On and off the frontier: the impact of taxes on growth

Abstract

In the context of explaining inter-country growth rates, empirical work to date finds a negligible role for the parameters of a country's taxation system. In our opinion, part of the explanation for this result is that the wrong dependent variable is used in the analyses. We decompose the growth rate for OECD countries into movements along and movements towards the frontier. The inter-temporal change in our index of movement towards the frontier is used as the dependent variable in an analysis of the role in growth of non-input country characteristics, mespecially the taxation regime. We find a very strong negative relationship between movement towards the frontier and changes in the rate of labour taxation.