Optimal tax revenues and economic growth in transition economies: A threshold regression approach

Abstract

The purpose of this article is to explore the impact of tax revenue as a share of GDP on economic growth in transition economies. The article uses a dynamic panel threshold model to examine the nonlinear relationship between tax revenue and economic growth of 11 central and south-eastern European and Baltic countries during the transition process between 1995 and 2014. The results suggest that the optimal level of tax revenue for maximising economic growth is approximately 18.00% of GDP for full transition economies, 18.50% for developing economies and 23.00% for developed economies. The findings indicate that tax revenues as a share of GDP above the threshold level adversely affect economic growth whereas a tax revenue rate below the threshold positively affects growth. The results of the current study reveal that tax sizes representing the share of the government in the economy have an optimal level. © 2019 Inderscience Enterprises Ltd.