Public Investment Taxes and Institutions: Growth Tests on Emerging Markets

This research highlights three macro fiscal sectors with revenue generation based on taxes from output and production, revenue spending with public investments from tax funded budgetary allocations and government delivery by extension of its institutions. The first empirical chapter examines broad tax issues affecting growth within our sample. We construct tax variables within a revenue-neutral framework and check for the observed growth effects. These results were subsequently ranked according to the magnitude of growth distortions. Corporate income tax reported the most distortionary growth coefficients, while personal income tax, consumption taxes and property taxes were less distortionary to output growth. Within the revenue neutral framework results obtained from the emerging markets studied, growth can be triggered with a reduction in income taxes and a corresponding increase in consumption taxes while leaving the overall burden of taxation unchanged.

The second empirical chapter focused on core investment issues in the public sector and productivity effects of public capital within a panel of emerging countries. Six new measures of public investment were constructed from available secondary data and plugged into our growth model with neoclassical and endogenous foundations while conditioning for the budget constraint and introducing the net marginal productivity of capital as an alternative dependent variable. We conclude that public investment is positively associated with growth irrespective of how these investments are financed. Our estimates also suggest a complimentary relationship with private investment ratios and we find no evidence of crowding out in our sample except beyond a 7 percent threshold.

The third empirical chapter looks at institutional effects that cause growth and development progress in these countries. Using Rodriks taxonomy, we broadly model market creating institutional indicators from the Frasier Institute and Polity IV datasets and examine the growth impacts. The research concludes that Institutions matter for growth and our sample institutions need to improve on the legal protection of rights and basic legal enforcement to continually attract and keep new investments.