Taxation and economic growth: an evolutionary approach

Taxes play an extremely important role in assuring of the activities of the state, financing the production of public goods and income redistribution. At the same time, neither theoretical work, nor the facts can give the definite answer concerning the character and significance of the impact of taxes on the economic growth. The reason for such discrepancies in the obtained results can be ignorance of the existence of different tax populations and subpopulations. They are defined as groups of countries, which formed similar formal and informal tax institutions during the long socio-economic evolution. In the paper the results of an empirical test of this hypothesis are given. Methodology of the study was based on the construction of the procedure of stepwise selection and analysis of statistically adequate econometric models as for undivided sample of 117 countries, so as for different tax populations and subpopulations. In constructed models, economic growth was viewed as the dependent variable, and the tax ratio and the size of the shadow economy were considered as independent variables. These results confirm the investigated hypothesis. Wherein, for the mixed tax populations’ countries, including subpopulations of Muslim countries, as well as a subpopulation of post-colonial countries of the European tax population, an increase in the effective tax rate contributes to real economic growth. In the tax subpopulation of Western European countries, the significant interrelation between the level of taxation and variations in real economic growth is absent. For Eastern European tax subpopulation including Ukraine, the increase in the real tax ratio leads to a fall in the real economic growth. This happens because of a clear priority of social spending and inadequate government funding programs for economic growth, and low efficiency of state institutions.