Institutions, taxes and economic growth: evidence from developing countries

Abstract

There has been a massive influx of research about governance-institutional quality and taxes. However, the relationship of the triangle of governance-institutional quality, taxes and economic growth is still limited. The study aims to (i) test bi-directional causality among three above variables and (ii) estimate the effects of governance-institutional quality, tax revenue and their interaction term on economic growth. Data for the study covers 70 developing countries over the period from 2005 to 2014. Our findings show that governance-institutional quality, tax revenue, and effectiveness government have significantly positive impacts on economic growth at one or five percent. Social benefit tax rate has a significantly negative impact on growth of economies, indicating that governments in developing countries should focus on establishing institutions better and issuing optimal tax policy (especially focus on suitable tax rate of social benefit) to promote economic growth. Additionally, being consistent with all six indicators of governance-institutional quality, the significant signs of convergence in these economies show that the developing countries have been inclined to improve governance-institutional quality (here after we call “institutions”) and policy of taxation to improve economic growth.