Taxation and economic complexity: Further evidence regarding environmental taxes

Abstract

This study identifies the effect of taxation on economic complexity by exploring the contemporary context of environmental taxes. Our model uses a dynamic approach with a global sample of 98 countries from 2006 to 2020. The two-step system GMM estimated results show that the Economic Complexity Index (ECI) increases by 0.016 standard deviations with a 1-standard-deviation increase in environmental taxes (% GDP). Regarding the environmental tax base, while energy, transport, and pollution taxes enhance economic complexity, resource taxes seem to reduce economic complexity. The impact of environmental taxes on economic complexity varies across regions and income levels, with a stronger effect in low-income economies and countries with lower levels of economic complexity. This finding might imply diminishing returns from environmental taxes in promoting technological and energy-efficient investments in high-income countries. Examining the taxation system, our results confirm the negative effect of profit taxes and the positive effect of labor taxes on economic complexity, given changes in environmental taxation.