Influence of Taxation on Economic Growth

ABSTRACT: The purpose of the study is to analyze the relative efficacy of monetary and fiscal policies in fostering economic growth in Bangladesh concerning predictability, speed, and magnitude. Moreover, it aims to find the relationship between the economic boom of Bangladesh and two measures of macroeconomic management i.e., monetary and fiscal policy. The ARDL model and bound test are applied to examine the long-term link between monetary policy, fiscal policy, and economic growth. Data is obtained from the World Development Indicator (WDI) for Bangladesh for the period 1974 to 2022. Several diagnostics tests like CUSUM and CUSUMQ are used to identify both the strengths and weaknesses of the models. The findings demonstrated a long-term correlation between the two policies and economic growth. According to the calculated short-run coefficients, the short-term effect of fiscal policy is mentionable but the effect of monetary policy is negligible in the short term. But over time, the immediate effects become noteworthy. The long-term outcomes indicated that both fiscal and monetary policies have a favorable and substantial long-term impact on economic growth. The result shows fiscal policy is more effective compared to monetary policy for making Bangladesh, a role model of Bangladesh. Furthermore, all the diagnostics tests showed the stability of the estimated ARDL model. Expansionary fiscal and monetary policies lead to higher government spending and an increase in the money supply, which raises GDP levels. Conversely, if government spending and the money supply decline (contractionary fiscal and monetary policies), the GDP level falls. As a result, this study suggests using expansionary policies to boost Bangladesh’s economy.

This work examined the comparative impact of fiscal policy and monetary policy on economic growth in Nigeria over the period 1981 to 2021 using annual time series data on real gross domestic product, broad money supply, government expenditure, total government revenue, and interest rate (lending rate). The objectives are to determine whether the fiscal policy or the monetary policy impacts more on economic growth in Nigeria and to ascertain the causality relationship between fiscal policy, monetary policy and economic growth in Nigeria over the period. The study employed ARDL Bounds Testing methodology in determining whether long run relationship exists between fiscal policy (proxy government expenditure and total government revenue), monetary policy (proxy broad money supply and interest rate (lending rate) and real gross domestic product. The result indicated that broad money supply representing monetary policy has positive relationship with and statistically significant impact on economic growth in Nigeria over the study period as indicated by its t-statistic and probability values of 6.436365 and 0.0000 respectively. Fiscal policy variable (government expenditure), on the other hand, has negative relationship with economic growth and statistically significant impact on economic growth in Nigeria as indicated by its t-statistic and probability values of -2.427968 and 0.0234 respectively. From the result, a change in money supply (monetary policy) affects economic growth positively while a change in Fiscal policy variable (government expenditure) affects economic growth negatively. Besides, the coefficient of monetary policy (0.457048) is greater than fiscal policy coefficient (-0.300554) and implies that monetary policy impacts more than fiscal policy impacts on economic growth in Nigeria. Therefore monetary policy does impact more than Fiscal policy on economic growth in Nigeria over the period studied. The result further indicated that there is no significant causality relationship between fiscal policy, monetary policy and economic growth in Nigeria over the period covered as indicated by the probability values of both fiscal and monetary policy variables employed and economic growth. The study therefore recommends that policy makers should focus more on monetary policy than fiscal policy so as to enhance economic growth since monetary policy has more concern with economic growth than fiscal policy. Keywords: Economic growth, fiscal policy, monetary policy, ARDL, Bound Test, Causality, Nigeria.

COVID-19 and socioeconomic impact in Africa: The case of Kenya

The study analyzed the effect of fiscal policy on foreign direct investment as well as the impact of Foreign Direct Investment on economic growth in Nigeria over the period of 1981-2017. The main type of data used in this study is secondary; sourced from various publications of Central Bank of Nigeria, such as; Statistical Bulletin and Annual Reports. The regression analysis of the co-integration is the estimation technique that is being employed in this study to determine the relationship between and impact of the fiscal policy on Foreign Direct Investment as well as the impact of Foreign Direct Investment on economic growth. The findings revealed that corporate income tax as fiscal indicators has a positive effect on foreign direct investment and government expenditure as a fiscal indicator has a negative effect on foreign direct investment. It also revealed that foreign direct investment have a significant impact on economic growth, it is further revealed that corporate income tax and interest rate and exchange rate have a negative and significant relationship on economic growth. Government expenditure and inflation have a positive and significant relationship impact on economic growth. This implies that foreign direct investment is an engine of economic growth. The paper recommended that the government should ensure a strict fiscal policy discipline and also government need to demonstrate high level of commitment to selectively choosing investors so as to favor the economy and not investor's selfish interest as this will promote economic growth. The project work is further recommended for further study.

PurposeThe present study aims to investigate the impact of the reduction of the corporate tax rate on corporate tax revenue. The study adopts the theory of taxation by Ibn Khaldun, depicted as the Laffer curve.Design/methodology/approachThe paper analyses time series data for the period 1996 to 2014 using the autoregressive distributed lag (ARDL) approach.FindingsThe paper finds that the corporate tax rate has a dual effect on corporate tax revenue over the study period. It shows an inverted U-shape relationship between the corporate tax rate and corporate tax revenue and reveals that the optimal tax rate is 25.5156 per cent. Inferentially, a positive relationship exists between the two variables prior to the optimal tax rate, and a negative relationship prevails afterwards. A further test of causality shows a long-run unidirectional causality between corporate tax rate and corporate tax revenue.Research limitations/implicationsFirst, it should be noted that the policy was not implemented in isolation. Several other tax incentives were given to corporate tax payers, and therefore, such incentives should be controlled for to have a more insightful evaluation of the policy. Second and most important, there is a need to investigate whether the increased cash flow available to firms as a result of the reduction in the corporate tax rate adds value to firms. It is also necessary to investigate whether firms’ stakeholders benefited from the increased cash flow or was there managerial diversion of firms’ resources.Practical implicationsThe policy of gradual reduction of the corporate tax rate in Malaysia is suspected to have a positive impact on the productivity of Malaysian companies, which has contributed to an increase in corporate tax revenue. It also has a positive impact on the economic growth of the country. It means that the lower corporate tax rate has actually reduced the cost of doing business in the country.Originality/valueThe benefit of increased corporate tax revenue needs to be investigated empirically for insightful policy evaluation. In Malaysia, however, such investigation is close to non-existent to the best knowledge of the researchers. Thus, the present study aims at investigating the impact of the policy of gradual reduction of the corporate tax rate on corporate tax revenue over an 18-year period from 1996 to 2014.

Schumpeter took a great interest in actual fiscal policy, first, during ?9?8 and ?9?9 to rescue Austria’s economic position and currency in the aftermath of World War i. These reform proposals pertain to situations of extreme economic misery. For reforms of the fiscal system under normal economic conditions, we have to look at Schumpeter’s articles in Der deutsche Volkswirt in the years ?926 to ?930, which represent commentaries on German fiscal and economic policy in the Weimar Republic. As modern Germany’s economic and fiscal situation is characterized by high unemployment, high budgetary deficits, high public indebtedness, low economic growth, and a high level of impost (taxes and social security contributions), the present situation is not fundamentally different from the economic situation in the Weimar Republic. Screening these proposals, we find that Schumpeter was in favor of general taxes to avoid tax shifting, he pleaded for preferential tax treatment for saving and investments, he asked to keep taxes and contributions moderate, in particular the marginal rates, he suggested reducing the excess burden of taxation, he favored increasing the level of the tax-exempt subsistence income, and favored increasing the excise taxes on tobacco and alcohol. Concerning the social security system, we can only conjecture that Schumpeter would have recommended a funded social security system. A Schumpeterian escape from Germany’s current economic problems would be an impost system consisting of a flat tax supported by a social component. Under this proposal, all sources of domestic income are taxed at a proportional rate t. The social component comprises the subsistence level of a family and all inevitable expenses for making its living. The excess of the social component over the rate s of worldwide income is subsidized by public funds. Using a micro-simulation model for Germany, it is shown that such a system not only balances for t = 30% and s = 35%. It is also able to dispense with the corporation tax and the business tax. It reduces the excess burden of taxation considerably and causes dramatic reductions in the inequality of net incomes. A closer look at necessary reforms of the German tax and social security reform shows that they conform perfectly with Schumpeter’s ideas for Germany in the period 1926-1930, published in Der deutsche Volkswirt. Following Schumpeter, we end up with a flat tax and a social component for Germany to solve her current economic problems.

We use a simple DSGE model with prices and wages rigidities to evaluate the efficiency of various fiscal policies intended to sustain economic activity and growth. We show that a fiscal policy aiming at reducing the tax burden would be all the more efficient as wages are more flexible. Besides, a decrease of the capital taxation rate appears as the most efficient fiscal policy. Indeed, it would decrease the capital cost, and it would foster private and public investment, but also private and public consumption. Wages rigidities would then reduce the inflationary tensions due to this economic growth. In comparison, a decrease of the consumption taxation rate increases private consumption, and all other components of global demand; however, economic growth is then more limited than with a decrease of the capital taxation rate. Finally, a decrease of the labor taxation rate would increase private investment and consumption and public expenditure exactly in the same proportions, but it would be much less efficient than the previous policies in order to sustain economic growth. Besides, it would favor public consumption expenditure, whereas the decrease of consumption or capital taxation rates would mainly promote the most productive public investment expenditure.

Purpose: The study examined the impact of corporate income tax on economic growth in Zambia using the Instrumental Variable (IV) approach. Materials and Methods: The study utilized a quantitative research approach, employing time series data for the period 1994-2023. The data was compiled from various sources. The top statutory corporate and personal income tax rates were obtained from the World Tax Database while the other variables namely, FDI, population growth, education and trade were obtained from the World Development Indicators, compiled by the World Bank. The study employed both OLS and 2SLS using IV Methods to address endogeneity concerns. Findings: The empirical findings show a statistically significant negative impact of CIT on economic growth in Zambia. OLS estimates suggest that higher CIT rates are associated with slower GDP per capita growth, though the magnitude of this effect is relatively small. However, the IV approach yields larger negative coefficients, reinforcing the argument that CIT exerts a substantial adverse effect on economic growth when endogeneity is accounted for. Specifically, the IV results indicate that a 10 percent reduction in the corporate tax rate causes an increase in GDP per capita growth by approximately 1.19 to 1.34 percent. Unique Contribution to Theory, Practice and Policy: The negative impact of CIT on economic growth calls for policymakers to come up with an optimal taxation structure in which taxation of income is not excessive. This is attributed to the effects of a high CIT rate which discourages reinvestment by reducing after-tax profits, limiting the capacity of firms to expand, innovate and/or create jobs. In turn, this dampens productivity and slows overall economic growth. The study recommends that policymakers should consider lowering the CIT rate to encourage business expansion, attract investment and boost job creation.

Government economics is the study of how government policies influence a country's economic activities. In this case, fiscal and monetary policies are the two main instruments used by the government to control economic growth. In Indonesia, fiscal and monetary policies are used to increase economic growth and overcome economic problems faced by the country. Qualitative methods that can be used in this research are case studies or field research. This research aims to analyze the influence of fiscal and monetary policy on economic growth in Indonesia. The research results show that fiscal and monetary policies have a significant effect on economic growth in Indonesia. Fiscal policy, as measured by the ratio of government debt to GDP and government spending, has a positive influence on economic growth. that fiscal and monetary policies have a significant influence on economic growth in Indonesia. Fiscal policy, particularly government spending on infrastructure projects and social programs, has a positive impact on economic growth. Meanwhile, monetary policy, such as interest rate policy and banking regulations, has a less significant influence.

PurposeIn the academic debate, the tax–growth relationship is always a controversial one. This paper aims to investigate the relationship between tax structure and economic growth in India for the period 1980-2016. After controlling for total tax revenue share to GDP in the estimation model, the authors examine the long-run and short-run relationship between tax structure and growth in India.Design/methodology/approachAuto-regressive distributed lag (ARDL) model has been used in this study. This bound cointegration model has certain advantages to the traditional cointegration model. This study also applies the threshold cointegration test of Hansen and Seo (2002) for examining non-linearity in tax–growth nexus.FindingsThe analysis shows that income tax share, corporation tax share and excise tax share are harmful to growth in the long-run. While the custom share is enlarging the growth performance. Corporation tax share is also reducing growth in the short-run. Following the Pesaranet al.(2001) approach of ARDL bound testing, the authors find the existence of a long-run relationship between studied variables. However, this study does not find any existence of threshold effect in the tax–growth relationship for India.Practical implicationsBased on the empirical findings, the author suggests that the prime tax change, which has the potential to impact both long-run growth and short-run economic recovery is the reduction of corporate tax rate with sustainable revenue generation. It will definitely enlarge the foreign direct investment, saving and investment in India.Originality/valueThis study will be a contribution to the empirical literature by investigating “tax–growth” relationship in the Indian case. To the knowledge, this will be the first study to examine this relationship for India with a recent data set.

Monetary policy and fiscal policy are sister strategies that can be used alone and in combination to direct the economic goals. In the literature relative efficacy of fiscal and monetary policy has been studied extensively. Friedman and Meiselman (1963), Ansari (1996), Reynolds (2000, 2001), Chari, et al. (1991, 1998), Schmitt and Uribe (2001a), Shapiro and Watson (1988), Blanchard and Perroti (1996), Christiano, et al. (1996), Chari and Kehoe (1998), Kim (1997), Chowdhury (1986, 1988), Chowdhury, et al. (1986), Weeks (1999), Feldstein (2002) and Cardia (1991) have examined the impact of fiscal and monetary policies on various economic aggregates. However, the bulk of theoretical and empirical research has not reached on conclusion concerning the relative power of fiscal and monetary policy to effect economic growth. Some researchers find support for the monetarist view, which suggests that monetary policy generally has a greater impact on economic growth and dominates fiscal policy in terms of its impact on investment and growth. [Friedman and Meiselman (1963); Ajaye (1974); Elliot (1975); Batten and Hafer (1983)], while other argued that fiscal stimulates are crucial for economic growth. [Chowdhury (1986); Olaloye and Ikhide (1995)], On the other hand, according to Cardia (1991) macroeconomic activities are largely explained by some other variables. The experiment of 1970s clearly demonstrates that a policy mix produced only stagflation. Some economist took keen interest in money by combining Keynesian neoclassical mixture which is called the “funnel” theory by James Tobin. The argument was that tax rate and money growth simultaneously leads to stagflation thus the Government could choose either fiscal or monetary policy stimulus which will enhance growth. [Reynolds (2001)].

The Effect of the VAT Rate Change on Aggregate Consumption and Economic Growth

Effective management of Indonesia’s macroeconomic variables –production, inflation, money supply, aggregate demand, and interest rates– is crucial for economic stability and growth. This study examines the fiscal and monetary policies implemented by the Indonesian government from 2015 to 2019 and assesses their impact on key macroeconomic variables. Utilizing a qualitative research approach and comprehensive literature review, the study analyzes the principles and implementation of these policies. Fiscal policies, including infrastructure development, social protection, and tax amnesty, significantly contributed to economic growth and reduced unemployment. Monetary policies, such as interest rate adjustments, open market operations, and reserve requirements, maintained inflation around 3% and improved liquidity. However, economic growth fluctuated, indicating the need for better policy coordination. The study highlights the importance of strategic fiscal and monetary policies in achieving macroeconomic stability and offers insights into optimizing these tools for addressing economic challenges and promoting long-term development in Indonesia.Keywords: Indonesian government; macroeconomic management; fiscal policy; monetary policy; economic growth

Influence Of Budget Deficit On Economic Growth: The Case Of The Republic Of Macedonia

IntroductionMonetary and fiscal policies have long been the important instruments for policy makers to achieve their macroeconomic goals like economic growth with price stability and exchange rate stability and economic development. Monetary policy is the policy used by the central bank to control the liquidity in the market which involves controlling inflation, exchange rate oscillations through various monetary instruments like CRR, SLR various interest rates and open market operations. Likewise finance ministry uses fiscal policy to achieve its objectives like economic growth and development through various fiscal tools like public revenue, public expenditure and public borrowings.According to traditional macroeconomic theories, fiscal policy is more effective in the case of fixed exchange rate system and monetary policy is more effective under flexible exchange rate system. Economists usually compare the effect of both these policies on different economies under different exchange rate regimes and different economic systems. The reason behind is both the policies are equally important to achieve major and common macroeconomic goals like economic growth (growth rate of GDP) and economic development directly or indirectly through GDP. In case of economic growth and development, fiscal policy can be applied directly and results can be obtained immediately, but monetary can be applied directly for economic growth through decreasing rates and it is difficult to apply monetary policy directly to achieve development goals. It is possible only through decreasing interest rate and its impact on investment, employment and income. Also it will take some time to achieve the development goals. That's why it is always necessary and important to test the effectiveness of fiscal and monetary policy in the economy. In order to analyses the effectiveness of macroeconomic policies on the economy; this study uses Money Supply (M1), Interest rate (R), Government expenditure (G), Taxation (T) and Exchange rates (E) for analysis.In the last few centuries countries across the world have been increasingly engaging with one another in terms of trade. The advent of mass production techniques and discovery of new technology and hence greater demand have opened up several fronts in global trade. Countries which earlier were self-sufficient became reliant on others. Much of the work in economics had an underlying assumption that the nation was a closed economy.Several new models were proposed by various eminent economists like Mundell-Fleming, Trevor Swan and other models widely followed in international macroeconomics. Globalization has only accelerated the process of higher trade between nations. The western world was the first to embrace the concept of open economy. Many Asian countries like South Korea and Singapore adopted the open economy in early 1960s. Asians giants India and China have been relatively late in adopting the open economy model. India freed the control of government over key sectors in the 1990s reforms that had restricted the interaction of India with foreign nations.Opening up of the economy brings in several benefits. However, due to limited governmental control over the functioning of the economy now it becomes difficult for the policy makers to strike a balance between governmental interference and market forces. Due to various factors, the effectiveness of a policy may or may not produce the desired effects. It becomes more important to consider the implications and the behavior of such policy actions. Analyzing the effect of macroeconomic policies under different exchange rate regimes may provide clue towards taking appropriate measures.The impacts of these decisions seem to have profound effect on several key economic parameters and hence their analysis assumes considerable significance. The present paper is structured as follows: Introduction and significance of the study are given in Section 1. …