Taxation and economic development: The state of the economic literature*

Periodically, the World Bank relates economic performance in developing countries to the level of taxation and finds that countries with lower marginal tax rates have higher economic growth. The chapter summarizes the empirical results on taxation for studies examining various types of investments. It focuses on some additional considerations of concern to policy makers. Investment decisions were rarely examined, and only a few studies used income as a dependent variable. Indicators of market size, such as population and per capita income, are generally included to represent local demand. Researchers using the representative tax approach should consider using a wider array of tax and expenditure variables in their models. Fiscal reform should move toward more efficient tax systems and expenditure accountability. As a result of federal reform, new responsibilities for welfare spending represent fiscal challenges for the states; state welfare expenditures will likely increase, possibly leading to more variations in taxes among states.