The Influence of Tax Mix and Tax Policy on Savings and Capital Formation in Developing Economies: A Survey.” Asia-Pacific Development

This paper surveys the existing theoretical and empirical literature on the relationship between taxes and economic growth, with special reference to developing economies. It reports on studies of tax mix and tax policies and their influence on savings and capital formation. These studies are divided into those adopting a positive approach (empirical studies) and those that discuss tax reform issues following a normative approach. Although there are no universal laws (valid for all countries at all times) concerning the influence of the tax mix and tax policies on a nation’s savings and growth, there are some inferences that can be drawn from the studies that are discussed here. Taxation, in its various forms, affects the ability and willingness of an individual to work, save and invest. These effects vary, depending on the base of the tax, the rate structure of the tax and the level of the tax burden. Several studies have shown that the structure of taxation can have a major influence on the real sector and that taxation policy can therefore be an important tool for promoting saving, capital formation and economic growth. This applies to both developed and developing economies, although there are significant differences in the tax mix and tax structure between countries at different levels of economic development. In this paper the theoretical and empirical literature on the influence of taxation on savings and capital formation is surveyed, with special reference to developing economies. The first section looks at the theoretical and empirical linkages between savings and its major determinants – income, the interest rate and other factors. This is followed by a section dealing with the determinants of investment. The next section covers the empirical literature on the relationship between tax, savings and capital formation. Tax reform studies are examined in the penultimate section of the paper