The macroeconomic effects of a switch from direct to indirect taxes: An empirical assessment

This paper investigates the macroeconomic effects of switching the tax burden from direct to indirect taxes in an empirical model based on 22 OECD countries. The Engle-Yoo three step procedure is employed to estimate both the short and long run effects of such a tax switch. The results reveal that a switch from direct to indirect taxes is likely to generate efficiency gains in the short run which lead to higher levels of aggregate output. However, for the majority of countries in the sample the tax changes have no impact on the level of economic activity in the long run.