Demographic Changes and Direct Tax Dynamics in OECD and Non-OECD Markets: A Revisit

This study investigates the dynamic relationship between demography and direct taxes on income, profit, and capital gains. The data, for the period 1990–2017, encompass 89 OECD and non-OECD countries. The study employs generalized method of moments (GMM) estimation to identify the relationships. The findings suggest a U-shaped correlation in OECD countries, which supports the argument that a rise in the aging population initially decreases taxes on income, profit, and capital gains. Conversely, any further rise in the aging population after reaching a certain threshold leads to increased taxes on income, profit, and capital gains. Furthermore, across non-OECD countries, the findings suggest an inverted U-shaped relationship implying that the labor income tax rate will fall with a rise in the dependency ratio until the aged population constitutes half of all voters, but the correlation between these variables becomes positive if the number of aged people reaches 50% of voters or more. The findings lead to the suggestion that other potential factors, such as empathy among family members, as opposed to political muscle only may affect voters’ behavior in a median voter model.