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OVERVIEW

In this paper, we ask whether exceeding a critical tax-to-GDP threshold is sufficient for a country to enter an accelerated trajectory of economic growth and development. We conduct new event studies and exploit a richer dataset to revisit Gaspar, Jaramillo and Wingender’s 2016 “tax tipping point” result. Both with their local discontinuity approach and a cutting-edge dynamic difference-in-differences estimation, we find that cumulative growth over 10 years increases by 10 percentage points when the tax-to-GDP ratio increases above a 10 percent threshold, confirming their results. Further, we show that crossing the threshold coincides with the beginning of significant improvements in measures of financial development, government effectiveness, legal framework, and governance. Event studies additionally reveal that only transformational episodes of tax increases above the threshold deliver these gains: episodic crossings that fail to bring taxes safely above the threshold and that don't coincide with improvements in financial development and government effectiveness yield fleeting gains. Our results show that a minimal tax capacity is necessary for growth but emphasize that only a sustained tax increase associated with other developmental progress is sufficient

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