Public Investment, Tax Policy and Economic Growth in Taiwan

Abstract

This paper applies Kocherlakota and Yi's (1997) model to discuss the effects of public investment and tax policies (tax burden and tax mix) on economic growth using Taiwanese data from 1960 to 2010. These effects changed structurally in 1990. First, public investment had no impact on economic growth before 1990. After 1990, the benefits resulting from the effects of public investment on economic growth outweighed the crowding-out effect on private investment. Public investment hence had a positively significant effect on economic growth. Second, the growth rate of direct tax relative to indirect tax has negatively affected the economic growth. Third, the tax burden has had no significant impact on economic growth because the effects of direct and indirect taxation on economic growth cancel each other out. In order to promote economic growth, we suggest that the government increase public investment and adjust tax mixes, such as by lowering the ratio of direct to indirect tax.