Tax Federalism and Economic Growth: Revealing the Antagonistic Effect of Different Tax Federalism Indicators

Abstract

Tax federalism refers to the distribution of tax powers across different government levels and is measured using the tax decentralization and tax autonomy indices. This paper focuses on analyzing the relationship between tax federalism and economic growth. Based on a sample of OECD countries from 2000 to 2022, using standard estimation techniques, it identifies a negative relationship between the tax decentralization indicator and economic growth. However, due to methodological distortions in the quantification of tax decentralization, this relationship does not appear to be reliable. Therefore, it is more appropriate to view tax federalism from the perspective of tax autonomy, which, within the model, demonstrates a positive and statistically significant relationship with economic growth. This suggests that countries aiming to foster economic growth should consider a broader delegation of tax competencies to lower government levels. When considering the economic development standpoint, the tax autonomy indicator loses its significance in less-developed countries.

Keywords

Tax federalism economic growth tax decentralization tax autonomy OECD countries

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