This study uses the ICTD UNU‐WIDER Government Revenue Dataset .. Turning to the relationship between tax and GDP per capita, Figure 2. 3rd International Symposium on Sustainable Development, May 31 - June 01 , Sarajevo key in enabling Bosnia to attract foreign investments in this sector . causal relationship between taxes and growth be investigated. .. growth trajectory is steadily declining for both tax revenues and GDP, in similar traits although.
The focus of this study is that the effect of tax revenues to economic growth will be positive in developing countries in the case of legal regulations are made about tax policy. Income and corporation tax are both example of direct taxes. Indirect taxes arise from the use of services and goods. Everyone derived benefit from services or goods liable to tax has to pay it at the same rate regardless of income level. Tax payer and payer are different on this subject.
Economic Growth Drives the Level of Tax Revenue
Direct taxes which consist of income tax, property tax and corporation tax, indirect taxes which consist of taxes taken from both domestic and foreign trade have different function and impact on the economies. Direct taxes have the results for high income groups which have inclination to high savings and investment and also low marginal propensity to consume.
On the other hand, indirect taxes have results for low income groups.
The basic aim of the taxation is to create resources to cover expenses of public for both developed and developing countries. So, both tax types can also be used as a policy tool. The Percentage of Direct and Indirect Taxes www. While the ratio of direct tax to the total tax revenue in the developed countries is high, it reverses for the developing countries. This reversal is a result of easier collection of indirect taxes, and that easiness comes from the unawareness of tax payers about statutory obligation.
Tax revenue and economic growth: an empirical case study of Kenya
So, they do not respond to tax executives. When the progress of direct and indirect taxes have been examined, the composition of total tax revenue reversed from direct tax to indirect tax revenue after s.
Turkey distinguishes from developed countries with this tax structure. This deterioration is a result of increased value added tax rate like excise tax rate. Table 1 shows the distribution of indirect and direct tax revenue percentages between years. But this moderate effect may have large cumulative effect on living standards. Lee and Gordon shown that corporation tax rate has negative relationship with economic growth, and there is no relationship between tax rate associated with manpower income and economic growth by analyzing 27 years long data set of 70 countries between The relationship between economic growth and tax revenue in the period of was tested in the study of Anastassiou and Dritsaki for Greek economy.
According to their findings; there are relationships between total tax revenues, marginal direct tax rates, savings- income rate and economic growth in the long term. They have reported that there is one-way causal relationship from total tax revenue and marginal direct tax rate to the economic growth in the short term. The relationship between tax revenue and economic growth was investigated for Turkey by Durkaya and Ceylanand they used Engle-Granger co-integration test in order to search long term relations between direct and indirect tax revenues and economic growth.
Vector error correction model VECM and Granger causality test were used to investigate short-term relations between direct and indirect tax revenues and growth for the years of The findings show that there is causal relationship between direct tax and growth. Temiz analyzed to find relationship between public tax revenues and economic growth for years. Temiz used Johansen co-integration test to search long term relations and VECM to search short term relations.
The findings show that there are two way causal relationships between total tax revenue and economic growth. The findings are that the direction of casual relations is from economic growth rate towards the proportion of direct tax revenue in total tax revenue and the proportion of indirect tax revenue in total tax revenue.
Additionally, one-way causal relationship from direct tax burden proportion of direct tax revenues to GDP toward growth rate has also been reported. They determined the relationships among them by means of co-integration test for the long term duration, and the granger causality test shows that there is one way relation from direct tax revenue toward economic growth in the short term 4.
ADF test has been applied to series for stationary of them in order to investigate the relationships between the variables, and Table1 indicates the ADF test results. Critical values have been evaluated by Eview-5 econometrical program and based on MacKinnon values. ADF test results have indicated that the levels of variables are not stationary, but first levels of variables are stationary. Johansen-Juselius test has been used in order to examine long-term relationships between variables, by then.
In Johansen-Juselius test, two different tests called Trace and Max Eigen value statistics have been applied to determine the number of co- 35 3rd International Symposium on Sustainable Development, May 31 - June 01Sarajevo integration vector and whether they are statistically significant or not.
Before these tests have been applied, the length of optimal lag should have been determined under different criteria. Taking into account annual data usage and shortness of period, the maximum lag length has been determined as 3.
This results show that the variables of both tax types and economic growth have been acted together in the long term. Cointegration Test According to Table 4. There is no any relationship between economic growth and indirect or direct tax revenues in the short term. It should be pointed out that there should be other factors which may affect to the economic growth Table 5: Growth is not the granger cause of indirect tax 0.
Evaluation has been completed through impulse- response functions and variance decomposition analysis. Impulse- response function IRF reflects the effects of one standard deviation shock in one of the random error terms to the present and future values of internal variables.
While the impacts of one standard error shock occurred in indirect tax revenue on the economic growth has increased till second term, it has decreased till fourth term and decreasingly lost its significance.
While the impacts of one standard error shock occurred in direct tax revenue on GDP has decreased till third month and gradually increased.
The two years with the lowest take were under the supposedly "socialist" Obama admittedly a function of the weak economy and the highest tax take was under Clinton, at the height of the dotcom boom in Sincetax revenues in the UK have fluctuated between about 30 and 38 percent and have stuck near 35 percent for the last 15 years.
Over the same period, tax revenues in the U. Government in both places have seen revenue act independently of tax rates in some instances. In the United States through the s and s, top individual federal tax rates remained at 70 percent while revenue climbed to Following the recession in andtax revenue dropped to 24 percent, then climbed steadily throughdespite top marginal income tax rates coming down to 28 percent and the corporate rate dropping to 34 percent in Tax revenue fell in the early s before and after the Bush tax cuts, only to rise again after the Bush tax cut.
What Drives Tax Revenues? As The Economist writer implies, economic growth is a major driver of the level of tax revenues. In the times when tax revenues are up, the economy is doing well. We see this in each of the times when revenue fluctuates. From the mids through the late s the economy grew steadily and tax revenues grew along with it.
Conversely, between andtotal tax revenue in the U.
The short answer to how we maximize tax revenue: We can do this by limiting taxes on economic factors that drive economic growth, namely investment.