Untangling the causal relationship between tax burden distribution and economic growth in 23 OECD countries: Fresh evidence from linear and non-linear Granger causality

The aim of the paper is to investigate the linear and nonlinear causality between a set of alternative tax burden ratios and economic growth in 23 OECD countries. To that end, the linear causality approach of Toda– Yamamoto (1995) and the nonparametric causality method of Kyrtsou and Labys (2006) are applied to annual data spanning from 1970 to 2014. Results obtained from the nonlinear causality test tend to reject the neutrality hypothesis for the tax structure–growth relationship in 19 of the 23 OECD countries. In the majority of the countries under investigation, the evidence is in line with the growth hypothesis where causality running from economic growth to tax burden ratios was detected in Australia, Denmark, Finland, Japan, New Zealand, and Norway. The opposite causality running from tax structure to economic growth was found in Germany, Netherlands, Portugal, and Sweden. In contrast, the neutrality hypothesis was supported in Austria, Italy, Luxembourg, and the USA, whereas the feedback hypothesis was supported in Turkey and the UK. Additional robustness checks show that when the signs of variations are taken into account, there is an asymmetric causality running from positive tax burden shocks to positive per capita GDP shocks for Belgium, France, and Turkey. Overall, our findings suggest that policy implications of the tax structure-economic growth relationships should be interpreted with caution, taking into account the test-dependent and country-specific results.