Role of taxation in financing economic development economics. We use standard growth estimation techniques with country and year fixed effects to determine the effect of income tax rates on gdp per capita growth. Overview of the tax found ons general equilibrium model. Especially taxation of corporations has great importance because a corporate tax. An empirical case stud y of kenya by esther wairimu gacanja x50761712009 a research paper submitted to the school of. Taxation, efficiency, and economic growth by dale w. This document,1 prepared by the staff of the joint committee on taxation, includes an overview of economic growth and the impact that taxes may have on economic growth.
Examine the relationship between direct tax revenue and economic growth of nigeria. The result indicated a unidirectional causality between tax revenue and economic. The revenue variable is differentiated into separate tax items, the expenditure variable remains unchanged, while the variable of budgetary balance. On the basis of the introduction of chinas previous main measures in tax reform, this paper uses methods as descriptive statistics, multisegment linear regression model and principal component analysis to analyze how economic growth and tax reform. The responsiveness of gross tax revenue to the changes in gross income is referred to as the tax buoyancy. However, no support is found for the theoretical prediction that corporate income taxes are the most harmful for growth. Tax revenue collection after flat tax reforms 16 1.
Bush signed the economic growth and tax relief and reconciliation act into law, initiating a multiyear program of reductions in taxes on individual income. Using this and other progressivity measures, the paper i documents a decline in progressivity over the last decades and ii examines the relationship between progressivity and economic growth. The relationship between economic growth and tax revenues is a debate that has existed for a long time in the living history. In india, for example, the contribution of direct taxes to total tax revenue was 18.
The study period spans economic cycles for about 66 percent of the life of the country, since attaining political independence in 1960. Robert lynch found little evidence that state and local taxes are important factors in determining business location decisions or in affecting state economic growth. Jorgenson, harvard university and kunyoung yun, yonsei university april 2, 2012 acknowledgements. Effect of tax policy on economic growth in nigria 199420. Taxation and economic growth institute for fiscal studies. The impact of economic growth and tax reform on tax revenue. Each year over the 10year budget window starts with baseline estimates of marginal tax rates, federal revenue, and economic projections. The impact of indirect tax revenue on economic growth.
Distribution tables are more likely to overstate the gains of reform. Pdf the study examined the impact of tax revenue on the nigerian economy. The impact of the government revenues and expenditures on. We conclude the paper with a summary and discussion of policy implications in section 6. The study focuses on the impact of petroleum profit tax, company income tax, personal income tax, value added tax revenue on nigerias economic growth between 1980 and 20. A comprehensive survey of the economic literature on the relationship between taxes and economic development by economist dr. Others claim that if we reduce taxes, almost all of the benefits will go to the rich, as those are the ones who pay the most taxes. It suggests a measure of progressive capacity of tax systems, based on the kakwani index, but independent of pretax income distributions. The corporate tax code could also play a larger role in countering increased concentration in the economy. Static distribution tables provide a reasonable approximation to the change in economic wellbeing across the income distribution, and economic growth does not.
The general objective of this study is to evaluate the impact of tax policy on economic growth of nigeria. Economic growth drives the level of tax revenue tax. Bushera tax cuts are scheduled to expire at the end of 2012, leading to interest in raising revenue through a carbon tax. In january 2003 president bush approved the jobs and growth tax relief reconciliation act of 2003, substantially cutting taxes on business income.
Using a framework that in prior research generated significant, negative, and robust. Apr 29, 2015 the effects of state tax policy on economic growth, entrepreneurship, and employment remain controversial. This paper investigated empirical evidence on contributions of tax revenue for economic growth of ethiopia using time series data from 1993 to 2012. Our point of departure from the existing studies lies in.
Tax analysis and revenue forecasting issues and techniques. This revenue could be used to either cut other taxes or to avoid cuts in federal programs. This study used physical capital, human capital, population growth, tax revenue gdp, personal income tax, corporate income tax, consumption tax and property tax as the variables. Theoretically and empirically it has been shown that taxes affect the. Taxation of corporations and their impact on economic growth. The target population for this study consisted of the quarterly reports on the state of the kenyan economy in relation to productivity. Pdf the effect of economic growth on taxation revenue. As we will see, there are good reasons to be skeptical of such a claim, and several decades of. People often think of tax revenue as a function of tax rates. The tax foundations taxes and growth model is a tax scoring model that evaluates the impact taxes have on the economy. Advocates of tax cuts claim that a reduction in the tax rate will lead to increased economic growth and prosperity. Economic growth drives the level of tax revenue tax foundation. We specifically consider 69 countries with at least 20 years of observations on total.
In a recent interview the president stated that you cannot lower tax rates and raise revenue without getting it from the middle class and the poor. The nexus between government revenue and economic growth. This study examines the effect of tax revenue on economic growth in nigeria, utilizing time series data for the period spanning from 1970 to 2011. One of the most commonly discussed issues in economics is how tax rates relate to economic growth. One form of bias is the multiple taxation of saving. We specifically consider 69 countries with at least 20 years of observations on total tax revenue during the period 1970200921 high. Tax systems are also used to promote other objectives, such as equity, and to address social and economic concerns. When tax revenues are down, its because the economy is doing poorly. Relative to rate increases, broadening the income tax base is more conducive to economic growth. This study examines the effect of tax revenue on economic growth in ghana using quarterly data for the period 1986 to 2010 within the var framework. Ascertain the relationship between tax policy and economic growth in nigeria. The study found that there exist both short run and long run relationship between economic growth and tax revenue. This paper aims to study the mechanism of how economic growth and tax reform affect total tax revenue and structure over the period 19502011.
The effect of tax revenue on the economic development of nigeria is not significantly different from its impact on economic growth using gdp as a measure. Proponents of business tax breaks claim that taxes are a significant factor in the location choices of businesses, and that a state can tax cut its way to economic growth and generate tax revenue in the process. Taxes are always a complicated topic, but when you look to infer the investabiltiy or potential of a country, using tax policy and tax rates, things become a mess. We see this in each of the times when revenue fluctuates. Several structural shortcomings of the corporate tax codewidely varying tax rates on different types of investment, insufficient support for research and development, and other weaknesseslimit its efficiency and progressivity. Myles abstract the development of endogenous growth theory has opened an avenue through which the effects of taxation on economic growth can be explored. To understand how tax policy may change gdp by affecting labor supply, physical capital, human capital, and technological progress, it is useful to think of gdp as being the product of the amount of labor supplied in the economy and the average productivity of that labor. This paper was prepared for the handbook of computable general equilibrium modeling, edited by peter b. At this stage, however, there is little agreement about federal reserve board, washington, d. Data and research on income taxes including oecd tax databases, taxing wages, revenue statistics, tax policy studies. We produce baseline marginal tax rates with the tax calculator for every year over the budget window. The effects of economic growth on government tax revenue were investigated for malaysia during the period of 19702009. Only people who purchase gasoline who use the highways pay the tax. This paper explores the causal influence of tax revenue on economic growth in ghana.
The result suggests that tax revenue exerted a positive and statistically significant effect on economic growth both in the longrun and shortrun implying that tax revenue enhances economic growth in ghana. Hence, the collection of data for the database and its computerization are prerequisite conditions for the establishment of an efficient revenue collection and monitoring system. The studys objective was to determine the effect of value added tax on economic growth in kenya. At the contemporary periods, ethiopiaas economic growth transformed from single to double digit. The case of eu countries baranova veronika, janickova lenka abstract one of the most debated questions in economy is the relationship between tax rates and economic growth. At this stage, however, there is little agreement about federal reserve board, washington. If you want to raise more tax revenue, raise tax rates. Jan 28, 2020 abstract the federal government faces increasing revenue needs driven by the aging of the population and emerging challenges. The below mentioned article provides a study note on the tax revenue function.
Pdf generally, the maximization of tax revenue is incompatible with the maximization of gross domestic product gdp. A good example of this use of excise taxes is the gasoline excise tax. As our economy shifts, our tax system fails to keep pace with economic growth. Data in the analysis of the impact of the government revenues and expenditures on the economic growth in romania, quarterly data over the period 1998q1 2014q1 is being used.
Thus, taxation aims not just to raise the necessary funds for government expenditure, but also to contribute to income redistribution, economic stabilization, resource allocation, while at the same time should be supportive to the economic growth. After 2019, annual economic growth is projected to slow furtherto an average of 1. Dec 22, 2011 in a recent interview the president stated that you cannot lower tax rates and raise revenue without getting it from the middle class and the poor. Jump to content jump to main navigation jump to main navigation. Tax as we know is a main source of government revenue and the collection of the tax will be used by government for development purposes. Tax revenue and economic growth in india uk essays. This report investigates how tax structures can best be designed to support gdp per capita growth. The research design adopted in this study was causal study. There is a close link between the eti and the laffer curve, the inverseushaped relationship between tax revenue and tax rates that implies taxes above a certain rate discourage so much economic.
Summary reports of monthly tax collections and refunds. The tax buoyancy is also defined as the ratio of proportionate change in gross tax revenue to the proportionate change in income. Contemporary tax policies pursue diversity of policy objectives. If revenueneutral tax reform delivers equitable growth, then a static distribution table will show it. The relationship between tax revenue and economic growth of. The result indicated a unidirectional causality between tax revenue and economic growth and it flows from tax revenue to economic growth.
Pdf this study examines the relationship between tax revenues and the rate of economic growth for greece. There is a body of economic research suggesting that such. In addition, the government should utilize the positive relationship between tax and economic growth to realize efficient government investment expenditure that spars growth in turn boosting the revenue levels. Study notes on the tax revenue function econometrics. If you dont want to lose revenue, dont cut tax rates. Governments use the revenue from this tax to build and maintain highways, bridges, and mass transit systems.
In the times when tax revenues are up, the economy is doing well. The purpose of the study is to identify the role of tax in economic growth. Reductions to lower tax rates will reduce government revenue. Revenue may be extracted from sources such as individuals, public enterprises, trade, royalties on natural resources and or foreign aid. Abstract the federal government faces increasing revenue needs driven by the aging of the population and emerging challenges. The links between economic growth and tax revenue in ghana. Public listing of individuals and businesses against whomwhich the department has filed tax liens protecting the commonwealths interest in liabilities owed to it monthly revenue reports. Explicit modelling of the individual decisions that contribute to growth allows the analysis of tax incidence and the prediction of growth effects. The tag model estimates the impact tax changes have on wages, jobs, cost of capital, distribution of income, federal revenue, and the overall size of the economy. But the united states collects less revenue than it typically has in th. The impact of economic growth and tax reform on tax. We have talked about withholding tax before, but we have not addressed tax to the degree that it deserves to be addressed. Yet, in practice, it is hard to completely separate the analysis of the overall tax burden from that of tax structure. The objective of this study was to analyze the relationship between tax revenue and economic growth in kenya for the period 2002 to 2012.
The study period spans economic cycles for about 66 percent of the life of. Thus, the reported results provide the evidence of the existence of feedback or bilateral causality between tax revenue and economic growth in india. This indicates that the economic growth in india as measured by real gdp causes tax revenue and also tax revenue causes economic growth in india. Taxation and economic growth national tax association. Instead, economic growth is often the key driver of tax revenues. Tax revenue is the income that is gained by governments through taxation.
Christopher heady, school of economics, university of kent, keynes college, canterbury, kent ct2 7np, uk. From 2024 to 2029, economic growth and potential growth are projected to average 1. The relationship between taxes and economic growth and government revenue is much stronger for business taxes than for individual taxes. Reports and statistics pennsylvania department of revenue. The study applied the concepts of elasticity and buoyancy to examine the relationship between tax revenue and economic growth in kenya for the period 2002 to 2012. Taxes and economic growth page 2 of 3 tax foundation.
We investigate the relation between changes in tax composition and longrun economic growth using a new dataset covering a broad crosssection of countries with different income levels. Taxation is the primary source of income for a state. The study analyses tax forms such as personal income tax, corporate income tax and tax on property, and their potential relationship with economic growth, measured by gdp growth rate. The objective of excise taxation is to place the burden of paying the tax on the consumer.
But the united states collects less revenue than it. The paper analyzes the relationship between value added tax revenue and intermediate consumption in the case of romania in the period january 2007 september 2018 quarterly data, using an unrestricted vector autoregression model based on the rate of dynamic taxations level in terms of value added tax revenue and the rate of dynamic intermediate consumption. Taxation is important mechanism that boosts countryas economic level. The economic effects of capital gains taxation a joint economic committee study chairman jim saxton joint economic committee united states congress june 1997 abstract there is broad recognition that the current tax system is systematically biased against saving, investment, and work effort. Ho1 tax revenue has no significant positive impact on economic development of nigeria using hdi. Pdf the effects of tax revenue on economic growth in. Part i of this document discusses four principal determinants of economic growth that tax policy may be able to influence.
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