Marginal Income Tax Rates and Economic Growth in Developing Countries

One of the central predictions of growth theory, old and new, is that income taxes have a negative effect on the pace of economic expansion. This paper examines a method of obtaining average marginal income tax rates that combines information on statutory rates with the amount of tax revenue collected and with data on income distribution. This method is applied to the countries included in Sicat and Virmani's summary of statutory income tax rates for 1984. There is a positive correlation between the income-weighted average marginal tax rates and the level of real per capita income. This simply reflects the fact that developed countries tend to rely more on income taxes than less developed countries.