Convergence analysis of the tax burden and economic development in OECD countries: a causality analysis

Economic development strongly influences both the level and scope of the tax burden, while the level and structure of taxation can, in turn, decisively influence economic development. Similarly, the convergence processes of both phenomena might be interrelated. This paper analyses the convergence of both the tax burden and economic development, as measured by the tax level ratio and GDP per capita, respectively, in OECD countries over the period 1995–2022. To analyse the possible interdependence between the tax burden and economic development, we use a recursive panel analysis and control for heterogeneity with fixed effects to estimate the time evolution of the convergence rates of both variables. Our findings show that the speed of convergence of the tax burden is much higher than that of GDP per capita. During the recessionary phase of the economic cycle, the speed of economic convergence increases because better positioned countries experience a larger decline in growth than those initially in a worse position; whereas during the expansionary phase of the cycle, the opposite holds. The Granger causality test confirms that convergence in GDP per capita influences convergence in the tax burden, but not vice versa. • Economic development affects a country’s tax capacity, while taxation, in turn, influences economic growth. • The speed of convergence of the tax burden is much higher than that of GDP per capita. • In recessionary periods, both the speed of economic convergence and that of tax burden convergence tend to accelerate, while in expansionary periods they tend to slow down. • An analysis of the long-term evolution of taxation in OECD countries shows that the observed trends towards convergence in overall ratios and structures are not necessarily irreversible. • GDP per capita convergence drives tax burden convergence, but not vice versa.