Taxes and Economic Growth in Developing Countries : A Dynamic Panel Approach

This paper looks at the effects of taxes increase on economic growth of 47 developing countries. In developing countries, there is no magic tax strategy to encourage economic growth. Some countries with high tax burdens have high growth rates and some countries with low tax burdens have low growth rates. Despite much theoretical and empirical inquiry as well as political and policy controversy, no simple answer exists concerning the relationship of taxes on economic growth in developing countries. The research takes an empirical approach to analyze the effects of four types of taxes namely taxes revenue, taxes on goods and services, taxes on income, profits, and capital gains and taxes on international trade on economic growth. Mobilizing a dynamic panel data over the period 2000–2012 and using the system GMM estimator to address endogeneity issues, the econometric results yield that (i) there is a non-linear relationship between taxes revenue and economic growth, specifically, these taxes increase economic growth at short run and this effect then increases over time as these taxes increase, and (ii) there is a non-linear (U-shaped) relationship between taxes on income, profits and capital gains, taxes on international trade and economic growth, specifically, these taxes lower economic growth at short run and these effects then diminish over time as these taxes increase