Direct Versus Indirect Taxes: Impact on Economic Growth and Total Tax Revenue

Abstract

This study investigates the effects and consequences of both direct and indirect taxes on economic growth and total tax revenue in a panel of 51 countries over the period 1992 – 2016. The data were estimated using the dynamic panel generalized method of moments (GMM) estimation. The results indicate that direct taxes are significant and negatively correlated with the economic growth, while indirect taxes seem to have a positive but insignificant impact on the dependent variable. Additionally, this study also found a significant and positive contribution of direct taxes on the total tax revenue compared to indirect taxes. The conclusion is that tax structure based on direct taxes such as taxes on income, profit and capital gains is harmful to the economic growth, yet more efficient in terms of collecting the tax revenue in a country.