Tax Capacity and Growth: Is There a Tipping Point?

• Author: Vitor Gaspar - Laura Jaramillo - Philippe Wingender
• Pages: 1-3

IMF

Volume 17, Number 4 December 2016

www.imf.org/researchbulletin

B U L L E T I N

In This Issue

1 Tax Capacity and Growth:

Is There a Tipping Point?

4 U.S. Shale Revolution and

Its Spillover Effects on the

Global Economy

7 Q&A: Seven Questions

about the Relationship

between Country Financ e

and Governance

10 Conference Call for Papers

11 IMF Working Pape rs

14 Recommended Readings

from IMF Publications

15 IMF Economic Review

16 Staff Discussion Notes

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Tax Capacity and Growth: Is There a

Tipping Point?

Vitor Gaspar, Laura Jaramillo, and Philippe Wingender

Is there a minimum tax-to-GDP ratio associate d with a significant acceleration

in the process of growth and de velopment? We give an empirical answer to this

question by investigating the exi stence of a tipping point in tax-to-GDP levels. We

use two separate databases: a novel contemporary database covering 139 countries

from 1965 to 2011 and a historical database for 30 advanced econo mies from 1800

to 1980. We find that the answer to the question is yes . Estimated tipping points

are similar at about 12¾percent of GDP. For the contemporary dataset we find

that a country just above the thresho ld will have GDP per capita 7.5 percent larger,

after 10 years. The ef fect is tightly estimated and economically large.

Building ta x capacity is closely linked to the process of economic de velopment

and growth. ere is a long intel lectual history behind t his concept of the role

of taxes and the state . Joseph Schumpeter, in his famous paper “e Crisis of the

Tax State” (Schumpeter, 1918), links the state and tax s o closely that he stresses

that “tax” in “t ax state” can be regarded as almost redu ndant. He emphasizes that

taxes are not only asso ciated with the historical origi n of the state, they are also

active in shaping it. In hi s view, the organic development of taxation was associ-

ated with the organic de velopment of other dimensions of the state. For Schum-

peter, the analysis of the consequence s of taxation requires a long-run perspective

that allows for struc tural and self-reinforcing evolutionary dy namics to play out

in full. os e are not only economic, but also social and politica l.

In contemporary research, Be sley and Persson (2011, 2013, 2014) emphasize

the broader concept of state capacity to sta nd for a range of capabilities that

are needed for the state to func tion eectively. We follow Besley and Persson

and argue that st ate capacity is shaped by the interaction between ta x capac-

ity, legal capacity, and public adminis tration capacity. Tax capacity provides

a stable and elastic source of revenue for the government to na nce govern-

ment activities. A lso, a government with a larger stake in the economy throug h

a developed tax system has s tronger motives to play a productive role in the