Interaction of taxation, government expenditure and economic growth: Panel var model for OECD countries

Abstract

The article is focused on the mutual relationship among effective tax burden, size of government spending and economic growth. Its aim is to verify the effect of taxation and government spending on economic growth, but also to verify the effect of taxation and economic growth on the size of government spending. The analysis is methodologically based on a panel VAR model where taxation is approximated by standard Tax Quota as well as an alternative World Tax Index (WTI), which was compiled by the authors. The data cover the period of 2005 - 2010 for the OECD countries. The results of empirical analyzes show that economic growth is positively infl uenced by government spending, while the effect of taxation is negative for all types of taxes. Government expenditures are negatively influenced by both economic growth and the size of the taxation. We come also to the conclusion that WTI is preferable approximator of the tax burden than the Tax Quota, and may be used in further empirical analyzes. © Copyright (C) 2000 - 2014 Vysoká škola ekonomická.