This article provides an analysis of the taxation structure in Europe, and its possible
impact on growth. It is often assumed that a decrease in taxes will improve growth.
The study covers the period 1985-2003, the 12 countries belonging to the Eurozone,
and details the different categories of taxes across countries. The panel data analysis
is based upon an error component model. The only negative relationship between
growth and taxes is found when considering the social contributions. In other words,
policymakers willing to positively impact their country’s growth should concentrate
first on the reduction of social contributions.
This paper addresses the question of the impact of taxes on growth. In the European context,
it is an interesting question in the sense that an implicit assumption is often made: A decrease
in tax will help countries attract new investments. If this is true, we should find traces of this
“positive” effect in GDP growth rates. Moreover, this implicit assumption is often used to
emphasize that the incentive countries have to start a war of attrition or a race to the bottom
in terms of tax within the European Monetary Union (EMU). As pointed out by Razin and Sadka
(1991), the fear of a war of attrition is a theoretical argument that is often used at both the EU
institutional level and in the economic literature to recommend some harmonization of national
tax policies (See also Wildasin, 2001).
Using the Eurostat database, the study will cover the period 1985-2003, and the 12 member
countries of the Eurozone for the different categories of taxes. It is indeed interesting for the
policymaking to know whether any kind of taxes have an impact on growth or whether a
country should target one category.
Section 2 will briefly detail the background literature. Sections 3 and 4 will present the
dataset as well as the methodology. Results will be explained in section 5. Section 6 deals with
conclusions. |
