Government Size, Tax Burden and Private Investment

Lina Sineviciene


Purpose. Arising problems in public finances, changes in demographic, social and economic situation promote scientific and policy debate on the effectiveness of public finance and its impact on the economy and, especially, on private investment. Private investment is the main driver of economic growth in the long run and it strengthens the country’s competitiveness in the global market. Therefore, it is very important to assess whether growing government size and the tax burden are not harmful to the private investment. The purpose of the paper - to assess the link between government size, the tax burden and private investment.

Methodology. The research object: the relationship between government size, the tax burden and private investment. In order to assess the relationship between government size, the tax burden and private investment following research methods are used: the systemic, logical and comparative analysis of scientific literature, the analysis of statistical data, descriptive statistics, hierarchical cluster analysis, correlation analysis, regression analysis. Empirical analysis focuses on the data of the European Union (EU) countries. The study covers 2003 – 2012 years. The cross–sectional data is used.

Results. Taxes have impact on the initiatives to create new businesses and to invest which results in the growth of investment and economic growth in the long-run. There is a view that high corporate taxes are the most harmful to investment growth compared with a personal and consumption taxes. The empirical research results show that there is a negative relationship between government size and private investment, and that consumption taxes are most conducive to the growth of private investment.

The theoretical contribution. There is a view in the scientific literature that decrease in taxes leads to increase in savings and economic growth because the private sector uses resources more productively than public sector. If government spending is productive, the larger government size may increase the well-being of the society, and the well-being of the society in developed countries is higher than that in less developed ones. However, the government size is larger in high developed countries, and government size determines the higher tax burden on the private sector. This paper attempts to shed light on these different views in the scientific literature, assessing the links between government size, the tax burden and private investment in the case of the European Union countries. In the EU countries, social and demographic changes put pressure on the increase of government size; therefore, the structure of the tax burden becomes very important.

Practical implications. The research uses cross-sectional data; therefore, the results show only the relationship between government size, the tax burden and private investment but do not indicate causality links. The tax burden is very different in the EU countries; therefore, it is very difficult to draw inferences from the research results that would be suitable for all countries.

Keywords: Government size, tax burden, private investment.

Paper type: Research paper.


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