The Effect of Economic Uncertainty on the Tax Wedge: The Case of Selected OECD Countries

Politico-economic uncertainty is able to directly and indirectly affect many macroeconomic variables. In this respect, politico-economic agents are expected to act scientifically and realistically to reduce uncertainty in their statements and decisions. Otherwise, the costs of economic activities will inevitably increase due to the uncertainty phenomenon. This study analyzes the relationship the tax wedge, one of the costs of economic activities, has with politico-economic uncertainty. The study performs the analysis over 18 OECD countries during the 2000-2020 period and examines the long- and short-term relationships using the panel autoregressive distributed lagpooled mean group (ARDL-PMG) model. According to the empirical results, the study obtained homogeneous results for the countries over the long term and concluded economic policy uncertainty to have a positive effect on the tax wedge rate. However, no short-terms relationship was found between the variables. The error correction coefficient was statistically significant (between 0 and -1) in the model, and approximately 11% of the short-term imbalances were concluded to have disappeared by the next period.