Abstract
This study is an effort to examine whether there is a potential of variations in tax efforts of different types in making a positive impact on economic growth in a typical developing economy. We take the case of Nepal and analyse 44 years (1975–2018) of time series data of growth and fiscal variables. We conclude that Nepal has already reached its optimal tax GDP ratio. Additional efforts to collect more tax revenue are counter-productive; rather, it should take some other structural measures for higher GDP growth. Implementation of several scenarios of revenue replacement does not have a significant positive impact on GDP; however, minimising the contribution by excise duties but replacing its contribution by income tax has minimal positive impact on GDP. It refers to the need to protect Nepalese infant industries at this juncture of the fiscal-growth discourse of this small developing economy.
Highlights
Three simulation scenarios are developed in this regard: No change in the income tax and excise duties, but additional tax effort is from value-added tax
No change in the import duties and value-added tax, but additional tax effort is from income tax
The trend of the growth of excise duties is expected from the income tax
Summary
Review of the available methods in measuring the impact of the tax rate changes on economic growth, B. Keep revenue GDP ratio as a controlled variable while assessing the impact of the variations of different tax types on the economy’s growth performance. Based on the best fit models on revenue vs growth diagnostics, the study has conducted some simulation analyses with the impact of an increase in public sector revenue on the overall growth performance of the economy.
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