The long-run impact of personal income taxation on economic development: Evidence from Croatia

Abstract

Since the endogenous growth model appeared in the economic theory, taxation has been considered as one of the key determinants of the economic growth. In the public finance theory, taxation is considered to have a negative impact on economic growth, which is explained by implications of tax revenues distortions on the economic activity. This assumption has been investigated by many empirical studies. The aim of this paper is to analyse the impact of personal income taxation on economic conditions in Croatia in the long-run. After providing a brief insight into the economic and the public finance theory regarding taxation and economic growth, previous relevant research is presented. The empirical analysis of the impact of personal income taxation on economic conditions in Croatia is conducted using the Johansen cointegration approach. The existence of cointegration is examined and the error correction model is estimated using monthly data from January 2000 to March 2016. The results of the research show that personal income taxation in Croatia has a significant negative impact on the economic growth in the long-run, which is in line with the economic theory and relevant empirical research.