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The Macroeconomic Effects of a Switch from Direct to Indirect Taxes: An Empirical Assessment

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  • Madsen, J
  • Damania, D

Abstract

This paper investigates the macroeconomic effects of switching the tax burden from direct to indirect taxes in an empirical model based on twenty-two OECD countries. The Engle-Yoo (1989) three-step procedure is employed to estimate both the short- and long-run effects of such a tax switch. The results reveal that a switch from direct to indirect taxes is likely to generate efficiency gains in the short run which lead to higher levels of aggregate output. However, for the majority of countries in the sample, the tax changes have no impact on the level of economic activity in the long run. Copyright 1996 by Scottish Economic Society.

Suggested Citation

  • Madsen, J & Damania, D, 1996. "The Macroeconomic Effects of a Switch from Direct to Indirect Taxes: An Empirical Assessment," Scottish Journal of Political Economy, Scottish Economic Society, vol. 43(5), pages 566-578, November.
    • Handle: RePEc:bla:scotjp:v:43:y:1996:i:5:p:566-78
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    Cited by:

    1. Arvin, Mak B. & Pradhan, Rudra P. & Nair, Mahendhiran S., 2021. "Are there links between institutional quality, government expenditure, tax revenue and economic growth? Evidence from low-income and lower middle-income countries," Economic Analysis and Policy, Elsevier, vol. 70(C), pages 468-489.
    2. Cosmina-ȘTefania Chiricu, 2019. "The Analysis Of The Economic Impact Of Vat On The Economic Growth In Southern Europe," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 24, pages 47-56, December.
    3. Jorge Martinez-Vazquez & Violeta Vulovic & Yongzheng Liu, 2011. "Direct versus Indirect Taxation: Trends, Theory, and Economic Significance," Chapters, in: Emilio Albi & Jorge Martinez-Vazquez (ed.), The Elgar Guide to Tax Systems, chapter 2, Edward Elgar Publishing.
    4. Kashif Munir & Maryam Sultan, 2018. "Are some taxes better for growth in Pakistan? A time series analysis," International Journal of Social Economics, Emerald Group Publishing Limited, vol. 45(10), pages 1439-1452, August.
    5. Dokas, Ioannis & Panagiotidis, Minas & Papadamou, Stephanos & Spyromitros, Eleftherios, 2024. "The impact of the shadow economy on the direct-indirect tax mix: Can central banks’ independence mitigate the effect?," Journal of Policy Modeling, Elsevier, vol. 46(3), pages 475-493.
    6. Stoyan Tanchev, 2019. "Tax structure and economic growth: empirical evidence from Bulgaria," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 5, pages 24-41,42-58.

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