Empirical Analysis On The Effectiveness Of Tax Structure On Economic Growth In OECD Countries

Organization for Economic Co-operation and Development (OECD) countries currently has 34 members. The tax systems in OECD countries have three main goals:to raise revenue for public expenditures, to consider economic efficiency objectives, and to redistribute income and wealth to help those in need. Tax systems can increase tax revenues to improve economic growth through modifying the tax base and changing the tax rate. It is generally believed that low tax rates can increase savings, investment and productivity, thus increasing economic efficiency in the long-term. On the other hand, increased taxes for those in high-income brackets can reduce income inequality, thus making the whole tax system overall more progressive. Therefore, taxation is not only related to economic growth, but is also related to social equity.This thesis discusses two primary taxation concepts:tax level and tax structure. Tax level is a useful standard for measuring the aggregate tax burden, but governments cannot solely rely on it when making their taxation policies. The tax structure combines individual taxes together and influences the economy in a mixed way. Therefore, it is necessary for governments to consider the effectiveness of the tax structure when making tax policies.This thesis mainly discusses the effectiveness of tax structure on economic growth both over the short-term and the longer-term (five years or more) based on the empirical and theoretical findings of OECD countries from a period spanning from 1981 to 2014, and then proposes reasonable policy recommendations. This thesis highlights the following issues:(1) How do different types of taxes influence the GDP per capita growth rate, both individually and collectively? (2) How does tax structure influences the economy over the short-term and the longer-term? (3) How to can the endogenous issue be solved?This thesis uses data from between the years of 1981 to 2014 from the relevant OECD, OECD Tax and The World Bank Databases. It uses GDP per capita growth rate as a measure of economic growth, and concludes that, in the short-term, the effectiveness of tax structure on GDP growth rate per capita may be biased because of a natural cyclical influence on the economy. Furthermore, endogenous issues can be ironed out to some extent after taking five-year lagged data on taxation variables. In the longer-term, all taxes except property tax are negatively correlated with the GDP per capita growth rate, but reducing the rate may not have the same effectiveness on economic development. Moreover, though some taxes reduce economic growth, governments should still support them because they reduce inequality.This thesis is unique in that it compares short-term effects with longer-term effects by using annual data, yearly lagged data and yearly averaged data together concurrently, thus increasing the accuracy of empirical results. However, this thesis is still limited in its methods and contents. Due to the limitation of collected data, the thesis does not use longer averaged data on independent variables, and thus cannot precisely predict how the tax structure influences economic growth in the long-term (decades of years or longer).