Tax revenues and tax rates in the context of macroeconomic determinants

Abstract

There is general agreement that taxes are a significant political tool making a macroeconomic impact. Therefore, alternative tax policies must be assessed to understand how they affect tax revenues. This paper focuses on quantifying the impact of tax rates and selected macroeconomic indicators on corporate tax revenues in European Union (EU) countries from 2002 to 2021. Data were drawn from the databases of the European Commission (2022), OECD (2022), ZEW (2021), and the World Bank (2022). Three models were estimated to evaluate the impact: the pooling model, the fixed effects model, and the random effects model. Cluster analysis grouped countries based on the similarity of their tax systems. Ward's method was used for comparison, and the similarity of countries was assessed using the Euclidean distance. The result of the cluster analysis was two groups of countries: the first group mainly included Eastern European countries, and the second group included Western European countries. We used panel data regression analysis to evaluate corporate income tax determinants in individual country clusters. The results confirmed the suitability of the random effects model. The study indicates that direct foreign investment is the most significant variable affecting corporate income tax in the first cluster. In contrast, in the second cluster, it is direct foreign investment, unemployment rate, and gross domestic product.