Estimating the optimal income tax in Central America: effects of tax pressure on economic growth (1991–2024)

Abstract

This study analyzes the relationship between tax pressure and economic growth in six Central
American countries during the period 1991–2024, intending to estimate an optimal income tax rate for the region. The research is grounded in the theory of optimal taxation and the Laffer curve, applying a fixed effects panel data model to identify non-linear effects of income taxation on tax revenue, including cross-effects with consumption taxes. In addition, a tax progressivity index was constructed to evaluate the regressivity of tax systems. The results show that most regional tax systems have been predominantly regressive, except Panama. A Laffer curve for income tax is confirmed, allowing the estimation of an optimal rate that balances revenue efficiency and fiscal equity in the region. These findings are relevant to inform tax reform in Central America aimed at fostering more sustainable and equitable economic growth.