Tax Structure and Economic Growth: An OECD Analysis

Luke Raynor

Student thesis: Master thesis


The purpose of this thesis is to provide an analytical analysis on how different tax structures of OECD countries affect their rates of economic growth from the period 1980-2004. This thesis attempts to gather results so that governments may better structure their tax system in order to promote more pro-growth friendly structures of taxation. The measures of taxation that I will be testing are three of the most prominent methods of taxation in most OECD countries; the Value-Added Tax, the Labor Income Tax, and the Corporate Income Tax. This is a very popular topic in today’s media, especially in Europe where there has been a fallout from the recent financial crisis which is leading to measures of austerity throughout the region. Even in the U.S. there has been much debate on how to move forward from the financial crisis in order to generate more economic growth, and fiscal policy has been at the forefront of some of these debates. There has been recent evidence of governments lowering or raising taxes in order to try and promote economic growth, such as Sweden reducing their corporate tax rate to 22% from 25%. In order to provide a thorough discussion and analysis of tax structure and economic growth, the following is discussed:  A comprehensive literature review that focuses on early literature dealing with the theory of economic growth and also literature that focuses on the more recent studies of taxation and economic growth. The determinants of economic growth and estimates are discussed and these determinants are also incorporated into the empirical analysis in the paper.  The different econometric methods and estimation techniques that are used in this paper which include random effects, fixed effects, and pooled panel data regressions will be discussed and show how they were implemented. The potential shortcomings of these different methods will be discussed and I will also show, using other statistical techniques that help verify these models, which is the appropriate method to use for my analysis on OECD countries.  Finally, I will test how statutory tax rates on capital and labor differ from effective tax rates on capital and labor. There is an extensive amount of literature available on effective tax rates and this will be discussed thoroughly in my analysis along with how to calculate these so called effective tax rates. These results will be presented in order to help build upon other research in order for governments to make the most efficient decisions regarding fiscal tax structure in order to obtain a higher level of economic growth rates.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2013
Number of pages70