The relationship between taxes and growth at the state level. A comprehensive survey of the economic literature on the relationship between taxes and economic development by economist dr. The effect of taxes on economic growth sacramento state. The basic objective of this article is to evaluate the impact of both direct and indirect taxes on economic growth of india. Bush signed the economic growth and tax relief and reconciliation act into law, initiating a multiyear program of reductions in taxes on individual income.
Jorgenson, harvard university and kunyoung yun, yonsei university april 2, 2012 acknowledgements. A revenue neutral growthoriented tax reform would, therefore, be to shift part of the revenue base from income. Pdf this study examines the relationship between tax revenues and the rate of economic growth for greece. Taxes and economic growth in developing countries a. This work examined the nature of tax system, benefits of tax revenue and mechanism that can be adopted to properly harness the revenue from taxation in nigeria. 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. We study the relationships between per capita gdp, overall tax revenue and tax composition in particular direct vs. 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. 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. During the 19652012 period as mentioned above, the top marginal income tax rate on labor income has trended downward and the effective tax rate has fluctuated in a narrower range, while average hours worked has steadily declined see. Taxation is the primary source of income for a state.
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. Case study on ethiopia prepared by teigist lemma addis. Tax revenue value 7,926 8,243 10,906 12,265 16,164 18,111 20,716 23,758 27,204. As most developing countries strive to achieve economic growth and development through taxation, they face numerous economic challenges. This report investigates how tax structures can best be designed to support gdp per capita growth.
The economic growth and tax relief reconciliation act of 2001 was a major piece of tax legislation passed by the 107th united states congress and signed by president george w. Governments use the revenue from this tax to build and maintain highways, bridges, and mass transit systems. As we will see, there are good reasons to be skeptical of such a claim, and several decades of. Advocates of tax cuts claim that a reduction in the tax rate will lead to increased economic growth and prosperity. Total tax revenue as a percentage of gdp indicates the share of a countrys output that is collected by the government through taxes. Contemporary tax policies pursue diversity of policy objectives. The impact of taxation on economic growth in south africa. It will simply draw a line between tax revenue and nigerian economic growth. These researches use the gross domestic product gdp as a dependent variable.
Chapter overview this chapter presents the study on the impact of tax evasion on revenue collection performance in tanzania. In the longterm, both cutting the corporate tax rate to 25 percent and moving to full expensing would lead to increased total federal tax revenue in the long term due to more jobs, higher wages, and more economic activity. Many economists would agree with the proposition that high taxes are bad for economic growth and use the tax multiplier to analyze. The impact of the government revenues and expenditures on the. Economic growth drives the level of tax revenue tax foundation. The paper adds marginally to the empirical literature, showing how the two types of tax revenue influence economic growth in eastern europe, under an extended set of economic and socio. Robert lynch found little evidence that state and local taxes are important factors in determining business location decisions or in affecting state economic growth. Excise taxes, sometimes called luxury taxes, are used by both state and federal governments. Growth comes from the accumulation of capital both human and physical and from innovations which lead. Effects of income tax changes on economic growth brookings. 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.
The contribution of taxation to any economy globally cannot be overemphasized. 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. Economic growth and the role of taxation prepared for the oecd. Tax rates and economic growth federation of american.
Effects of income tax changes on economic growth william g. It is also known by its abbreviation egtrra often pronounced eggtra or eggterra, and is often referred to as one of the two bush tax cuts. A good example of this use of excise taxes is the gasoline excise tax. Data and research on income taxes including oecd tax databases, taxing wages, revenue statistics, tax policy studies. This study investigates the role of valueadded tax vat on the economic growth in china. Dependency theorists argue that sometimes lowincome earning countries shown evidence of economic growth with.
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. The purpose of the study is to identify the role of tax in economic growth. It aimed to give a detailed examination of the effect of tax avoidance on the economic growth and development in nigeria. Gale, the brookings institution and tax policy center andrew a. Tax revenue and economic growth in india uk essays. The tax foundations taxes and growth model is a tax scoring model that evaluates the impact taxes have on the economy. This study focused more on the influence of tax evasion toward revenue collection performance. If you dont want to lose revenue, dont cut tax rates.
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. In january 2003 president bush approved the jobs and growth tax relief reconciliation act of 2003, substantially cutting taxes on business income. Tax revenue, infrastructural development, foreign direct investment, economic growth. The structure and financing of a tax change are critical to achieving economic growth. The study period spans economic cycles for about 66 percent of the life of the country. While general observations can be made, it would be inaccurate to draw any firm conclusions between top tax rates and economic growth. Introduction a tax is a fee charged or levied by a government on a product, income, or activity. 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. The impact of the government revenues and expenditures on. Tax analysis and revenue forecasting issues and techniques. Taxation, efficiency, and economic growth by dale w. 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. Only people who purchase gasoline who use the highways pay the tax.
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. Sales taxes are an important source of revenue for most states and some large cities and counties. Especially taxation of corporations has great importance because a corporate tax. The results show that legally mandated revenue potentials in countries in eastern europe and. Samwick, dartmouth college and national bureau of economic research. This paper was prepared for the handbook of computable general equilibrium modeling, edited by peter b. Pdf the study examines the effect of tax revenue and economic growth. The data used for the study is a time series of the period from 19852016. Findings from this study show that hightax countries have been more successful in achieving their social objectives than lowtax countries. Whereas direct tax impacts directly the disposable income, the indirect tax impacts the prices of goods and services in the market. Taxation of corporations and their impact on economic growth. Mar 15, 2017 we challenge the oecd view arnold et al. By leaving more money in the free market, the expectation is that money will.
The finding also revealed that there is no significant relationship between company income tax and the growth of the nigeria economy. We specifically consider 69 countries with at least 20 years of observations on total tax revenue during the period 1970200921 high. 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. They found that various tax reforms are positively and significantly related to economic growth and that tax reforms granger cause economic growth. Tax effort is defined as the ratio between the actual revenue collected. Home topics banking and finance project topics and materials pdf impact of tax.
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. This thesis examines the relationship between taxes and economic growth. It showed that there is a significant relationship between non oil revenue and the growth of the nigeria economy. The effects of state tax policy on economic growth, entrepreneurship, and employment. 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. The study adopts the ordinary least square ols regression technique and established that tax revenue has positive effect on economic growth in nigeria. The countries chosen for this study have embarked on their growth paths uneven economic growth and with uneven tax effort among these countries. Pdf the study examined the impact of tax revenue on the nigerian economy. Pdf taxation revenue and economic growth in africa semantic. This paper examines how changes to the individual income tax affect longterm economic growth. Tax systems are primarily aimed at financing public expenditures. The study found that there exist both short run and long run relationship between economic growth and tax revenue. Pdf the relationship between tax revenue and economic. Worryingly, the results of studies such as this have.
Revenue may be extracted from sources such as individuals, public enterprises, trade, royalties on natural resources and or foreign aid. Above all, these will increase the tax revenue base with resultant increase in growth. The objective of this study was to analyze the relationship between tax revenue and economic growth in kenya for the period 2002 to 2012. Instead, economic growth is often the key driver of tax revenues. The tax burden is measured by taking the total tax revenues received as a percentage of gdp. Distribution of federal tax change by expanded cash income percentile. If you want to raise more tax revenue, raise tax rates. The taxation revenue on nigeria economic growth comes to lime light considering the incidence of overdependent on oil revenue in nigeria. 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. Case study on ethiopia prepared by teigist lemma addis abada, ethiopia. Interestingly, they have done so with no economic penalty. Economic growth entails an increase in gross domestic product overtime and is mainly linked to tax revenue through its effect on tax base. It can be regarded as one measure of the degree to which the government controls the economys resources. Explicit modelling of the individual decisions that contribute to growth allows the analysis of tax incidence and the prediction of growth effects.
The tax rate varies from state to state, and the list of taxable goods or services also varies from one state to the next. Apr 29, 2015 the effects of state tax policy on economic growth, entrepreneurship, and employment remain controversial. At this stage, however, there is little agreement about federal reserve board, washington. Findings from this study show that high tax countries have been more successful in achieving their social objectives than low tax countries.
Taxation, government spending and economic growth edited by philip booth with contributions from ryan bourne. Tax revenue was captured by government nonoil revenue, while wage employment and economic growth were proxied by wage and salaried workers employees and real gdp respectively. For the independent variables, this research using the total population, employed persons, consumer price index, and valueadded tax. Impact of taxation revenue on economic growth of nigeria.
Economic growth drives the level of tax revenue tax. The structure and financing of a tax change are critical to. People often think of tax revenue as a function of tax rates. Myles abstract the development of endogenous growth theory has opened an avenue through which the effects of taxation on economic growth can be explored. 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. In the wake of the recent financial and economic crisis, many oecd countries face the challenge of restoring public finances while still supporting growth. Tax systems are also used to promote other objectives, such as equity, and to address social and economic concerns.
Here is masood 2010 who explores the relationship between economic growth and tax revenue for pakistan. Ormaechea and yoo henceforth aoy2012, which examined the relationship between tax structures and economic growth rates, finding that revenue. 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. The result indicated a unidirectional causality between tax revenue and economic. Many are members of free trade areas such as the european union, and as. This work evaluates the effect of tax avoidance and tax evasion on economic growth and development in nigeria 20062016. Tax reforms and economic growth in nigeria using relevant descriptive statistics and econometric analysis. Using a framework that in prior research generated significant, negative, and robust. 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. Tax revenue is the income that is gained by governments through taxation. The objective of excise taxation is to place the burden of paying the tax on the consumer. All oecd economics department working papers are available on the oecd internet website at. The study period spans economic cycles for about 66 percent of the life of. The finds show that the relationship between tax and economic growth is very weak and in practise taxation does not affect the rate of growth.
Data were sourced from central bank statistical bulletin and extracted through desk. 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. 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. 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. Yet, in practice, it is hard to completely separate the analysis of the overall tax burden from that of tax structure. Thus, the reported results provide the evidence of the existence of feedback or bilateral causality between tax revenue and economic growth in india. An empirical case stud y of kenya by esther wairimu gacanja x50761712009 a research paper submitted to the school of economics, university of nairobi in partial.
Economic growth is the basis of increased prosperity. The paper examined the impact of value added tax on revenue generation in nigeria. The impact of indian taxation system on its economic growth. We specifically consider 69 countries with at least 20 years of observations on total tax revenue. Apart from the revenue function it performs for the government, it is also used to assist the national government to achieve the countrys macro economic objectives in the. The impact of indirect tax revenue on economic growth. As we will see, there are good reasons to be skeptical of such a claim, and several decades of research on the relation between state taxes and growth confirm that such claims are vastly overblown and sometimes completely misleading. Tax rates and economic growth congressional research service 3 taxes could affect the hours intensity of work. An empirical investigation for greece using causality analysis.
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