Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2012:6: Taxation of Income and Economic Growth: An Empirical Analysis of 25 Rich OECD Countries

Margareta Dackehag () and Åsa Hansson ()
Additional contact information
Margareta Dackehag: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Åsa Hansson: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

Abstract: Several empirical papers have studied the effect of government size, typically measured as government expenditures, on economic growth. There is no consensus on the direction of this impact, even though more recent studies tend to find a negative relationship between the general level of government expenditures and economic growth. This negative relationship is explained by the distortions that raising tax revenues cause on economic activities. There are, however, several ways to raise tax revenues that likely have different distortionary effects and, hence, may impact economic growth differently. This paper analyses how taxation of income influences economic growth. More precisely we study how statutory tax rates on corporate and personal income affect economic growth by using panel data from 1975 till 2010 for 25 rich OECD countries. We find that both taxation of corporate and personal income negatively influence economic growth. The correlation between corporate income taxation and economic growth is more robust, however.

Keywords: Economic growth; taxation of corporate income; taxation of personal income

JEL-codes: H21; H24; H25; O40

33 pages, March 2, 2012

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