Abstract
This study investigates the effects and consequences of both direct and indirect taxes on economic growth and total tax revenue in a panel of 51 countries over the period 1992 – 2016. The data were estimated using the dynamic panel generalized method of moments (GMM) estimation. The results indicate that direct taxes are significant and negatively correlated with the economic growth, while indirect taxes seem to have a positive but insignificant impact on the dependent variable. Additionally, this study also found a significant and positive contribution of direct taxes on the total tax revenue compared to indirect taxes. The conclusion is that tax structure based on direct taxes such as taxes on income, profit and capital gains is harmful to the economic growth, yet more efficient in terms of collecting the tax revenue in a country.
Highlights
Taxation is one of the most effective tools that serves to collect the necessary fund as revenue for public spending, improvement of infrastructure, as an economics’ stabilizer and can influence the allocation of resources in a country (Prammer, 2011)
The highest contributor of the collection of tax revenue (56% of GDP) among 51 countries selected was stated by Malta, while the lowest collection of tax revenue (7.71% of GDP) was recorded by Guatemala. Both of direct and indirect taxes has contributed more than 50% of revenue which indicates that these taxes are important as the main sources of revenue for a country. By looking at these two types of taxes, this study found that taxes on goods and services that classified as indirect taxes has an average value of 32.89% of revenue which is slightly higher than taxes on income profits and capital gains (27.56% of revenue)
The main objective of this study is to examine the effect of both direct and indirect taxes on the economic growth and the collection of tax revenue in 51 developing and developed countries
Summary
Taxation is one of the most effective tools that serves to collect the necessary fund as revenue for public spending, improvement of infrastructure, as an economics’ stabilizer and can influence the allocation of resources in a country (Prammer, 2011). The relevant literature has demonstrated the different impact of taxes on economic growth and other economic variables. Ilaboya and Ohonba (2013) stressed that the different types of tax structures have different effect on macroeconomic indicators. In the system of taxation, there have commonly two types of taxes which are direct and indirect taxes. The tax revenue collected from indirect taxes such as goods and services taxes have contributed more than direct taxes such as personal income and corporate taxes (Masika, 2014)
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