A Tax Shift and its Effect on Economic Development in the European Union

The aim of the paper is to examine effects of a tax shift on economic growth and provide a direct empirical evidence in the European Union (EU). It is used the Eurostat's definition to categorize tax burden by economic functions and implicit tax rates of consumption, labour and capital are investigated. Empirical analysis is based on annual panel data of 22 EU Member States in years 1995-2012 (time span is divided into a pre-crisis and a post-crisis period). Explanatory variables are examined using Generalized Method of Moments. For a model specification, Dynamic Panel Data Model Wizard is applied. Results confirm positive and statistically significant impact of consumption taxes and weaker but negative effect of labour taxation on economic growth. In a post-crisis period, findings report increase of labour taxes as the strongest and the only significant variable affecting economic growth. It suggests that harmful effect of labour taxation is enlarging in a time of unfavorable economic conditions. A tax shift on capital taxation has negative but often statistically insignificant impact on economic growth.