Do tax burdens and currency outside banks drive economic development? Empirics from Ghana

Abstract

PurposeSome African policymakers have turned their attention towards electronic transaction levy (e-levy) to maximise tax revenues in recent years due to the inability to meet revenue targets. However, some argue that the implementation of an e-levy will increase the tax burden (TB) and the currency outside banks (COB). Primarily, this paper examined the effects of the TB and COB on economic development as well as the impact of institutional quality on moderating the nexus.Design/methodology/approachThis paper used structural equation modelling (SEM) and maximum likelihood (ML) estimation techniques on quarterised data from 1996 to 2020.FindingsThe results show that the TB negatively impacts gross domestic product (GDP) per capita and urbanisation but positively affects the Economic Freedom of the World Index (EFWI). The COB impacts EFWI, GDP per capita and urbanisation positively. Institutional quality moderates the TB and the COB, establishing positive relationships with the economic development indicators.Practical implicationsThe findings strongly imply that the arguments that TB and COB are catalysts for tax evasion and corruption lack substantial empirical evidence.Originality/valueThe examination of the econometric impact of the COB on economic development is one of the first studies in the field. The paper recommends that to drive economic development and accelerate sustainable development goals (SDGs) achievement, tax revenues should be channelled into the productive sectors of the Ghanaian economy.