Tax composition and economic growth in the age of demographic change

ABSTRACT This study analyses the impact of the relative use of distortionary and non-distortionary taxes on economic growth using a panel of Organisation for Economic Co-operation and Development (OECD) countries and a sample period of 1980–2015. In particular, we examine whether the impact of non-distortionary taxes on economic growth increases with ageing, which has increased in western countries over the past 30 years. We do so by extending the dataset to include the dramatic change in the demographic structure seen in OECD countries since 1990. Using this lengthened data range allows us to find a negative effect of distortionary taxation as expected. However, our results also show that an increase in non-distortionary taxation is negatively associated with growth. This study thus argues that recent distortions from non-distortionary taxation can be accounted for by the rapid ageing of the population. Ideal tax systems are often formulated by economists, but politicians cannot always adopt such an ideal tax design because of the risk of losing popularity with the electorate. Our analysis could be applied to design tax systems that can be implemented in the real world.