We investigate the relation between changes in tax composition and long-run economic growth using a new dataset covering a broad cross-section of countries with different income levels. We specifically consider 69 countries with at least 20 years of observations on total tax revenue during the period 1970-2009-21 highincome, 23 middle-income and 25 low-income countries. To our knowledge this is the most comprehensive and up-to-date dataset on tax composition and growth. We find that increasing income taxes while reducing consumption and property taxes is associated with slower growth over the long run. We also find that: (1) among income taxes, social security contributions and personal income taxes have a stronger negative association with growth than corporate income taxes; (2) a shift from income taxes to property taxes has a strong positive association with growth; and (3) a reduction in income taxes while increasing value added and sales taxes is also associated with faster growth.
This paper studies the e↵ects of compositional changes in public expenditure on long-run growth. To do this, we assemble a new dataset based on the IMF's GFS yearbook for the period 1970-2010 and 56 countries (14 low, 16 medium, and 26 high income countries). Using dynamic panel GMM, we find that in general compositional changes in public spending are not statistically associated with growth. However, a robust result emerges when the change involves an increase in education spending. We find that a rise in education spending has a positive and statistically robust e↵ect on growth when the compensating component remains unspecified or when this is associated with a reduction in social protection spending. We also find that public capital spending, relative to current spending, appears to be associated with higher growth, yet in this case the result is not robust.
We estimate the effects on growth of nine fiscal reform episodes in seven high-income countries using the Synthetic Control Method. These episodes are selected using an indicator-based approach applied to the evaluation of growth-friendly fiscal reforms during 1975-2010. We find that in reform countries the annual growth rate of real GDP was on average about 1 percentage point above their synthetic units 10 years after each respective reform. Moreover, countries which were initially less developed seemed to experience a larger growth impact after their reforms. Results are broadly robust to controlling for structural reforms on business regulation, financial market, labor market, and legal and product markets, which may also affect growth. Our findings also suggest that inequality is not affected by the growth-friendly fiscal reforms analyzed in this paper.
The public sector, in carrying out its operations, often incurs foreign currency denominated liabilities and, as such, is exposed to exchange rate fluctuations that could affect the value of public debt to GDP ratios over time. This paper shows that converting foreign currency denominated flows and stocks into local currency using the average and the end-of-period exchange rates, respectively, as envisaged in public finance manuals, gives rise to an identifiable stock-flow adjustment term—due to intra-year exchange rate fluctuations—that affects public debt accumulation. Importantly, the inclusion of this often-ignored stock-flow adjustment term is critical to accurately project public debt levels and any related indicator that could in turn inform about the risk of debt distress. Using a novel dataset covering 82 countries during 2008–19, the paper shows that this stock flow adjustment term is sizable in countries experiencing large exchange rate depreciations, namely above the 99th percentile of the full sample, reaching 1.2 percent of GDP. Interestingly, the measurement of policy-related concepts such as interest rate-growth differentials and debt stabilizing primary balances are also affected by intra-year exchange rate fluctuations, and in non-negligible ways.
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