Effects of Tax Rates on Economic Growth in the European Union

Seminar paper from the year 2002 in the subject Economics - International Economic Relations, grade: 1,3 (A), Marquette University (Public Choice), course: Economies of the Public Sector, 13 entries in the bibliography, language: English, abstract: I Introduction The influence of distortionary taxes on economics and consequently tax reforms as a means to stimulate economic growth have been a topic of public economics highly discussed for a long period of time. Not only is it discussed in the United States, but also in almost all European nations. Especially in Germany as - in terms of economics - the most important nation in the heartland of Europe, possibilities of tax reforms in order to strengthen economic growth were 'the' major issue in the 1998 election campaign. Moreover, possible tax reforms were discussed in Denmark, Austria, France, Italy and other EU members. (However, only few things have really changed the past years). These taxation issues are often discussed in the context of the ideas of a 'common economic and financial government' amongst the members of the Euro group and closer tax rate harmonization in Europe. Though there is no serious doubt about the importance of taxes on economic growth in academic fundamental research, only little empirical research has been done. In fact, even Robert Barro argues that tax distortions are 'likely to be important for growth ... but further measurement and investigation is important for obtaining reliable results' (Barro, 1997:120). This paper takes Barro's statement into task, additionally influenced by the current discussion in Europe, by empirically testing the role of tax distortions on economic growth. It will examine the role of marginal and average tax rates in the EU member nations plus some nations that have close economic links to the EU, such as possible future members of the EU and EFTA members. There is some background information on these nations provided in part II, part III and IV focus on existing research. Parts V to VII point out the central question of this paper, including model, data and results. Part VIII comes to the conclusion. [...]

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