The document discusses tax structures and their implications for economic growth in low and middle-income countries, noting a shift from trade taxes to consumption taxes like VAT. It highlights that these shifts may not negatively impact growth, but increasing personal income taxes could harm GDP growth rates. Key findings underscore the complex relationship between tax composition and economic performance across income levels.

1. Tax Structures,
Economic Growth and Development:
ICTD working paper No. 22
9 / 9 / 2014
Kyle McNabb (km133@hw.ac.uk)
& Philippe LeMay-Boucher
Heriot-Watt University Edinburgh
9/9/2014
Tax
Structures,
Economic
Growth
and
Development

2. Motivation (1/2)
• Ongoing shift away from reliance on trade taxes toward
consumption taxes such as the VAT
– IMF “Policy Prescription” (IMF, 2011)
• What are the implications of such structural shifts?
– Baunsgaard & Keen (2010): Revenue recovery following
liberalisation has been poor in low- and middle- income
countries.
– Effects on GDP growth rates are as yet unclear
• GRD allows us to consider the effect revenue – neutral
shifts in tax structure
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Tax
Structures,
Economic
Growth
and
Development

3. Motivation (2/2)
• The picture in low income / developing
countries
– Low tax ratio
– Reliance on indirect taxes
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Tax
Structures,
Economic
Growth
and
Development
Tax/GDP (%)
’80 - ’89 ’90 -’99 ’00 -’09
Low-Income 13.4 11.7 13.7
Middle-Income 13.7 14.2 15.9
High-Income 23.2 22.6 23.5
OECD 25.7 25.1 25.5
Source: ICTD GRD (2014)

4. Trends in the data
• Disaggregate tax components into shares of total
revenue
– Direct
• Personal and Corporate income tax + Property tax
– Indirect
• Consumption
• Trade
• Divide countries into ‘Low’, ‘Middle’, ‘High’ income.
• Figures 2 & 3: 1980-2009
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Tax
Structures,
Economic
Growth
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Development

5. 0 10 20 30 40 50 60 70 80 90 100
% of Tax revenue
Tax Revenues, Low Income Countries
35 - 40%
45%
1981 1985 1989 1993 1997 2001 2005 2009
Year
Direct Goods and Services Trade
NB: Mean values used
20%
~33%
Source: ICTD GRD (2014)

6. 0 10 20 30 40 50 60 70 80 90 100
% of Tax revenue
Tax Revenues, Middle Income Countries
30-35%
1981 1985 1989 1993 1997 2001 2005 2009
Year
Direct Goods and Services Trade
NB: Mean values used
15%
30-35%
50%
Source: ICTD GRD (2014)

7. 0 10 20 30 40 50 60 70 80 90 100
% of Tax revenue
Tax Revenues, High Income Countries
< 10 %
1981 1985 1989 1993 1997 2001 2005 2009
Year
Direct Goods and Services Trade
NB: Mean values used
Source: ICTD GRD (2014)

8. 0 10 20 30 40 50 60 70 80 90 100
% of Tax revenue
Tax Revenues, Low and Middle Income Countries
1990 1993 1996 1999 2002 2005 2008
Year
PIT CIT Goods and Services Trade
NB: Mean values used
Source: ICTD GRD (2014)

9. 0 10 20 30 40 50 60 70 80 90 100
% of Tax revenue
Tax Revenues, High Income Countries
1990 1993 1996 1999 2002 2005 2008
Year
PIT CIT Goods and Services Trade
NB: Mean values used
Source: ICTD GRD (2014)

10. Effects of tax structure on GDP growth
• Kneller et al. (1999): Increases in ‘distortionary’ taxes are
harmful for growth (0.1% - 0.2%)
– (22 OECD countries, 25 years)
• Arnold et al. (2011): Revenue-neutral %pt increase in income
taxes, offset by reductions in consumption and property taxes,
reduces GDP in levels by (0.25 – 1%)
– (21 OECD countries, 34 years)
• Acosta-Ormaechea & Yoo (2012): Extend work of Arnold et al.
– Larger panel (69 countries, ≥20 years), including developing
countries
– RN Increase in income tax share, offset by reduction in
‘consumption and property taxes’ reduced LR GDP growth rates
• Results hold for ‘High’ and ‘Middle’ income countries
• Little consideration of the shift away from trade taxes, yet this has
been the greatest structural shift seen over past 30 years
9/9/2014
Tax
Structures,
Economic
Growth
and
Development

11. Findings (1/3)
• Dep. var: Δ GDP growth; N=103; t ≥20
– CCEMG estimation (Pesaran, 2006)
• Revenue Neutral shift from Indirect -> Income taxes
Taxes on Income, Profits -0.0013***
& Capital Gains (0.0004)
– Negative impact on LR GDP growth of ~ 0.13% following 1%
increase in income tax share
• Revenue Neutral shift trade -> income; consumption
Taxes on Income, Profits -0.0027***
& Capital Gains (0.0009)
Indirect Taxes
Consumption Taxes -0.00003
(0.0006)
– No evidence trade -> consumption positive for growth
– Potentially negative growth effects of Trade -> Income taxes
(between 0.2 and 0.3% following a 1% shift)
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12. • Revenue – neutral shifts from trade or consumption
toward PIT are more harmful to growth than those
toward CIT (n=88)
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Findings (2/3)
PIT -0.0045** -0.004***
(0.002) (0.001)
CIT 0.001 -0.002**
(0.002) (0.001)
Consumption 0.001
(0.002)
Trade -0.0003
(0.002)
Omitted Category Trade Consumption

13. Findings (3/3)
• Revenue Neutral shifts away from trade toward PIT harmful
for GDP growth in Low and Middle income economies
– Again, no evidence to suggest that shifts toward consumption taxes
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have harmed GDP growth rates
Income Group: Low Middle High
PIT -0.005** -0.005*** -0.001
(0.002) (0.002) (0.003)
CIT 0.002 -0.002* 0.0005
(0.002) (0.001) (0.003)
Consumption Taxes 0.000 -0.001 0.001
(0.001) (0.001) (0.002)
No. of Countries 23 26 34
Omitted Category Trade taxes
Tax
Structures,
Economic
Growth
and
Development

14. Conclusions
• Revenue neutral shifts away from trade taxes -> consumption
taxes
– No negative effects on growth
– However RN shifts toward Income, specifically Personal Income,
taxes are potentially harmful to GDP growth rates.
• Key findings hold
– Following the exclusion of resource-rich countries
• Where non-tax revenue exceeds 10 per cent of GDP
– After controlling for the degree of openness to trade
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Structures,
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Growth
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Development

15. References
• Acosta- Ormaechea, S.L.E, & Yoo, J (2012). ‘Tax Composition and Growth: A Broad
Cross-Country Perspective’. No. 12-257. International Monetary Fund
• Arnold, J. M., Brys, B., Heady, C., Johansson, Å., Schwellnus, C., & Vartia, L. (2011).
‘Tax Policy for Economic Recovery and Growth’. The Economic Journal, 121(550),
F59-F80.
• Baunsgaard, T. and Keen, M. (2010) ‘Tax revenue and (or?) trade liberalization’,
Journal of Public Economics 94(9): 563-577
• IMF (2011), ‘Revenue Mobilization in Developing Countries’. International Monetary
Fund. Available at http://www.imf.org/external/np/pp/eng/2011/030811.pdf, Accessed
5/12/2013
• Pesaran, M. H. (2006). Estimation and inference in large heterogeneous panels with
a multifactor error structure. Econometrica, 74(4), 967-1012.
• Tanzi, V., & Zee, H. H. (2000). Tax policy for emerging markets: developing countries.
National tax journal, 299-322.
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Structures,
Economic
Growth
and
Development