Changes in taxation and their impact on economic growth in the European Union

Abstract

The aim of the paper is to analyze changes in taxation and their impact on economic growth in the European Union. The analysis is performed on adjusted annual panel data of 24 European Union countries in a period 1995-2008. Panel regression with fixed effects is used as a basic method of research. The panel regression is based on analysis the effect of total tax quota changes on GDP growth in model 1, of changes in its components (social contribution, direct and indirect tax quotas) in model 2 and of personal and corporate income tax quota changes in model 3. Results of empirical tests verify statistically significant negative effect of tax burden on GDP growth. Total tax quota increased by 1% decreases the GDP growth rate by 0.29% in the same year. Estimations confirm a statistically significant negative effect of direct taxes on GDP growth as well. A cut in the direct tax quota by 1% raises the GDP growth rate by 0.43%. The model also presents a high negative impact of an increase in the corporate income tax quota on GDP growth (a value of the regression coefficient is minus 1.28%). The effect of social contribution quota on GDP growth is not statistically significant in any estimation.