The blend of taxes used to fund national, state, and local governmental bodies: A factor in the economies of the world?
Gober, Jerald Robert
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A country's tax structure affects both its economy and the economies of other countries. The lump-sum tax used by economists in much of their theoretical work is not representative of the real world. Each country's actual tax mix must be collected in order to examine the effect of distortions (taxes). Minimal research has focused on the effect of the blend of taxes, but results indicate that a relationship exists between taxes and the economy. More research has focused on the effect of either total governmental spending on gross national product or on specific types of taxes and one economic indicator. This study examines the relationships of both total tax revenues and tax components in relation to three economic indicators: change in GNP, saving, and investment. These three indicators proxy for the movement of the economy, and the reaction of taxpayers to the tax structure. The types of taxes used are personal and corporate income tax, social security taxes, personal property taxes, consumption taxes, an "other" category, and the deficit/surplus. Each of these taxes has been examined in prior studies and a relationship found to exist with an economic indicator. The effect of differing tax combinations has not been examined. Expansion of the field is accomplished in this study by including eighteen industrialized countries in the sample. Also, by using the seemingly unrelated regression (SUR) technique, the interaction among economic indicators and among countries can be incorporated. The technique adjusts the parameters for independent variables to account for correlation in error terms among the original regression functions. Within a country, this technique will partially include the effects of one dependent variable on another. Effects of movements in the economies between countries are incorporated when the functions are for various countries. The results indicate that the tax structure is highly significant in relation to the economic indicator for each country in this sample. Movement of parameter estimates is found when the SUR technique is applied. This movement indicates that the effects of a shift in the tax structure to place more, or less, dependence on a particular type of tax must be viewed from an overall perspective. Simply making a change with the intention of raising saving levels can have effects that extend to both other economic indicators within the country and to the economies of other countries. Specific results indicate that an increase in consumption taxes will have a positive effect on all phases of the economy, while increased use of a deficit has a negative effect. The impact on a specific country is reflected in the parameter estimates, and the change in the estimate values gives an indication of the interactions. The implications of this research for tax policy are very important. Basically, any change in the tax structure should be examined in view of the overall effects found in this study. The change may have detrimental effects that could be addressed either through other tax structure changes or spending changes.