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DDTC Working Paper 1315

                                        Figure 2 - Relationship GDP per Capita Growth and Change in Tax Ratio

                                                                      People’s Rep. of China

                              GDP per capita growth (%)  5 0  Sri Lanka Malaysia  Pakistan  Thailand
                                                                         Rep. of Korea

                                          -10              0               10               20            30
                                                               Change in tax (% of GDP)

                                                    Developing Asia       OECD
                                                    Rest of the world     Trend, developing asia
                                                    Trend, all economies

                          Source: Acosta-Ormaechea and Yoo (2012) in Abdon, A., Estrada., GB., Lee, M., and Park, D.(2014),”Fiscal Policy and Growth in Developing Asia”, ADB Economics
                          Working Paper Series, No 412.

                         whereas the effect of changes in sales and       for low, middle, and high-income economies.
                         excise  tax  rates exert limited  effects to     Their  estimation corrected  for  possible
                         both  output  growth  and  investment.  King     endogeneity arising from the simultaneous
                         and  Rebelo   identified  that  appropriate      relationship  between tax  burden and
                         tax policies can potentially have a positive     growth. While tax  burden  affects  growth,
                         impacts to long-term growth.                     changes in growth may also lead to changes
                                                                          in the tax level or structure.
                            Figure 2 plots the relationship between
                         tax  ratios  and  GDP  per  capita  growth          Specifically  for  the  case  of  Indonesia,
                         from  1970  to  2011  for  13  developing        fiscal  stimulus  through  tax  incentives
                         Asian  economies,  25  high-income  OECD         packages would  have had a  larger impact
                         economies,  and 33 economies  from other         on the economy during the crisis compared
                         regions.  The  trend indicates no clear          to an increase in government spending. One
                         association between GDP per capita growth        factor  that  support this argument  is most
                         and changes in tax ratios given the presence     corporation and households in Indonesia are
                         of outlying observations, but  the trend in      myopic  and  less  focus  on  forward-looking
                         developing  economies  indicates that  there     decision. They will adjust their consumption
                         may  be  a  positive association between         and investment decision to the government
                         growth and taxation. It is, however, difficult   policies that affect directly to them. Second
                         to model the relationship between the two        factor is the government’s capital spending,
                         given that  it is likely endogenous.  While      such as increasing infrastructure spending,
                         government taxation  may impact  growth,         might have a desirable  impact  on the
                         higher growth  may also  lead  to higher         economy in the latter periods. Third factor is
                         taxes .  Acosta-Ormaechea  and  Yoo  (2012)      exports, mostly commodity exports, plays a
                         analyzed the  impact  of changes in  tax         major role in boosting private consumption.
                         composition on long-run economic growth          Therefore, as discussed earlier, a package of
                                                                          tax incentives combined with greater social
                                                                          spending should  have been  an  effective
                   12.  King,  R.  G.  and  S.  Rebelo  (1990),”Public Policy and  Economic
                   Growth: Developing Neoclassical                        strategies in stimulating the economy.
                   Implications”, Journal of Political Economy. 98 (5). Part 2: The Problem
                   of Development: A                                         Most of this section will explore most of
                   Conference of the Institute for the Study of Free Enterprise Systems. pp.   the content from the paper written by John
                   13. Estrada et al (2014)
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