Taxes and the GDP: The Tied Up Connection

The more distortions a tax generates, the greater the number of exchanges that cease to be made, thereby reducing the efficiency and productivity of the economy, and the greater the negative impact of this tax on long-term economic growth.

Data base

This study used quarterly data for the period 1995: 01 to 2009: 04. The total quarterly gross tax burden was obtained from IPEA. Real GDP was obtained from IBGE. Below we include the graphs referring to the quarterly GDP and the quarterly tax burden.

As can be seen in the figure below, the tax burden showed a strong evolution in the period. In 1995 the gross tax burden was around 27.4% of GDP, but the year ended 2009 reaching approximately 34.4% of GDP. That is, a 7 percentage point increases in GDP over a 15-year period. Strictly speaking, in 2008 the tax burden was even higher, reaching 34.9% of GDP. The tax exemptions adopted by the government to combat the crisis slightly reduced the 2009 tax burden. You can calculate all through the best tax software for tax preparers.

The next figure shows the performance of GDP over the past 15 years

It indicating an average GDP growth of approximately 2.8% per year. If we discount the population growth rate from GDP growth, we will have that the GDP per capita has grown, on average, approximately 1% per year in the last 15 years. That is, a performance similar to that of the 1980s, known as the lost decade.

The figure below shows the growth rate of GDP and the gross tax burden in the last 15 years. As we can see, there is a strong negative correlation between these two series. That is, when the tax burden goes up, GDP falls, and vice versa. The correlation between these growth rates is -0.78.

Statistical Results

The correlation shown in the figure above is just an initial indication that the tax burden may affect GDP growth or that the variation in GDP may affect the tax burden. We are going to do a statistical exercise assuming that the causal relationship starts from the tax burden for the GDP, that is, an increase in the tax burden by the government would have an impact on the GDP. From there, we resorted to standardized statistical procedures, in a “regression analysis”.

In the regression that seeks to estimate the long-term relationship between tax burden and GDP we find that an increase of 1% in the gross tax burden would generate a 3.86% reduction in GDP in the long run. This is an extremely negative effect of the growth of the tax burden on long-term economic performance.

In the short-term regression, we found that an increase of 1% in the growth rate of the tax burden would reduce the GDP growth rate by 0.42%. The results indicate an adjustment speed of approximately 4.68% per quarter.