Journal
SUSTAINABILITY
Volume 15, Issue 9, Pages -Publisher
MDPI
DOI: 10.3390/su15097146
Keywords
personal income tax; corporate income tax; economic growth; EU countries; panel data regression
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Through fiscal policy, the government can influence businesses and individuals to regulate their behavior. This study examines the impact of direct taxation on economic growth in two main clusters of countries with different levels of fiscal efficiency. The results show that corporate income taxes have a significant negative effect on economic growth for countries with both high and limited fiscal efficiency. Additionally, personal income tax is associated with lower economic growth in countries with limited fiscal efficiency. Therefore, lowering direct taxation can have multiple positive effects on the economy.
Through fiscal policy, the government can influence businesses and individuals in order to regulate their behaviour. The research used panel data from all 27 EU countries covering the period 2008-2020 to investigate the impact of direct taxation on economic growth at the level of two main clusters of countries concerning fiscal efficiency. Therefore, the analysis employed cluster methods to classify the main EU countries in both groups of countries with a high level of fiscal efficiency and those with a rather limited level of fiscal efficiency. The study employs fixed effect models and dynamic GMM methods to investigate the effect of direct taxation components (personal and corporate income taxes) on economic growth. The analysis also considers the informal economy's role in relation to the official economy. The empirical results revealed that corporate income taxes significantly negatively impact economic growth for both clusters of high- and limited fiscal efficiency countries. Additionally, personal income tax was associated with lower economic growth for countries in the limited fiscal efficiency group. Thus, from the perspective of policymakers, lowering direct taxation can increase disposable income, stimulate consumption and economic growth, encourage investment leading to job creation, increase competitiveness, and reduce tax evasion and avoidance, thereby leading to a more efficient tax system.
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