Tax policy, social inequality and growth

Abstract

The effects of social inequality usually include income inequality. Income inequality is augmented or reduced by tax policies. This paper finds empirical evidence that shifting the tax burden from the socially disadvantaged to the socially advantaged would cause gross domestic product (GDP) to rise. Specifically, this paper uses Reiterative Truncated Projected Least Squares – a regression technique that produces reduced-form estimates while solving the omitted variables’ problem – to estimate dGDP/d(Property Tax), dGDP/d(Corporate Tax), dGDP/d(Individual Tax) and dGDP/d(Sales Tax) for 23 countries using annual data from 1970 to 2012. GDP is measured in millions of US dollars and each tax is tax revenues as a per cent of GDP. For 13 of the 23 countries examined after 2008, we find that property and corporate taxes are the best taxes (increases GDP the most) to increase and individual income taxes and sales taxes are the worse to raise.

Keywords:

• social inequality
• income distribution
• growth
• surplus of savings
• estimates

Acknowledgements

We appreciate the research help given by Yumiko Deevey and of Kunihiro Fujio.

Notes on contributors

Jonathan E. Leightner is professor of Economics at Augusta University. He has been a visiting professor for Johns Hopkins University in Nanjing, China; Chulalongkorn University in Bangkok, Thailand; and Seikei University in Tokyo, Japan. His research focuses on Asia, the effectiveness of government policies, the relationship between economics and religion/ethics, and the omitted variables problem of regression analysis.

Zhang Haiqi is working in Shanghai Taxation Bureau. She got her master’ degree from the Johns Hopkins University-Nanjing University Center for Chinese and American Studies. Her research focuses on the effectiveness of tax policies in China and Europe, FATCA (Foreign Account Tax Compliance Act) and Global Standard for the Automatic Exchange of Financial Information.