John MacCarthy, Paul Muda and Prince Sunu

Correspondence: John MacCarthy, maccarthy.john@upsamail.edu.gh

Accounting Department, University of Professional Studies, Accra, Ghana.

pdf (425.21 Kb) | doi: https://doi.org/10.47260/bae/922

Abstract

The paper sought to assess the taxes and economic growth nexus in Ghana. The study used annual time-series data collected from 1972 to 2019. The study used the Johansen Co-integration technique, vector error correction model, and Granger causality test to assess the causal relationship between tax revenue and economic growth in Ghana. The Co-integration test was used to establish the long-run relationship. In contrast, the Granger Causality test was used to establish the short-run relationship between the variables used in the model. The study revealed that the model has a speed of adjustment of 61.4% to restore the short-run relationship to the long-run equilibrium path. Furthermore, the study found a unidirectional relationship between tax revenue variables and economic growth. Again, the study found support for a positive and significant nexus between direct tax revenue and economic growth and a significant and negative nexus between indirect tax revenue and economic growth. Based on the results, the study recommends that the government tax policy move gradually from indirect tax revenue concentration to direct tax revenue to finance development programs to sustain economic growth.

Keywords:

  Direct tax; Economic growth; Granger Causality; Indirect tax.

References

Ackah, I., and  Adu, F. (2014). Government expenditures and economic growth dynamics in Ghana.     International Journal of Economics and Empirical Research, 2(5), 180-190.Adefeso, H., Egbetunde, T., and Alley, I. (2013). Stock Market Development and Growth in Nigeria: A Causal Analysis. Arabian Journal of Business and Management Review, 2(6).Adeleye, N., Ogundipe, A.A., Ogundipe, O., Ogunrinola,. I., and Adediran, O. (2019). Internal and External drivers of Inflation in Nigeria, Banks Bank Systems, 14(4), 206-218.Adereti, S. A., Adesina, J. A., and Sanni, M. R. (2011). Value Added Tax and Economic Growth in Nigeria. European Journal of Humanities and Social Sciences, 10(1), 456-471.Adusei, M. (2013). Finance-growth nexus in Africa: A generalized panel method of moments (GMM) Analysis. AsianEconomicandFinancialReview, 3(10),1314-1324.Ahmad, S., Sial, M. H., and Ahmad, N. (2018). Indirect taxes and economic growth: An empirical analysis of Pakistan. Pakistan Journal of Applied Economics, 28(1), 65-81. DOI: 10.21859/eulawrev-08062Ali-Nakyea, A. (2006). Taxation in Ghana: Principles, Practice and Planning. Accra, Ghana: Black Mask Limited.Anderson, D. R., Sweeney, D.T., and Williams, T.A. (2009). Statistics for Business and Economics. New York: West Publishing Company.Anning, L., Ofori, C., and Affum, E. (2016). The impact of government on the economic growth of Ghana: A time-series analysis from 1990 - 2015. International Journal of Innovation and Economic Development, 2(5), 31-39.Arltova, M. (2016). Statistica. Praque, Czech Republic: University of Economics.Barro, R. (1990). Government spending in a simple model of endogenous growth. Journal of Political Economy, 98(5), 26-50.Barro, R.J., and Redlick, C.J. (2011). Macroeconomic effects from government purchases and taxes, the quarterly Journal of Economics, 126(1), 51-102.Bhanumurthy, N.R., and Mitra, A. (2004). Economic Growth, Poverty, and Inequality in Indian States in the Pre-reform and Reform Periods. Asian development review, 21(2), 1-27.Bloom, D., and Canning, D. (2001). The health and Poverty of Nations: From theory to practice. Paper presented at the Pan American Health Organisation.Bukie, O.H., Adejumo, O.T., and Edame, G.E. (2013). The effects of tax revenue on economic growth of Nigeria. International Journal of Humanities and Social Science, 2(6), 16-26.Clements, B., R., Bhattacharya, M. R.., and Nguyen, T. Q .(2003). External debt, public investment, and growth in low-income countries (No. 3-249). International Monetary Fund. Cottarelli, C. (2011). Revenue Mobilisation in Developing Countries, International Monetary Fund Paper, 1-85.Dackehag, M., and Hansson, A. (2012). Taxation of Income and Economic Growth: An Empirical Analysis of 25 Rich OECD Countries. Lund University Department of Economics. Working Paper No 6.Diego, V. (2006). The Effect of Foreign Direct Investment on Tax Revenue in Latin America: Are the Facts in Accord with the Conventional Wisdom?, A&M University Working Paper, Texas.Duasa, J. (2007). Determinants of Malaysian trade balance: an ARDL bound testing approach. Global Economic Review,36(1), 89-102.Edame, G. E., and Okoi, W. W. (2014). The impact of taxation on investment and economic development in Nigeria, Academic Journal of Interdisciplinary Studies, 3(4), 209-218Egbunike, C.  F., and Okerekeoti, C. U. (2018). Macroeconomic factors, firm characteristics and financial performance. Asian Journal of Accounting Research, 3(2), 142–168. https://doi.org/10.1108/ajar-09-2018-0029Egert, B. (2015). Public debt, economic growth and nonlinear effects: Myth or reality? EconPapers, 43(1), 226 -238Ekpung, E.G., and Wilfred, O.W. (2014).The Impact of Taxation on Investment and Economic Development in Nigeria. Academic Journal of Interdisciplinary Studies, 3 (4). https://doi.org/10.5901/ajis.2014.v3n4p209Engen, E., and Skinner, J. (1996). Taxation and economic growth. National tax journal, 49(4), 617-642.Engle, R. F. and Granger, C. W. J. (1987). Cointegration and Error Correction: Representation, Estimation and Testing. Econometrica, 55(2), 251-276.Etale, L., Bingilar, P. F., and Ifurueze, M.S. (2016). Market Share and Profitability Relationship: A Study of the Banking Sector in Nigeria. International Journal of Business, Economics and Management, 3(8), 103-112Fosu, A.K. (1996). The impact of external debt on economic growth in sub-saharan Africa, Journal of Economic Development, 21(1), 93-118.Gale, W.G., and Samwick, A.A. (2014). Effects of income tax changes on economic growth. Economic studies, Brookings Institute, 1-15.Gashi, B., Asllani, G., and Boqolli, L. (2018). The effect of tax structure in economic growth. International Journal of Economics and Business Administration, 6(2), 56-67. Retrieved from https://www.ijeba.com/journal/157/downloadGbato, A. (2017). Impact of taxation on growth in SubSaharan Africa: New evidence based on a new data set. International Journal of Economics and Finance, 9(1), 172193. Retrieved from https://hal.archives-ouvertes.fr/hal01673738/documentGranger, C.W. (1969). Investigating causal relations by econometric models and cross-spectral methods.     Econometrica, 37(1), 424-438.Granger, C.W.J. (1988). Some recent development in a concept of causality. Journal of Economics, 39(1), 199-211Gujarati, D. N. (2003). Basic Econometrics, (4th ed.), New Delhi, India: Tata McGraw-Hill.Ibadin, O.  P., and Oludipupo, A. O. (2015). Indirect taxes and economic growth in Nigeria. Ekon. Misao I Praksa Dbk, 24(1), 345-364.).Karras, G., and Furceri, D. (2009). Taxes and growth in Europe. South-Eastern Europe Journal of Economics, 2(1), 181-204.Kasman, S. (2014). Exploring the Laffer curve: Behavioural Responses to Taxation, University of Vermont.Khobai, H. (2018). The causal linkages between renewable electricity generation and economic growth in South Africa, Munich Personal RePEc Archive.Khumbuzile, D., and Khobai, H. (2018). The impact of Taxation on Economic Growth in South Africa, MPRA Paper 86219, University Library of Munich, Germany.King, R. G., and Rebelo, S. (1990). Public Policy and Economic Growth: Developing Neoclassical Implications. Journal of Political Economy, Vol. 98, No. 5, pp. 126-150,Kline, R.B. (2011). Principles and practice of structural equation modelling (5th ed.). New York: The Guilford Press.Koch, S. F., Schoeman, N. J., and Tonder, J. J. V. (2005). Economic Growth and the Structure of Taxes in South Africa: 1960 to 2002. South African J Economics, 73(2), 190-210.Kohpaiboon, A. (2003). Foreign trade regimes and the FDI–growth nexus: A case study of Thailand. The Journal of Development Studies 40 (2), 55-69.Koirala, J. (2011). The Effect of Stock Market Development on Economic Growth: An Empirical Analysis of UK, University of Wales.Kowalski, E. (2000). Determinant of economic growth in East Asia. Research Honors Project, 74, Illinois Wesleyan University, USA https://digitalcommons.iwu.edu/econ_honproj/74Liew, V. K. (2004). Which lag length selection criteria should we employ?. Economics Bulletin, 3 (33),    1-9Lin, B. Q. (2003). Economic Growth, Income Inequality, and Poverty Reduction in People's Republic of China, Asian Development Review, 20(2), 105-124.Lucas, R. (1988). On the mechanics of economic development. Journal of Monetary Economics, 22(1),      3-42.Lucas, R. E. and Rapping, L. A. (1969). Real Wages, Employment and Inflation. Journal of Political Economy, 77(1),721-754.Lupinski. M. (2013). Comparison of alternative approach to VaR evaluation. Ekonomika i Orgnizacja Przedsie¸biorstwa. Ekonomika i Orgnizacja Przedsie¸biorstwa 64, 3-16.Lutkepohl , J. H. (2005). New introduction to multiple time series analysis. New York: Springer Science & Business Media.Macek, R. (2014). The impact of taxation on economic growth: Case study of OECD countries. Review of Economic Perspectives, 14(4), 309-328. DOI: 10.1515/revecp-2015-0002.Magu, MC (2013). The Relationship between Government Revenue and Economic Growth in Kenya. Master of Business Administration Research Project, University of Nairobi, Kenya.Mankiw, N. G., Romer, D., and Weil, D. W. (1992). A contribution to the empirics of economic growth. The Quarterly Journal of Economics, 107(2), 407-437.Marsden, K. (1990). Taxes and growth: Taxation in Developing Countries, Baltimore: Johns Hopkins University Press.Martinez-Vasquez, J., Vulovic, V., and Lius, L. (2009). Direct versus indirect taxation: trends, theory, and economic significance. Andrew Young School of Policy Studies, Georgia State University.Mawejje, J., and Munyambonera, E. F. (2016). Tax Revenue Effects of Sectoral Growth and Public Expenditure in Uganda. South African Journal of Economics, 84(4), 537-554.McMahon, G., and Berrios, M. (1991). Tax Reforms and Macroeconomic Policy in the Developing Countries. Oxford: Oxford University Press.Mehrara, M., Masoumib, M., and Barkhi, F. (2014). The effect of fiscal shock on inflation and economic growth in developing countries. International Letters of Social and Humanistic Sciences, 41(1), 184-191. DOI: 10.18052/www.scipress.com/ILSHS.41.184Mertens, D. M. (2015). Research and Evaluation in Education and Psychology (4th ed.). Thousand Oaks, CA: Sage.Nafziger, E. W. (2005). Economic Development, (4th ed.), USA: Cambridge University Press.Nwaorgu, I. A., Herbert, W.E., and Onyilo, F. (2016). A Longitudinal Assessment of Tax Reforms and National Income in Nigeria: 1971-2014. International Journal of Economics and Finance, 8(8), 43-52.Ogbonna, C., and Ebimobowei, E. (2012). Effect of tax policy on firm’s performance in Nigeria: A study of Quoted banks. Journal of social sciences and finance 2(3).Ogundana, O. M., Ogundana, O. M., Ogundama, O. M., Ibidunni, A. S., and Adetoyinbo, A. (2017). Impact of direct and indirect tax on the Nigeria economic growth. Binus Business Review, 8(3), 215-220. DOI: 10.21512/bbr.v8i3.3621Ogundele, A.E. (1999). Elements of Taxation. (1st Ed.). Lagos, Nigeria: Libri Service.Okafor, R. G. (2012). Tax revenue generation and Nigerian economic development. European Journal of Business and Management, 4(19), 49-56.Onuoha, L. N., and Akintoye, R.I. (2018). Taxation as a veritable tool for wealth creation in Nigeria. International Journal of Advanced Academic Research, 4(12), 101 – 113.Organisation for Economic Co-operation and Development [OECD] (2010). Tax policy reform and economic growth. OECD Tax Policy Studies, 20(1), OECD Publishing. http://dx.doi.org/10.1787/9789264091085-enOsei, D. R., and Quartey, P. (2005). Tax Reforms in Ghana. World Institute for Development Economics Research Paper No.2005/66Oshoke, A.S. (2016). The Impact of Indirect Tax Revenue on Economic Growth: the Nigeria experience. Igbinedion University Journal of Accounting, 2(1), 62-87.Owens, F., and Zhan, J.  (2018). Introduction to the special issue trade, investment and taxation: Policy linkages. Transnational Corporations Journal, 25(2), 1-160.Owino, O. B. (2018). The trade-off between direct and indirect taxes in Kenya: An empirical analysis. Journal of Economics and Development Studies, 6(4), 187-201. DOI: 10.15640/jeds.v6n4a16Owusu-Gyimah, A. (2015). Tax revenue generation and the economic development of Ghana. European Journal of Business and Management, 7(14), 78-88.Pesaran, M. H., Shin, Y., and Smith, R. P. (1999). Pooled mean group estimation of dynamic heterogeneous panels. Journal of the American Statistical Association, 94 (446), 621-634.Pesaran, M.H., Shin, Y. and Smith, R.J. (2001). Bounds testing approaches to the analysis of level relationships, Journal of Applied Econometrics, 16(3), 289-326.Poulson, W., and Kaplan G. (2008). State income taxes and economic growth. Cato journal, 28(1), 53-71.Rahul (2015). Role of direct and indirect tax in development of Indian economy. International Journal of Research in Finance and Marketing, 5(12), 91-97.Rajeswari, K., and Mary, T.S. & Susai , M.(2014). The Trend And Pattern of Income Taxation in India. International Journal of Business and Administration Research Review, 2(2), 118-124.Romer, C. D., and Romer, D. H. (2010). The Macroeconomic effects of tax changes: Estimates based on a new measure of fiscal shocks. The American Economic Review, 100(1), 763-801.Samuelson, A., and Nordhaus W. (2010).  Economics. New York, U.S.A: McGraw Hill Education.Schultz, T.W. (1964) Transforming Traditional Agriculture, USA: Yale University Press.Solow, R.M. (1956). A Contribution to the Theory of Economic Growth. Quarterly Journal of Economics, 70(1), 56-94.Stoilova, D., and Patonov, N. (2012). An empirical evidence for the impact of taxation on economy growth in the European Union, Tourism and Management Studies International Conference Algarve, 3(1).Subrahmanya.V., and Urmi, A. (2017). The impact of taxation on economic growth in India : A disaggregated approach using the ARDLbounds test to co-integration. International Journal of Accounting and Economics Studies, 5 (1), 16-21.Tabachnick, B.G., and Fidell, L.S. (2007). Using multivariate statistics (5th ed.). Boston, M.A: Pearson Education, Inc.Takumah, W. (2014). Tax Revenue and Economic Growth in Ghana: A Cointegration Approach. MPRA PaperNo.58532. Retrieved from https://MPRA.ub.uni-muenchen. de/58532/1/MPRA_paper_58532.pdfTakumah, W., and Iyke, B. N. (2017). The Links between economic growth and tax revenue in Ghana: An empirical investigation. International Journal of Sustainable Economy. 9(1), 34-55.Tosun, S., and Abizadeh S. (2005). Economic growth and tax components: An analysis of tax changes in OECD. Applied economics, 35(19), 2251-2263.Velicer, W. F., and Fava, J. L. (2003). Time series analysis. Handbook of Psychology, 2(1), 581-606Wallstrom, M. (2006). The 35 Years of Euro-barometer European integration as seen by public opinion in the Member States of the European Union: 1973 - 2008. European Commission ReportWidmalm, F. (2001). Tax Structure and Growth: Are some Taxes better than others? Public choice, 1(107), 199-219.World Development Indicators [WDI] (2020) Workbank Database [online] http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators (accessed 24 December 2020).Worlu, C. N., and Nkoro, E. (2012). Tax revenue and economic development in Nigeria: A macroeconometric approach. Academic Journal of Interdisciplinary Studies, 1(2), 211-233.Xing J. (2012) Tax structure and growth: How robust is the empirical evidence, Economics Letters, 117(1), 379-382.