Taxation and Economic Growth (OECD Working Paper 620)

Summary

"Taxation and Economic Growth" is OECD Economics Department Working Paper No. 620 (2008), by Åsa Johansson, Christopher Heady, Jens Arnold, Bert Brys, and Laura Vartia, all economists in the OECD's Economics Department at the time. It is the source of what has become the single most-cited piece of institutional evidence in tax-policy debates for shifting taxation away from income and toward property: the "tax and growth" ranking. A condensed, peer-reviewed version of the same research programme was later published as Jens Arnold, Bert Brys, Christopher Heady, Åsa Johansson, Cyrille Schwellnus & Laura Vartia, "Tax Policy for Economic Recovery and Growth," The Economic Journal, 121(550), F59–F80 (2011) — see research/arnold-tax-growth-ej. The working paper carries weight not because it is theoretically novel — the underlying claim that taxes on a fixed factor are less distortionary is textbook public finance — but because it is an OECD Secretariat cross-country empirical study, produced for and feeding directly into OECD tax-policy advice to member governments, and it has subsequently been cited across the IMF, World Bank, European Commission, and national tax-reform reviews (including the Mirrlees Review) as authoritative empirical backing for "growth-friendly tax structures."

The Core Argument and Findings

Using panel data for 21 OECD countries over 1971–2004, the paper estimates the relationship between tax structure and GDP per capita using a Pooled Mean Group (PMG) estimator — a panel error-correction model that allows short-run dynamics and (in the baseline specification) the speed of adjustment to differ by country, while long-run coefficients on tax shares are pooled across countries. The authors report that total tax revenue is negatively and significantly associated with GDP per capita, and that, holding revenue constant, shifting the tax mix from direct to indirect taxation is positively and significantly associated with GDP per capita.

Disaggregating tax revenue by type, the paper's central and most widely cited result is a ranking of tax categories by estimated harm to long-run growth, from most to least harmful:

1. Corporate income taxes — most harmful to growth
2. Personal income taxes
3. Consumption taxes (e.g. VAT)
4. Recurrent taxes on immovable property — least harmful to growth

The authors' own summary is that a revenue-neutral, growth-oriented tax reform would shift the tax base "from income taxes to less distortive taxes such as recurrent taxes on immovable property or consumption." This is the empirical basis for the widely repeated claim that property taxes are the "most growth-friendly" or "least distortive" tax in the OECD's toolkit — a claim that has since propagated through OECD Going for Growth reports, IMF and World Bank tax-policy guidance, and numerous national tax reviews.

Relation to the Georgist Case

This paper is frequently invoked as institutional confirmation of the Georgist claim that taxing land/property is uniquely non-distortionary, and it supports the broader outcome that land value tax can substitute for capital taxation without an efficiency loss: the paper's own ranking puts recurrent property taxation at the opposite end of the harm spectrum from corporate income tax, the tax on capital it is most often proposed to replace. Because the estimates come from realised, decades-long cross-country data on actual OECD tax systems rather than a theoretical model, the paper is frequently treated as harder, "real-world" evidence for the same conclusion that the deadweight loss theory predicts on first principles: a tax on an immobile, inelastically supplied base does less economic damage than a tax on a mobile or elastically supplied one.

That said, the paper's policy relevance to land value taxation specifically is a step removed from what it actually measures — see Nuances and Limits below.

Nuances and Limits

Several caveats are essential to using this paper honestly in the Georgist case:

• "Recurrent taxes on immovable property" is not land value tax. The OECD Revenue Statistics category the paper analyses (OECD tax category 4100, "recurrent taxes on immovable property") includes ordinary property taxes levied on the combined value of land and buildings/improvements — the actual property tax regimes of the countries in the panel, almost none of which used a pure land value tax base at the time. The efficiency argument specific to land (as opposed to structures) is not separately tested; the paper cannot distinguish how much of property tax's favourable ranking derives from the land component versus the improvements component. This is the same category-conflation flagged on this wiki's LVT is just a property tax objection page — the OECD's finding is evidence for property taxation broadly, and only suggestively, not directly, for a land-only base.
• Correlation and identification. A PMG panel regression can support a well-identified long-run association, but causal identification in cross-country macro-growth regressions is inherently difficult: reverse causality (richer, faster-growing countries may choose different tax mixes for other reasons) and omitted country-specific factors are standard concerns for this literature, and the authors' claims should be read as "associated with" rather than proven causal effects.
• Robustness of the ranking has been directly challenged. Jing Xing, "Tax structure and growth: How robust is the empirical evidence?", Economics Letters 117(1), 2012, re-examines the PMG specification used in the published Arnold et al. (2011) version of this research and argues that the ordering among consumption, personal income, and corporate income taxes is not robust once the long-run coefficients are allowed to vary by country rather than being pooled — i.e., the precise ranking among the "middle" categories is sensitive to a modelling choice, though property tax's position at the least-harmful end is comparatively more stable across specifications in the literature that followed. [VERIFY: whether Xing's re-estimation specifically disturbs the property-tax result or mainly the corporate/personal/consumption ordering — this page reports Xing's own framing, but the original Economics Letters text could not be directly fetched in this session.]
• Later replication is more skeptical of the whole tax-shift claim. Donatella Baiardi, Paola Profeta, Riccardo Puglisi & Simona Scabrosetti, "Tax policy and economic growth: does it really matter?", International Tax and Public Finance 26(2), 2019 (working paper version: CESifo WP 6343, 2017), revisit the direct-to-indirect tax shift question with an extended sample and time period and find no robust relationship between revenue-neutral tax shifts and growth, casting doubt on the growth-enhancing effects of shifting from direct to indirect taxation that the OECD's 2008 result implied. Their paper does report a negative association between total tax revenue and growth, consistent with part of the original finding, but is considerably more cautious about the tax-composition result that underlies the "tax and growth ranking."
• Scope is limited to OECD, high-income countries over 1971–2004. The ranking's applicability to developing countries with different administrative capacity, informal sectors, and tax structures is not established by this paper; see World Bank property tax determinants and property tax raises welfare in developing countries for evidence more specific to that context.
• The paper does not evaluate a specific LVT reform proposal. It is a positive, descriptive empirical study of historical tax structures and growth, not a policy simulation of what would happen if a country replaced its corporate tax with a land value tax; the "replace capital taxes with land taxes" policy conclusion is an inference commonly drawn from the ranking, not a claim the paper itself tests directly.

Bears On

• Outcome: LVT can replace capital taxes without efficiency loss — the paper's ranking places corporate tax as most harmful and recurrent property tax as least harmful, the most-cited cross-country empirical support for shifting tax burden from capital toward property/land.
• Objection: LVT is just a property tax — this paper is itself a case study in the conflation the objection describes: its "least harmful" category is ordinary property tax (land + improvements), not a land-only base.
• Concept: Deadweight Loss — the paper's empirical ranking is commonly read as real-world confirmation of the theoretical deadweight-loss argument for taxing inelastically supplied bases.
• Research: The Mirrlees Review — cites this OECD tax-and-growth literature as part of the mainstream evidentiary basis for recommending a shift toward land/property taxation.
• Research: research/arnold-tax-growth-ej — the peer-reviewed Economic Journal article drawing on the same underlying research programme and estimates.

See Also

• The Mirrlees Review: Tax by Design
• research/arnold-tax-growth-ej
• Deadweight Loss
• Objection: LVT is just a property tax
• Taxing Immovable Property: Revenue Potential and Implementation Challenges
• World Bank property tax determinants

Sources

1. Åsa Johansson, Christopher Heady, Jens Arnold, Bert Brys & Laura Vartia (2008), "Taxation and Economic Growth," OECD Economics Department Working Papers, No. 620, OECD Publishing, DOI: 10.1787/241216205486. OECD — used for the paper's method (PMG estimator, 21 OECD countries, 1971–2004), the tax-and-growth ranking, and the stated policy conclusion about shifting revenue toward property/consumption taxes. [CITATION NEEDED: this session's web access to the OECD PDF and repec.org abstract pages returned 403/network errors; the method and ranking details above are drawn from multiple independent secondary summaries and search-indexed excerpts of the paper that agree on substance, but a future editor should verify page-level detail and any direct quotations against the primary PDF.]
2. Jens Arnold, Bert Brys, Christopher Heady, Åsa Johansson, Cyrille Schwellnus & Laura Vartia (2011), "Tax Policy for Economic Recovery and Growth," The Economic Journal, 121(550), F59–F80, DOI: 10.1111/j.1468-0297.2010.02415.x. Wiley — used to establish the peer-reviewed companion publication of the same research programme (see research/arnold-tax-growth-ej).
3. Jing Xing (2012), "Tax structure and growth: How robust is the empirical evidence?", Economics Letters, 117(1), 379–382. ScienceDirect — used for the robustness critique of the ranking among consumption, personal, and corporate income taxes under the PMG specification.
4. Donatella Baiardi, Paola Profeta, Riccardo Puglisi & Simona Scabrosetti (2019), "Tax policy and economic growth: does it really matter?", International Tax and Public Finance, 26(2), 282–316. SSRN — used for the later, more skeptical replication of the direct-to-indirect tax shift and growth claim.
5. Institute for Fiscal Studies, Tax by Design: The Mirrlees Review (2011). IFS — used to establish this paper's downstream institutional influence; see research/mirrlees-review.

[CITATION NEEDED: a directly fetched copy of OECD Working Paper 620's full text — this session's egress to oecd.org, repec.org (IDEAS/EconPapers), and ResearchGate returned 403 errors, so the abstract, exact wording, and any tables could not be verified first-hand. The findings above rest on multiple independent, mutually agreeing secondary sources (search-engine-indexed summaries of the OECD page, the companion Economic Journal article's abstract, and the Xing (2012) and Baiardi et al. (2019) papers that directly engage with and describe this paper's method and results) rather than a single primary-source read. A future editor with working access to oecd.org should confirm page numbers and add any direct quotations.]