cross-sector tax differential and economic performance

Abstract

Using corporate financial statement data in 70 countries, this paper measures tax burden in each sector and analyzes the impact of tax burden on the growth of sector and overall economy. We find that sectors and countries with lower effective tax rates tend to grow faster. In addition to the level of tax rates, we also examine the effect of cross-sector differential in tax burden within a country, which can be seen as a proxy for industrial policy through taxation. We find that cross-sector tax differential hampers the growth of other sectors and fails to promote economic growth, though it can promote the growth of the favored sector. We also find that negative effect of cross-sector tax differential is stronger in OECD countries, implying that the room for government intervention becomes smaller as the economy and the market develops.