THE EFFECT OF TAX STRUCTURES ON ECONOMIC GROWTH AND INCOME INEQUALITY
Ramot Immanuel Apricano Lumbantobing, Professor ICHIHASHI, Masaru
2012 | Tesis | S2 Magister Ek.Pembangunan-
A new OECD report (2011) concludes that income inequality is soaring in most developed countries, which are literally upending the Kuznets curve. Kuznets (1955) predicts that as nations become wealthier, income inequality initially rises, peaks, and then declines. He postulates that income would become more unequal as workers transitioned from low-paying agricultural work to higher-pay industrial work, but that the lower classes would catch up once the industrial revolution was completed. During the past decades, this issue has expanded again. Income inequality is on the rise in developed countries, and there is no obvious answer why. The transition from low-skill industrial work to high-skill knowledge work is one of the reasons why the income gap is widening. As educational costs rise, less-educated families are unable to gain the education required to complete the transition. Scholars still dispute the best policy for distributing the income between the rich and the poor. The crucial question is whether government fiscal policy can result in economic growth, which benefits the lower-income groups proportionately. Taxes both on corporate and personal income is believed to be one specific policy area of fiscal policy that could redistribute the income among various income groups. Some argue that lowering tax rates could boost economic growth, which is favorable for all citizens, including the poor. For example, in the vi United States during the 1980s, Ronald Reagan cut the top income tax rate from 70% to 28% to enhance economic growth. On the other hand, Diamond and Saez (2011) argue that increasing tax rate and promoting progressive tax could enhance more equal distribution of income. For instance, Bill Clinton introduced the Omnibus Reconciliation Act in 1993, which was designed to raise taxes and to create more tax brackets for corporations. Countries use taxes to increase revenue to fund government activities and to encourage or discourage specific types of behavior. Furthermore, taxes can be applied to change the distribution of income or wealth. From some perspectives, the main reason for a tax policy is to allocate the cost of government in some fair way. Attaining good tax systems which allow the government to collect revenue from the private sector is important in financing government programs to alleviate poverty, especially in developing countries. This thesis investigates how tax systems, in fact, affect a country’s economic growth rate and distribution of income through the use of a panel dataset of cross-national data consisting of 65 countries during the period 1970-2006. By using the top statutory corporate and personal income tax rate, this thesis estimates the impact of tax structures on economic growth and income inequality. For the estimation analysis, it applies OLS, random effect and fixed effect estimations. Random effect estimation is applied because it estimates the model with non-time varying explanatory variables (i.e., dummies), such as region and Gini Coefficient, to expand the analysis. Moreover, this paper also uses instrumental variable estimation following the assumption that of the endogeneity of tax measures. Theoretically, tax rates in one country are affected by other tax rates in neighboring countries. Therefore, this study employs an instrumental variable, which is the weighted average of income tax rate (corporate and personal), weighted by the reciprocal of the distance between the two countries. This thesis finds that statutory corporate income tax rates are strongly negatively associated with economic growth and income inequality by controlling for various other determinants of growth and income distribution. However, vii personal income tax rates have no impact on economic growth and on income inequality. Asian countries experience higher economic growth than other countries. Furthermore, income inequality in Asia and Europe is relatively lower than in other regions implying indicating that progressive corporate income tax rates could enhance income equality. In addition, by classifying the countries into tax groups based on their average top statutory corporate income tax rates, this study also found that high top CIT rates, above 40%, correspond with lower income inequality. On the other hand, lower CIT rates, those below 40%, are not significant in reducing income inequality.
Kata Kunci : Kuznets hypothesis; Tax structure; Economic growth; Income inequality
