This paper investigates the effects of changes in taxes on economic growth. Using
annual data from 1965 to 2003 for a panel of nineteen European economies, the
results show that the effect of an increase in taxes on real GDP per capita is negative
and persistent: an increase in the total tax rate (measured as the total tax
ratio to GDP) by 1% of GDP has a long-run effect on real GDP per capita of –0.5%
to –1%. The findings also imply that increases in social security contributions or
taxes on goods and services have larger negative effects on per capita output than
increases in income tax.
