Tax Structure and Economic Growth: New Empirical Evidence from the European Union

The impact of taxation on economic growth is a controversial issue in the academic literature, with no consensus yet reached on the optimal tax burden and growth- supportive tax structure. This study aims to contribute new empirical evidence regarding the impact of tax burden and tax structure on growth within the European Union (EU-27) member states. The methodology includes descriptive, comparative, correlation and regression analyses using annual panel data spanning from 2000 to 2022. Regression estimations employ the Panel Least Squares method. In addition, causality hypotheses are tested using the pairwise Granger causality test. Our findings reveal a negative impact of general government expenditure on the growth rate, whereas total tax revenue has a positive effect. These results suggest inefficiencies in public spending. The structures of tax systems across EU-27 countries appear conducive to economic growth, evidenced by growth-supportive effects observed in both direct and indirect tax revenues. However, social security contributions are found to adversely affect the growth rate. Moreover, value added tax, property taxes, and both corporate and personal income taxes are consistent with economic growth, whereas excise duties show no significant impact. The study has several practical and research implications. The findings indicate that government expenditure does not effectively contribute to positive fiscal impacts on the economy. Therefore, policymakers could enhance economic growth by gradually reducing public spending and striving for balanced budgets to maintain macroeconomic stability. Tax structures based on consumption and income taxes appear to be compatible with economic growth, while higher shares of social contributions are identified as detrimental to growth.