Estimating Optimal Level of Taxation for Growth Maximization in Asia

Abstract

What level of tax revenue in GDP is suitable for a country to maximize the growth rate in Asia? To address this question, this paper estimates the optimal size of taxes which maximizes growth rate, using Scully and quadratic models, from the unbalanced panel data of 32 Asian countries. Both methods approve that tax revenue around 18 percent of GDP maximizes the growth rate. However, quadratic model provides more consistent result than the Scully model. Most importantly, the findings clearly show the existence of inverse U-shaped relationship between taxes and growth.