The role of state capacity in the impact of taxes on economic growth

The oldest and main purpose of taxes is to finance public expenditures. In addition, since taxes have an impact on consumption, savings and investment decisions, they are also used as a fiscal policy tool to achieve macroeconomic targets. One of these macroeconomic targets is to ensure economic growth. However, there is no consensus on whether the impact of taxes on economic growth is positive or negative. One of the factors determining the direction of this impact is state capacity. The aim of this study is to examine the role of state capacity in the impact of taxes on economic growth in developing countries. In order to empirically examine the role of state capacity in the impact of taxes on economic growth, dynamic panel data analysis was conducted using annual data covering the period 2012-2019 of 51 low-income and middle-income countries whose data are available. According to the findings obtained from the estimations reached by using the system generalized moments method, the increase in tax revenues and state capacity in developing countries positively impacts economic growth. However, as the state capacity increases, the positive impact of taxes on economic growth decreases.