Tax Structure and Economic Growth: A Panel Cointegrated VAR Analysis

The paper is aimed to re-evaluate the relationship between tax structure and economic growth relying on linear and non-linear panel cointegrated VAR models. The asymmetric impact of tax changes on growth is estimated adapting the threshold cointegration methodology proposed by Hansen and Byeongseon (J Econom 110:293–318, 2002) to the panel framework. The tests indicate that the weak exogeneity and linearity hypotheses are not supported by data. Thus, the empirical results obtained by previous literature in a linear single-equation framework must be interpreted with caution. We find that recurrent taxes on immovable property seem to be the least harmful for the growth, while we do not found compelling evidence favouring consumption taxes over income taxes. Therefore, our results do not fully support the policy prescriptions proposed by many international organizations aimed at shifting the tax burden from income to consumption and property. Moreover, these findings are robust and significant when the tax burden is above the threshold value of around 30%, which is the case for the tax revenue to GDP ratio for the most of European countries in the sample. Policy conclusions are also discussed.