Taxes and Economic Freedom: Moderating Effect of Government Effectiveness

Maryam Yousefinejad (Faculty of Business, Management and Professional Studeis, Department of Accounting and Finance, Management and Science University, Malaysia)
Amilia Syuhada Binti Abdul Majid (Faculty of Business, Management and Professional Studeis, Department of Accounting and Finance, Management and Science University, Malaysia)
Jaizah Othman (Faculty of Business, Management and Professional Studeis, Department of Accounting and Finance, Management and Science University, Malaysia)
Noreha Halid (Faculty College of Business Administration, Princess Nourah Bint Abdulrahman University, Riyadh, Saudi Arabia)
Muhammad Saufi Akmal Bin Roslani (Faculty of Business, Management and Professional Studeis, Department of Accounting and Finance, Management and Science University, Malaysia)

International Business and Accounting Research Journal
Vol 6, No 2 (2022): July 2022

This study aims to examine the relationship between taxes and economic freedom, considering the moderating effect of government effectiveness in the Organization for Economic Cooperation and Development (OECD) countries from 1996 to 2018. The taxes are goods and services tax (GST), personal income tax (PIT), and property tax (PT). This study also examines other economic indicators such as foreign direct investment (FDI) to measure the impact of taxes on economic freedom. In this study, fixed effect panel data are used to test the hypotheses. The least squares panel results show that there is a positive and significant relationship between property tax and economic freedom. However, GST and income tax are negatively and significantly related to economic freedom. In addition, the results also demonstrate that government effectiveness moderates the relationship between taxes and economic freedom. These results can contribute to the existing literature in this area. They also allow governments to apply better tax systems to achieve a high score of economic freedom.