Essays on tax policy for developing economies

Abstract

This thesis presents a comprehensive examination of tax policies in developing countries, with the objective of empirically analyzing key macroeconomic factors associated with taxation and its relationship to three fundamental aspects of economic development: economic growth, public sector efficiency, and income inequality. These dimensions are intrinsically linked to the fundamental principles, functions, and objectives of taxation. The first and second chapters provide a foundational and historical overview of taxation over time to establish a clear understanding of the issue at hand. We explore the major differences in tax systems across countries and outline key debates surrounding the topic. This background facilitates the introduction of the research framework and justifies the selection of countries categorized as developing or emerging economies. A descriptive and comparative analysis for the largest developing economies in each region is also performed. This analysis examines various aspects of tax revenues, aiming to offer recommendations for improving tax collection performance. In the third chapter, we empirically investigate both linear and nonlinear relationships between the overall tax burden and various tax items with real per capita GDP growth rates for 41 developing countries from 1990 to 2019. Using panel data techniques, we assess the impact of taxation as a percentage of GDP on economic growth, considering both short- and long-term perspectives. We also identify threshold values for different types of taxes. Our findings contribute to the existing body of evidence on the linear effects while also supporting the existence of nonlinearities and motivating policies designed to increase certain tax revenues without adversely affecting economic growth. The fourth chapter examines the effects of the tax structure composition for public sector efficiency in a sample of 41 developing countries for the period between 1997-2019. We start by calculating Public Sector Performance (PSP) composite indicators and use them as outputs to compute Data Envelopment Analysis (DEA) efficiency scores under different orientation setups. After using a general-to-specific approach to identify the most determinant variables, we analyze the relevance of different taxes for public efficiency in a panel regression specification. We find that tax effects are significantly different depending on the orientation of DEA scores. Notably, we observe that taxation presents stronger detrimental effects to input-oriented scores in comparison to output-oriented, and that Opportunity PSP indicators seem more affected by property taxes and iv working contributions, while Musgravian PSP indicators are more closely related to individual and corporate income taxes. Our results allow us to provide policy recommendations regarding tax structures to improve efficiency on the provision of public goods and services. Finally, the fifth chapter explores the redistributive effects of taxation through the tax and transfer system’s role in affecting income inequality. We investigate the effects of various taxes on the difference between pre- and post-tax Gini coefficients, commonly referred to as the Reynolds-Smolensky Index (RSI), using a panel of 107 advanced and developing economies over the period from 1990 to 2020. Contrary to existing literature, our results show weak evidence that direct taxation exerts significant redistributive effects, while indirect taxes have negative impacts only in developed economies. In contrast, robust redistributive effects are observed for social security contributions in both groups of countries, whereas property taxation appears to contribute to redistribution particularly in the long term. A series of robustness checks further support these findings and emphasize the role of investment and employment levels in shaping income redistribution.