with E. Felli, M. Gerli, X. Long and G. Tria.
(This version, July 2010[pdf]).
Abstract
One of the oldest issues in the economic analysis of taxation, both theoretical and empirical, is that of the appropriate mix of direct and indirect taxes and whether it could affect economic growth. The present study develops an empirical investigation to assess the macroeconomic effects of switching the tax burden from direct to indirect taxes in Italy. To explore the role of tax composition on economic performance, we employ a structural macroeconomic model. The results of the simulations based on Italian national accounts provide an argument for the reduction of the direct to indirect tax ratio. Indeed, differently from previous studies that find only a slight link between taxes and growth, our investigation reveal that a switch from direct to indirect taxes is likely to generate efficiency gains in the short run, which lead to higher growth rates of per capita GDP, all other things being equal. The channel through which a change in tax composition affects economic growth can be described as follows. Ceteris paribus (i.e. keeping the government spending unchanged), a reduction in direct taxation (e.g. personal income tax) completely financed through an increase in indirect taxes (e.g value added tax), induces a net increase in labour supply which in turn implies higher equilibrium growth rates.
Presented @ AEEFA2010