The Tax Policy from an Economic Growth Perspective

Abstract

This article summarizes the evidence on the relationship between tax policy and economic growth, referring to several case studies providing more substance and detail. Potential negative effects of tax policy on economic growth have been addressed in the debates on whether to increase taxes to reduce the deficit and reform taxes by broadening the base to lower tax rates.

This is a key element of modern trends in public finance and macroeconomics. Many economists have tried to explain the correlation between tax policy and economic growth. However, many dilemmas have remained open, and the empirical relationship between taxes and growth seems much more complex than theoretical findings suggest. The impact of taxes on growth can be noticed both in terms of efficiency and changes in equity that taxes introduce to the economy.

The article analyzes the correlation between tax policy and economic growth through the prism of 3 components: (i) the level of taxation, (ii) the structure, and (iii) the complexity of the taxation system. In addition, the article reviews if there is a correlation between the level of taxation or its change and the country’s development level.