Tax structure and macroeconomic performance

Abstract

This paper reassesses the relationship between tax structure and long-run income, using as indicators of tax structure both a new series of implicit tax rates based on Mendoza et al. (J Public Econ 66:99–126, 1997) and tax ratios, adopting a dynamic panel estimation strategy, and explicitly accounting for cross-sectional dependence in the panel. When implicit tax rates are used, the paper shows that the link between tax structure and long-run income per capita is not robust to the adoption of different assumptions on observable and unobservable heterogeneity across countries. When tax ratios are used, there is some evidence of a negative impact of labour taxation on long-run income, but this result is shown to capture non-fiscal effects coming from the evolution of the labour share. Turning to the short run, the research presented here finds strong evidence of a positive effect on per capita income of a tax shift from labour and capital taxation towards consumption taxation, which provides support for fiscal devaluations.

Appendices

Appendix 1: Computation of implicit tax rates

The following list provides the tax revenue data used in order to compute implicit tax rates. Using the OECD codes, we have:

• 1100 Taxes on income, profits, and capital gains of individuals or households;

• 1200 Taxes on income, profits, and capital gains of corporations;

• 2100 Social security contributions paid by employees;

• 2200 Social security contributions paid by employers;

• 2300 Social security contributions paid by the self-employed and persons outside of the labour force;

• 2400 Social security contributions unallocated;

• 3000 Taxes on payroll and workforce;

• 4000 Taxes on property;

• 5110 General taxes on goods and services;

• 5121 Excise taxes;

• 5122 Profits of fiscal monopolies;

• 5123 Customs and import duties;

• 5126 Taxes on specific services;

• 5128 Other taxes (among taxes on specific goods and service);

• 5200 Taxes on use of goods and performances;

• 6000 Other taxes;

• CP private final consumption expenditure;

• EE dependent employment;

• ES self-employment;

• CG government final consumption expenditure;

• OS net operating surplus of the overall economy;

• OSPUE unincorporated business net income (including imputed rentals on owner-occupied housing);

• PEI interest, dividends, and investment receipts;

• W wages and salaries of dependent employment;

• WSSS compensation of employees (including private employers’ contributions to social security and to pension funds).

The implicit tax rate on consumption $\mathrm{ITR}_\mathrm{c}$ is computed as:

$$\begin{aligned} \mathrm{ITR}_\mathrm{c} =\frac{\left( {5110+5121+5122+5123+5126+5128+5200} \right) }{\left( {\mathrm{CP}+\mathrm{CG}} \right) } \end{aligned}$$

In order to compute implicit tax rates on labour and on capital, we first calculate the implicit tax rate on total household income ($\mathrm{ITR}_{\mathrm{hh}} )$, the wage-bill for the self-employed ($\mathrm{WSE})$, the share of labour income in household income ($\alpha )$, and, correspondingly, the share of capital income in household income ($1-\alpha \equiv \beta )$:

$$\begin{aligned} \mathrm{ITR}_{\mathrm{hh}}= & {} \frac{1100}{\left( {\mathrm{OSPUE}+\mathrm{PEI}+W} \right) }\\ \mathrm{WSE}= & {} \frac{\mathrm{ES}\cdot \left( {W-2100} \right) }{\mathrm{EE}}\\ \alpha= & {} \frac{W}{\mathrm{OSPUE}+\mathrm{PEI}+W}\\ \end{aligned}$$

If social security contributions are not deductible, the implicit tax rates on capital and labour are computed as:

$$\begin{aligned} \mathrm{ITR}_\mathrm{l}= & {} \frac{\left( {\mathrm{ITR}_{\mathrm{hh}} \cdot \left( {W+\mathrm{WSE}} \right) +2100+2200+2300+\alpha \cdot 2400+3000} \right) }{\left( {\mathrm{WSSS}+\mathrm{WSE}+2300+3000} \right) }\\ \mathrm{ITR}_\mathrm{k}= & {} \frac{\left( {\mathrm{ITR}_{\mathrm{hh}} \cdot \left( {\mathrm{OSPUE}+\mathrm{PEI}-\mathrm{WSE}} \right) +\beta \cdot 2400+1200+4000} \right) }{\left( {\mathrm{OS}-\mathrm{WSE}-2300-3000} \right) }\\ \end{aligned}$$

If social security contributions are deductible, they are equal to:

$$\begin{aligned} \mathrm{ITR}_\mathrm{l}= & {} \frac{\left( {\mathrm{ITR}_{\mathrm{hh}} \cdot \left( {W-2100+\mathrm{WSE}-2300-\alpha \cdot 2400} \right) +2100+2200+2300+\alpha \cdot 2400+3000} \right) }{\left( {\mathrm{WSSS}+\mathrm{WSE}+2300+3000} \right) }\\ \mathrm{ITR}_\mathrm{k}= & {} \frac{\left( {\mathrm{ITR}_{\mathrm{hh}} \cdot \left( {\mathrm{OSPUE}+\mathrm{PEI}-\mathrm{WSE}-\beta \cdot 2400} \right) +\beta \cdot 2400+1200+4000} \right) }{\left( {\mathrm{OS}-\mathrm{WSE}-2300-3000} \right) }. \end{aligned}$$

For France and Italy, we make some adjustments to account for peculiar taxes that the OECD classifies in the residual category “other taxes” and that generate large revenues (i.e. Tax professionelle and IRAP). Because their tax base includes both labour and capital, we split the revenues of these taxes between labour and capital according to the share $\alpha$ we defined before and add them to the numerator of the corresponding implicit tax rate.

Appendix 2: Descriptive statistics

See Table 6 and Figs. 1 and 2.

Table 6 Descriptive Statistics

Fig. 1

Evolution of implicit tax rates

Fig. 2

Evolution of tax ratios