Analyzing Tax Policy and Economic Growth by Using Semi-Parametric Approach

Mariuam SHAFI, Zahid ASGHAR, Saqlain RAZA

Abstract


Abstract. Due to complexities in measuring the impact of tax policy on economic growth, there is need to explore functional relationship between response and predictors. Semi-parametric approaches are often very handy in modeling relationships which are non-linear but cant be completely described either through parametric or non-parametric approaches. To determine the effects of tax policy on economic growthfunctional, cubic smoothing spline method is used along with cross validation test to control the smoothing parameter. To replace the functional form of smoothing coefficients into linear mixed model, maximum likelihood estimation is used. Results indicate that proposed methodology is robust in determining functional form and in achieving increasing average marginal tax rates has negative impact on economic growth results. Empirical results indicate that high AMTRs and population growth rate reduce the performance of economic growth in the developing countries. A reduction on dependence of AMTRs in South Asian countries is needed.

Keywords: Spline smoothing method, Semi-parametric, Tax structure, Economic growth, Average marginal tax rate.

JEL. H26, O40, C14, H71.


Keywords


Spline smoothing method; Semi-parametric; Tax structure; Economic growth; Average marginal tax rate.

Full Text:


References


Adam, C.S., & Bevan, D.L. (2005). Fiscal deficits and growth in developing countries. Journal of Public Economics, 89(4), 571-597. doi. 10.1016/j.jpubeco.2004.02.006

Arin, K.P., Berlemann, M., Koray, F., & Kuhlenkasper, T. (2011). The taxation-growth-nexus revisited, HWWI Research Paper, No.104. [Retrieved from].

Bania, N., Gray, J.A., & Stone, J.A. (2007). Growth, taxes, and government expenditures: growth hills for US states. National Tax Journal, 62(2), 193-204.

Barro, J., & Sahasakul., A. (1986) Average marginal tax rates for social security and the individual income tax. Journal of Business, 59(4),555-566. doi. 10.1086/296354

Barro, R.J. (1991) Economic growth in a cross section of countrie. The Quarterly Journal of Economics,106(2), 407-443. doi. 10.2307/2937943

Barro, R.J. (2000). Inequality and growth in a panel of countries. Journal of Economic Growth, 5(1), 5-32. doi. 10.1023/A:1009850119329

Barro, R.J. (2008). Inequality and Growth Revisite, ABD Working Paper, No.11. [Retrieved from].

Bengoa, M., & Sanchez-Robles, B. (2005). Does equality reduce growth? Some empirical evidence. Applied Economics Letters, 12(8), 479-483. doi. 10.1080/13504850500120177

Carroll, R., & Prante, G. (2012). Long-run macroeconomic impact of increasing tax rates on high-income taxpay. Tax Foundation Press. [Retrieved from].

Coen, R.M. (1969). Tax policy and investment behavior. American Economic Review. 59(3), 370-379.

Easterly, W., & Rebelo, S. (1993). Fiscal policy and economic growth. Journal of Monetary Economics, 32(3), 417-458. doi. 10.1016/0304-3932(93)90025-B

Fahrmeir, L., Kneib, T., Lang, S., & Marx, B. (2013). Regression Models; Methods; Applications, Springer.

Gemmell, N. (1996). Evaluating the impacts of human capital stocks and accumulation on economic growth. Oxford Bulletin of Economics and Statistics, 58(1), 9-28. doi. 10.1111/j.1468-0084.1996.mp58001002.x

Grace, W. (1978). Improper priors, spline smoothing and the problem of guarding against model errors in regression. Royal Statistical Society. Series B (Methodological), 40(3), 364-372.

Gray, J.A., & Stone, J.A. (2012). Debt and nonlinear and fiscal policy: Evidence from the states. MPRA Working Paper, No.39731. [Retrieved from].

Griffith, R., Redding, S., & Simpson, H. (2009). Technological catch-up and geographic proximity. Journal of Regional Science, 49(4), 689-720. doi. 10.1111/j.1467-9787.2009.00630.x

Hausman, J.A. (1978). Specification tests in econometrics. Econometrica, 46(6), 1251-1271. doi. 10.2307/1913827

Heckman, J.J. (2000). Policies to foster human capital. Research in Economics, 54(1), 3-56. doi. 10.1006/reec.1999.0225

Heller, P. (1975) A model of public fiscal behavior in developing countries aid, investment, and taxation. The American Economic Review, 65(3), 429−445.

Seater, J.J. (1985) On the construction of marginal federal personal and social security Tax rates in The U.S., Journal of Monetary Economics,15(1),121-135. doi. 10.1016/0304-3932(85)90057-1

Jaimovich, N., & Rebelo, S. (2013) Non-linear effects of taxation on growth. NBER Working Paper, No.18473. doi. 10.3386/w18473

Jones, C.I. (1994). Economic growth and the relative price of capital. Journal of Monetary Economics, 34(3), 359-382. doi. 10.1016/0304-3932(94)90024-8

Jones, L.E., Manuelli, R.E., & Rossi, P.E. (1993) Optimal taxation in models of endogenous growth. Journal of Political Economy, 101(3), 485-517. doi. 10.1086/261884

Kanaoka, M. (2012). Have the lessons learned from the Asian financial crisis been applied Effectively in Asian economies?, International Journal of Economics and Finance, 4(2), 103-115. doi. 10.5539/ijef.v4n2p103

Karagianni, S., Pempetzoglou, M., & Saraidaris, A. (2012). Tax burden distribution and GDP growth: Non-linear causality considerations in the USA. International Review of Economics & Finance, 21(1), 186-194. doi. 10.1016/j.iref.2011.06.002

Koester, R.B., & Kormendi, R.C. (1989). Taxation, aggregate activity and economic growth: Cross country evidence on some supply-side hypotheses. Economic Inquiry, 27(3), 367-386. doi. 10.1111/j.1465-7295.1989.tb02011.x

Kuhlenkasper, T., & Kauermann, G. (2010). Female wage profiles: An additive mixed model approach to employment breaks due to childcare, Hamburg Institute of International Economics, HWWI Research. [Retrieved from].

King, R.G., & Levine, R. (1993). Finance, entrepreneurship and growth. Journal of Monetary Economics, 32(3), 513-542. doi. 10.1016/0304-3932(93)90028-E

Lee, Y., & Gordon, R.H. (2005). Tax structure and economic growth. Journal of Public Economics, 89(5), 1027-1043. doi. 10.1016/j.jpubeco.2004.07.002

Levin, R., & Enelt, D. (1992) A sensitivity analysis of cross-country growth regressions. American Economic Review, 82(4), 952-963.

Li, W., & Sarte, P.D. (2004). Progressive taxation and long-run growth. American Economic Review, 94(5), 1705-1716. doi. 10.1257/0002828043052196

Mendoza, E.G., Razin, A., & Tesar, L.L. (1994). Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption. Journal of Monetary Economics, 34(3), 297-323. doi. 10.1016/0304-3932(94)90021-3

Mahdavi, S. (2008). The level and composition of tax revenue in developing countries: Evidence from unbalanced panel data. International Review of Economics & Finance, 17(4), 607-617. doi. 10.1016/j.iref.2008.01.001

McCulloch, C.E., & Searle, S.R., & Neuhaus, J.M. (2001). Generalized, Linear and Mixed Models, Wiley, Interscience.

Padda, I., & Akram, N. (2009) The impact of tax policies on economic growth evidence from Asian economies. The Pakistan Development Review, 28(4), 961-971.

Rivera-Batiz, L.A., & Romer, P.M. (1991). International trade with endogenous technological change. European Economic Review, 35(4), 971-1001. doi. 10.1016/0014-2921(91)90049-O

Ruppert, D., Wand, M.P., & Carroll, R.J. (2003). Semiparametric Regression, Cambridge University Press.

Schumpeter, J. (1942). Creative Destruction. Capitalism, Socialism and Democracy, Herper perennial Modern Classics.

Solow, R.M. (1956). A contribution to the theory of economic growth. The Quarterly Journal of Economics, 70(1), 65-94. doi. 10.2307/1884513

Trostel, P.A. (1993). The effect of taxation on human capital. Journal of Political Economy, 101(2), 327-350. doi. 10.1086/261878

Wahba, G. (1978). Improper priors, spline smoothing and the problem of guarding against model errors in regression. Journal of the Royal Statistical Society. Series B (Methodological), 40(3), 364-372.

Zagler, M., & Durnecker, G. (2003). Fiscal policy and economic growth. Journal of Economic Surveys, 17(3), 397-418. doi. 10.1111/1467-6419.00199




DOI: http://dx.doi.org/10.1453/jest.v3i4.1075

Refbacks

  • There are currently no refbacks.


Bookmark and Share


Journal of Economic and Social Thought - J. Econ. Soc. Thoug. - JEST - www.kspjournals.org

ISSN: 2149-0422

Editor: jest@ksplibrary.org   Secretarial: secretarial@ksplibrary.org   Istanbul - Turkey.

Copyright © KSP Library