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Top marginal taxation and economic growth

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  • Santo Milasi
  • Robert J. Waldmann

Abstract

The article explores the relationship between top marginal tax rates on personal income and economic growth. Using a data set of consistently measured top marginal tax rates for a panel of 18 OECD countries over the period 1965–2009, this article finds evidence in favour of a quadratic top tax–growth relationship. This represents the first reported evidence of a nonmonotonic significant relationship between top marginal income tax rates and economic growth. The point estimates of the regressions suggest that the marginal effect of higher top tax rates becomes negative above a growth-maximizing tax rate in the order of 60%. As top marginal tax rates observed after 1980 are below the estimated growth-maximizing level in most of the countries considered, a positive linear relationship between top marginal tax rates and GDP growth is found over the sub-period 1980–2009. Overall, results show that raising top marginal tax rates which are below their growth maximizing has the largest positive impact on growth when the related additional revenues are used to finance productive public expenditure, reduce budget deficits or reduce some other form of distortionary taxation.

Suggested Citation

  • Santo Milasi & Robert J. Waldmann, 2018. "Top marginal taxation and economic growth," Applied Economics, Taylor & Francis Journals, vol. 50(19), pages 2156-2170, April.
    • Handle: RePEc:taf:applec:v:50:y:2018:i:19:p:2156-2170
    DOI: 10.1080/00036846.2017.1392001
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    Cited by:

    1. Rudra P. Pradhan & Mak B. Arvin & Mahendhiran S. Nair & John H. Hall, 2022. "The dynamics between financial market development, taxation propensity, and economic growth: a study of OECD and non-OECD countries," Quality & Quantity: International Journal of Methodology, Springer, vol. 56(3), pages 1503-1534, June.
    2. Nazila Alinaghi & W. Robert Reed, 2021. "Taxes and Economic Growth in OECD Countries: A Meta-analysis," Public Finance Review, , vol. 49(1), pages 3-40, January.
    3. Kenc, Turalay & Cevik, Emrah Ismail, 2024. "Global corporate tax policy space," Economic Systems, Elsevier, vol. 48(2).
    4. Sturn, Simon & Epstein, Gerald, 2021. "How much should we trust five-year averaging to purge business cycle effects? A reassessment of the finance-growth and capital accumulation-unemployment nexus," Economic Modelling, Elsevier, vol. 96(C), pages 242-256.
    5. Nga Phan Thi Hang & My-Linh Thi Nguyen & Tung Duy Thai & Toan Ngoc Bui, 2020. "The Optimal Threshold of Tax Revenue for Economic Growth: An Investigation into the ASEAN 5+1 Countries," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(4), pages 422-434.

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