Demography and economic growth: the effect of tax composition

Several theories document the negative effect of population ageing on economic growth, either due to the smaller size of the labour force and consequent reduced productivity, or due to an excess of savings over desired investment. However, the evidence shows no such negative relationship. This paper argues that population ageing increases the demand for expenditure taxes rather than income taxes, leading to higher growth since the extent of distortionary relative to non-distortionary taxes falls and investment is facilitated. International panel evidence supports this hypothesis, and this relationship holds more firmly in stronger democracies.