Abstract
Tax revenue and economic growth in Jordan have been undertaking an upward growth path in absolute terms. A number of studies indicated mixed results for the effect of taxes on economic growth. Numerous of these studies found a negative relationship, others found that taxes affect economic growth positively. So this paper trying to investigate the short and long run effects of taxation on economic growth in an emerging country, Jordan. Annual data for the time period 1980 – 2018 used to develop an Auto-Regressive Distribution Lag (ARDL) approach. Results of the bounds test specify that the variables of economic growth, taxes, capital and trade are cointegrated. The empirical results of the estimated model confirm that there is a negative short and long run relationship between taxes and economic growth in Jordan. Also results of the cointegration estimation indicate that the short run deviations from long run equilibrium is adjusted by 60% towards long run equilibrium each year. Thus the paper proposes that fiscal policy is essential to promote sustainable economic growth. Therefore policy makers of the fiscal policy should take in account a tax rates that are appropriate to make enough revenues needed to finance government utility expenses that promote economic growth.
Highlights
Governments play a crucial role in the country’s economy, seeking to maintain and promote stability in both real and monetary sides
The t-statistics at level for variables GDP, trade and capital are less than the critical values at 10% level of significance for both Augmented Dickey Fuller (ADF) and Phillips Perron (PP) tests
The results show that tax revenue have a negative and significant long run effect on economic growth
Summary
Governments play a crucial role in the country’s economy, seeking to maintain and promote stability in both real and monetary sides. Where taxes can affect the growth through five ways; increase taxes can discourage investment rate, labor participation and hours of work, productivity growth, marginal productivity of capital, and distort the efficient use of human capital [1]. This led various studies to determine whether a long run relationship between taxation and economic growth exists. Government continues the fiscal reform program headed for handling the budget imbalances These procedures help to decrease the deficit to GDP ratio to 2.4% by the end of 2018 comparing with 8.3% of GDP in 2012.
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