Youthful dependents and economic growth: the effect of tax composition

Several theories document the positive effect of younger population on economic growth due to the larger size of the labour force. However, the evidence shows no such positive relationship. This paper argues that an increase in the youthful fraction of the population increases the demand for income taxes rather than expenditure taxes, as expenditure taxes are shared by three generations whilst income taxes are mainly afforded by the working-age population who increasingly dislikes being double-taxed at consumption when they raise their dependent children. This then reduces growth since the extent of distortionary relative to non-distortionary taxes rises and investment is constrained. International panel evidence supports this hypothesis.