The Effect of Tax and Public Debt on Economic Growth: Worldwide Cross-Sectional Evidence

The objective of this study is to examine the effect of taxes and public debt on economic growth. By using a battery of tests and procedures (including quantile regression and extreme bounds analysis) on a set of cross-sectional data covering 177 countries, we found strong evidence to support the hypothesis that both taxes and public debt retard growth. However, it is demonstrated that reducing the tax rate (particularly the corporate tax rate) has no effect on growth and that the tax burden is the variable that is more relevant to growth. This finding is explained in terms of the proposition that wage and salary earners, who bear the brunt of the tax burden, have a high marginal propensity to consume. This means that reducing the tax rate for the rich and corporations is less effective than reducing the overall tax burden by cutting taxes on the wages and salaries of the middle class. JEL Classification: O43, O47