Savings and taxation in developing countries : an empirical study
KRISHNAMURTY, K.
The relationship between taxation, private consumption, and savings in developing countries is investigated. The rate of private consumption, the marginal rate of total consumption/savings inclusive of the public sector, and the marginal rate of taxation are analyzed using a time-series approach for 12 countries and a cross-section approach for 35 countries. Seven of the 12 time-series analyses indicate no association between the tax variable and private consumption and total consumption/savings. Increased taxation did not have the effect of discouraging private consumption but did cut into private savings. For India, Greece, Honduras, the results suggest that increased taxation had the effect of discouraging private consumption and promoting private savings. The results for the Republic of China and the Philippines suggest that increased taxation had a negative effect on aggregate savings while it had no influence on private Chinese consumption and a positive impact on consumption in the Philippines. Cross-section analysis show that taxation had the effect of discouraging private consumption but that the positive effects of taxation in promoting aggregate savings have been neutralized by the behavior of current expenditures in the public sector.
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