes hinder economic growth more than consumption taxes. Somereasons for this are that the tax rate is progressive, double taxation of savings takes
place, delivering a blow to small-middle sized companies procuring funds, and thewillingness of low-income earners to work is harmed because of the high marginal tax
rate of income taxes and social security contributions.
Corporate income taxes hinder capital investment and improvements in productivity,

12the motivating force of economic growth. Furthermore, corporate income taxes
constrain overseas investment. Additionally, for the most part, tax break measures for
specific activities are not an injection of resources for companies contributing toeconomic growth.
Consumption taxes raise the commodity price and lowers a worker’s real income.
Consequently, labor supply is constrained and growth hindered. Nevertheless, savings
and investments are not constrained. This is also neutral for international trade.
Accordingly, the inhibitory effect on growth is small.
Wealth transfer taxes discourage real-estate transactions and hinder a reallocation
to a more productive use, and distort the incentive to save. Consequently, growth isconstrained.
Recurrent taxes on immovable property promotes growth by transferring investment
from housing to an object of higher profitability. However, in many countries, taxes on
housing have reduced and a tax increase is problematic. Accordingly, the reality is thatthe dependence on consumption tax will increase.

(3) Xing (2011; 2012)
Xing (2011; 2012) conducted an empirical analysis based on the error correction model,
similar to the above studies of Arnold (2008) and Arnold et al. (2011). However, as therobustness check was carried out more carefully, the following conclusions Xing
reached differed from that of Arnold (2008) and Arnold et al. (2011):(a) Reducing income taxes and consumption taxes, and increasing property taxes
promote economic growth.
(b) When classifying property taxes as recurrent taxes on immovable property andother, the latter hinders economic growth the least.
(c) The result that, for economic growth, personal income taxes are better thancorporate income taxes and consumption taxes are better than income taxes was not
obtained.

(4) Santiago and Yoo (2012)
Santiago and Yoo (2012) expanded the period and countries, which were the object of
the estimation, to a greater extent than Arnold (2008), Arnold et al. (2011), and Xing
(2011; 2012). The analysis categorized 69 countries into high-income countries,
middle-income countries, and low-income countries. The period of the estimation isfrom 1970 to 2009. The results of the analysis are as follows:(a) Based on tax revenue neutrality, economic growth is hindered when consumption

13

taxes and property taxes are decreased and income taxes are raised.
(b) Social security contributions and personal income taxes hinder growth more thancorporate income taxes.
(c) Economic growth is promoted when income taxes are reduced and property taxes
are raised.
(d) Economic growth is promoted when income taxes are reduced and consumption
taxes are raised. However, the effect of promoting growth is smaller than property
taxes.
(e) The above results apply to high-income countries and middle-income countries, but
not to low-income countries, because of the low level of tax administration in
low-income countries.

3.4. Scenario with government budget constraints (annual revenue neutral)

Shinohara(2012) separated and analyzed 30 countries of the OECD and 21 countries of
the OECD, similar to Arnold (2008). In the former group, it was found that fundprocurement by annual revenue items, other than personal income taxes (corporate
income taxes, social security contributions, and issuance of bonds), has a positive effecton economic growth. The latter group showed that, while corporate income taxes andsocial security contributions have a negative effect on economic growth, personal
income taxes, consumption taxes, and the issuance of bonds have a positive effect on
economic growth.

3.5. Short- and long-term effects

Bleaney et al. (2001) demonstrated that: (1) it is difficult to separate short- andlong-term effects based on five-year data, and that estimation by a model using annual
data with lags would be appropriate; (2) the desirable number of lags is eight.
In relation to short- and long-term effects, the process of converging to a steady state
differs by country (in Equation (8), the convergence coefficient ( 𝜙! ), short-term
coefficient ( b ), and the error term (𝜀) differ by country). It is assumed that, in the longterm, there is no difference in the tax structure and economic growth relationshipbetween countries (between countries the long-term coefficient (𝑎) is homogeneous).
After carrying out the Hausman test, Gemmell et al. (2007; 2011), Arnold (2008), andSantiago and Yoo (2012) maintained that the null hypothesis (the long-term coefficient(𝑎) is homogeneous) had not been rejected. In response to this, Xing (2011; 2012)14

maintained that in relation to testing the homogeneity of each explanatory variable,
the Wald test is more effective than the Hausman test. According to the Wald test, thenull hypothesis that all long-term coefficients are homogenous between countries isrejected.
Furthermore, Gemmell et al. (2007; 2011) elucidated that, while in the short-term,
the process of dynamic adjustment differs by country, the adjustment process to along-term equilibrium is short (a number of years, not decades).

4. Conclusion
This paper surveyed prior empirical research, the research methods used, andanalytical results obtained for research on the effect of the tax structure on economic
growth.
Table 1 presents the outline of analytical methods used. A number of characteristics
can be highlighted.
(1) For the most part, analysis was conducted using countries of the OECD based oncross-country panel data.
(2) The growth regression model was broadly classified into two groups based onwhether or not government budget constraints were imposed. Furthermore, analysis
on the premise of government budget constraints can be separated into the threegroups: (a) tax revenue neutral, (b) annual revenue neutral, and (c) considerations ofboth annual revenue and annual expenditure.
(3) The analysis moved on to separating the short- and long-term effects that fiscal
policy had on economic growth. Accompanying this, the method of estimation changed
from the pooling regression or the fixed effects estimation to PMG estimation.
The results indicate that while there are differences in terms of the object of theestimation, the period of estimation, the existence of government budget constraints,
the following can be pointed out:
(1) The majority of the estimated results of the research suggest that the tax structure
has an effect on economic growth. However, in an estimation based on five-year data,
Mendoza et al. (1995; 1997) found that a significant relationship between the two could
not be evidenced.
(2) It is not necessarily always the case that there will be a negative correlation
between income taxes (personal income taxes, corporate income taxes, and social
security contributions, and payroll taxes) and economic growth. Some research finds a
positive correlation (the case of developing countries in Miller and Russek (1993; 1997)15

and in the studies of Angelopoulos et al. (2006) and Shinohara (2012)).
(3) The direct to indirect tax ratio is negatively correlated with economic growth.
(4) There is a negative correlation between labor income taxes and economic growth(Angelopoulos et al. (2006)). In relation to capital income taxes and consumption taxes,
some research does not present a significant relationship with economic growth(Angelopoulos et al. (2006)). However, specific cases also indicate a negative andpositive correlation (Mendoza et al. (1995; 1997)).
(5) Distortionary taxation negatively correlates with economic growth.
(6) Based on tax revenue neutrality, economic growth is promoted when income taxes
are reduced and consumption taxes and recurrent taxes on immovable property areraised (Arnold (2008)). However, Xing (2011; 2012) is opposed to this.
(7) It is difficult to establish an order of individual taxes in relation to their effect onhindering growth. Arnold (2008) finds that the order of taxes that have a harmful
effect on the economy, starting with those that have the greatest effect are: corporate
income taxes, personal income taxes, consumption taxes, and recurrent taxes on
immovable property. However, this differs from the conclusion of Mercedes andMehrez (2004), Xing (2011; 2012), and Santiago and Yoo (2012).
(8) In relation to the long-term effect of tax policy, Gemmell et al. (2007; 2011), Arnold(2008), Arnold et al.(2011), and Santiago and Yoo (2012) maintain that the null
hypothesis that the long-term coefficient is homogeneous between countries is not
rejected by the Hausman test. However, Xing (2011; 2012) finds that this null
hypothesis is not applicable.
Finally, based on the survey of prior research above, this paper concludes with thepoint that a topic for further research is an empirical examination into the relationshipof the tax structure and economic growth in Japan.

16

Table 1. Outline of the Empirical Analyses Relating to the Effect of the Tax
Structure on Economic Growth
Government budget constraints（tax revenue neural）

Government
budgetconstraints（ annual
revenue neutra l）

Widmalm(2001)
Type of data
Object ofestimationPanel
23 countries of
the OECD

Arnold(2008)
Arnold et al.
(2011)
Panel
21 countries of
the OECD

Xing (2011; 2012)

Santiago andYoo(2012)

Shinohara(2012)

Panel
17 countries of
the OECD

Panel
69 countries( high-income,Panel
30 countries of
the OECD
21 countries of
the OECD
1970-2008

middle-income
and low income )Period ofestimation
EconometricmethodExplained
variable
Explanatory
variable
Annualexpenditure
Explanatory
variable
Annualrevenue

1965-1990( 5-year average )Pooling
regression（2SLS）
Real GDP per
capita growthrate−

1971-2004

1970-2004

1970-2009

PMG estimation

PMG estimation

PMG estimation

Fixed-effects
model

−

−

Changes in real
GDP per capita
growth rate−

Real GDP per
capita growthrate as a trend−

・Tax burden
・Progressivityof taxation
・Personal
income taxes
・Corporate
income taxes
・Wage taxes( social security

・Tax burden
・Income taxes( Personal

・Tax burden
・Income taxes( Personal

income taxes,

income taxes,

corporate

corporate

・Potential
national
burden・Income taxes( Personal

income taxes,

income taxes,

social security

social security

contributions,contributions,payroll taxes )payroll taxes )contributions

・Consumption
taxes・Property taxes(recurrent
taxes onimmovable
property andother s )・Prior period
real GDP per
head of theworking-age
population
・Physical capital・ Human capital・Population
growth rate
・Inflation rate
・Inflation
volatility
・R＆D

・Consumption
taxes・Property taxes(recurrent
taxes onimmovable
propertyand others)
・Prior period
real GDP per
head of theworking-age
population
・Physical capital・ Human capita l・Population
growth rate

・Tax burden
・Income taxes(Personal
income taxes,
corporateincome taxes)
・Social security
contributions
・Consumption
taxes ( generaland payroll
taxes )

・Consumption
taxes・Property taxes

Explanatory
variable
Variables
other thanfinancialvariables

・Prior period
real GDP per
head ofpopulation
・Physical capital・Population
growth rate
・Exports
・Labor market
instability
market ( daysof employment )Changes in real GDP per head of
the working-age population17

consumption
taxes, customs
and others )・Property taxes

・Prior period
GDP growthrate per headof population
・Physical capital・ Human capital・Population
growth rateincome taxes,
corporateincome taxes )・Social security
contributions
・Consumption
taxes
・Public loan
revenue・Prior period
real GDP per
head ofpopulation
・ Human capital・Purchasing
power parity
・Aging rate・ Trade openness

・ Trade openness
Separation ofshort-termand long-term
effects

Type of data
Object ofestimation

Period ofestimation
EconometricmethodExplained
variable
Explanatory
variable
Annualexpenditure

Explanatory
variable
Annualrevenue

Explanatory
variable

−

○

○

○

Government Budget Constraints (Consideration of Annual Expenditure)
Miller andKneller et al.
Bleaney et al.
Mercedes andRussek(1998; 1999)(2001)
Mehrez (2004)(1993; 1997)
Panel
Panel
Panel
Panel
39 countries
22 countries of 22 countries of 18 countries of(developed
the OECD
the OECD
the OECD
and developing
countries)
1975-1984
1970-1995
1970-1995
1970-2001(5-year mean)(annual and(5-year mean)
5-year mean)
Fixed-effects
Fixed-effects
・Fixed-effects
Fixed-effects
model
model
model
model
・Dynamic
panel model
Real GDP per
GDP per capita growth rate
capita growthrate
・ Scale of annual ・Productive
・Productive
・ Government
expenditure
expenditure
expenditureconsumption(central・ Non-productive ・ Non-productive
expenditure
government)
expenditure
expenditure・Social security
・National
・Other forms of ・Other forms ofbenefits
defenseexpenditure
expenditure・Subsidies
・Education
・Health・Social security
and welfare
・Economic
services
・Transport
・Other・ Scale of annual ・Distortionary ・Distortionary ・ Scale of annual
revenuetaxationtaxationrevenue(central・ Non-distortionary ・ Non-distortionary ・Direct taxes
government)
taxationtaxation( income taxes,
・Personal
・Other forms of ・Other forms ofproperty taxes,
income taxes
tax revenue
tax revenue
social security
・Corporate
・Revenue other ・Revenue othercontributions
income taxes
than tax
than tax
and pay roll・Social security
revenuerevenuetaxes )
contributions
・Indirect taxes
・Domestic
consumption
taxes
・Customs
・Other forms oftax revenue
・Revenue otherthan tax
revenue
○
○
○
○

18

−

Gemmell et al.
(2007; 2011)
Panel
17 countries of
the OECD

1970-2004

・PMG estimation
・Dynamic
panel model
Changes in the
GDP growthrate
・Productive
expenditure
・ Non-productive
expenditure
・Other forms of
expenditure

・Distortionary
taxation・Non-distortionary
taxation・Other forms oftax revenue
・Revenue otherthan tax
revenue○Financial
surplus
Explanatory
variable
Variables
other thanfinancialvariables

Separation ofshort-termand long-term
effects

Type of data
Object ofestimation
Period ofestimation
Econometricmethod・Prior period
real GDP per
head ofpopulation
・Physical capital・Population
growth rate
・Inflation rate
・Tradeopenness

・GDP per capita
of the initialperiod（1970,
1975, 1980,
1985,1990）
・Physical capital
・Growth rate of
the labor force
population

・Physical capital
・Growth rate of
the labor force
population

−

−

−

・GDP per capita
of the initialperiod（1970,
1975, 1980,
1985,1990）
・Physical
capital・Growth rate of
the labor force
population
・ Trade openness−○

No Government Budget Constraints
Mendoza et al. (1995; 1997)
Angelopoulos et al. (2006)

Lee and Gordon (2005)

Panel
18 countries of the OECDPanel
23 countries of the OECDPanel
70 countries

1966-1990 (5-year mean
and annual)
Pooling regression ( OLS,

1970-2000 (5-year mean)

1970-1997( annual）
1980-1997 (5-year mean)
・Pooling regression ( OLS,−

robust regression, instrumental

instrumental variables

variables method )method, robust regression,

Explained
variable
Explanatory
variable
Annualexpenditure
Explanatory
variable
Annualrevenue

Real GDP per capita growthrate
・Government consumption
expenditure

GDP per capita growth rate

・Labor income taxes
・Capital income taxes
・Consumption taxes

・Labor income taxes
・Capital income taxes
・Consumption taxes

Explanatory
variable
Variables
other thanfinancialvariables

・Initial period GDP (1965)
・Physical capital・Human capital
・Conditions of trade

Separation ofshort-termand long-term
effects−

・GDP per capita of theinitial period（ 1970, 1975,
1980, 1985, 1990, 1995 ）・Labor force
・Human capital・Investment
・Trade openness
・Birth rate
・Inflation rate−

Type of data
Object of・Physical capital・Employment
growth rate
(growthrate of thelabor force
population)

・Productive expenditure

No Government Budget Constraints
European Commission(2006)
Panel
OECD member countries

19

median regression )・Fixed-effects model
Real GDP per capita growthrate
・Scale of annual
expenditure・Tax burden
・Income taxes
・Corporate taxes
・Value added taxes
・Customs
・Real GDP per capita of theinitial period (1970, 1980,
1985, 1990, 1995)
・Human capital・Population growth rate
・Trade openness
・Inflation rate
・Corruption and quality ofbureaucrat−

Jorge et al. (2009)Panel
116 countries ( developed countries, developingestimation
Period ofestimation
EconometricmethodExplained
variables
Explanatory
variable
Annualexpenditure
Explanatory
variable
Annualrevenue
Explanatory
variable
Variables
other thanfinancialvariables
Separation ofshort-termand long-ter meffects

countries and transitioning economies )1975-2000 (5-year mean)

1972-2005 (5-year mean)

Fixed-effects model・Pooling regression ( OLS, robust regression )・Fixed-effects model

Real GDP per capita growth rate
・Size of government (government
consumption expenditure)−・Direct taxes
・Indirect taxes

・Direct taxes
・Indirect taxes
・Corporate income tax rate

・Initial period Real GDP per head of theworking-age population（1975, 1980, 1985,
1990, 1995）
・Physical capital・Investment in research and development
・Trade openness
・Extent of economic freedom−・GDP per capita of the initial period (1972,
1975, 1980, 1985, 1990, 1995, 2000)
・Human capital・Population growth rate
・Inflation rate
・Trade openness
・Sovereign credit risk−

Source: Prepared by the author.

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