Pro-Business Tax Policies, Public Spending, and Economic Growth

Abstract

In this work, I claim that business taxes affect economic growth conditional on public spending. When considering an entrepreneurial investment, businesses take their costs of operation and potential revenues into account. I argue that business taxes and government spending play a role in this “equation,” affecting economic outlook, investors’ incentives for capital accumulation, and, ultimately, economic growth. I test my hypotheses on a panel dataset of 25 OECD countries between 2000 and 2012. Finding some support for my theoretical expectations, I contribute to the literature by pointing out the circumstances under which low taxes may benefit the economy.