DO TAXES AND GROWTH AFFECT GOVERNMENT EXPENDITURE? EMPIRICAL EVIDENCE FROM THE OECD

The aim of this paper is to find out whether government spending is affected by the size of taxation and economic growth. Results for a part of panel VAR model are presented. In the model, data for OECD countries for the years 2005-2010 are used. It has been shown that taxation has a statistically significant positive impact on government spending, if we approximate taxation through the tax quota. However, if alternative WTI index is used to measure the tax burden, increasing effective taxation is, conversely, reflected in declining government spending, which can be attributed to legal tax evasion or the crowding out effect associated with declining tax revenues within the meaning of the Laffer curve. Moreover, in countries with a large share of distortionary taxes, the positive effects of increasing the tax quota become smaller, and conversely, the negative effects of an increasing tax burden are partially eliminated, since these countries, characterised by high direct tax yields, probably suffer from tax evasion less frequently.