Current trends in taxation and implications on economic growth : specific reference to the Maltese economy

Abstract

This dissertation sets out two hypotheses in respect of Taxation and Economic Growth for the Maltese economy over the past decade, namely between 2000 and 2012, being: (i) What have been the taxation trends in Malta (in terms of tax structures, tax shifts, and tax reforms), and whether these are consistent with trends in the European Union (EU) and with taxation most likely to be conducive to growth; and (ii) What are the implications of such trends upon Malta's economic growth, estimated through a growth regression for the Maltese economy, with the aim of establishing a 'tax and growth' ranking describing the degree of distortion of various tax instruments upon economic growth. It transpires that overall, developments in taxation relative to the Maltese economy have on one part contrasted and on the other hand mirrored EU trends. Yet, whilst the tax structure, tax shifts, and tax reforms in Malta are somewhat in contrast to EU patterns, such components reflect pro-growth characteristics, except for the developments in tax shifts. As for the 'tax and growth' ranking for the Maltese economy, Social Security Contributions (SSC) rank as the least distortive tax instrument, followed by consumption, production and import taxes, and at the bottom of the rank income taxes and capital taxes as the most distortive in terms of economic growth. Hence, it seems that levying SSC and indirect taxes leads to better growth performance for the Maltese economy, compared to direct taxes. As such, implications on policy within the local scenario could revolve around increasing SSC, consumption, production and import taxes whilst minimising taxes on capital and income.