Abstract
This article, in the statistical analysis of possible cointegration relationships among the variables from the expenditure approach to the GDP formula, explains how taxes affect the consumption to income ratio. A causal relationship that defines investment as the leading factor in GDP formation was rearranged and applied for the study of taxation effects under various income levels. The technique that was used for the estimation of taxation effects was based on the deterministic part of causal relationship, though the results must be interpreted very carefully. This analysis demonstrates that, when taken to the extreme, higher taxes have a huge negative effect on consumption and a very small effect on savings; in addition, these effects depend on the level of income. The higher the incomes are, the more deteriorating the effects of taxes on consumption can be observed; therefore, an economy cannot afford a high level of taxes, even when the income level is also high. As taxes have negative effects on consumption and, with lesser extent, on savings, tax-based fiscal consolidation has to be avoided at any cost, and governments should rely on tax-based fiscal consolidation only if no other option is available.
Highlights
Taxes are one of the most popular instruments of the politicians
Of all the variables that are found in the expenditure approach to GDP formula, gross fixed capital formation is the only one that causes GDP
The obtained cointegration relationship was used for the study of taxation effects on consumption and savings
Summary
Taxes are one of the most popular instruments of the politicians. In good times, when the economy is booming, politicians and bureaucrats tend to lower taxes, or at least they start and initiate a media debate about the revision of taxes. Since the start of the financial crisis, various political decisions to increase the taxes or to cut the expenditures led to social turmoil and unrest in many countries; the analysis of taxation effects is vital for the government and for the society as well. The subject itself is not a new one and prominent scholars like Alesina, Ardagna or Giavazzi wrote a number of articles, focused on these issues long before this dilemma became a subject of media debates, the rise in the popularity of this subject is directly related to the recent crisis In these publications, authors defended the view that expenditure cuts, as compared with tax increases, are less harmful. Ands for GDP, C for consumption, K for gross fixed capital formation, for investments, G for government expenditures and X M is net export. As all common estimation procedures and methods usually treat the error term et as a zero mean component, estimation will be in line with the properties of the economy, if export and import saldo will tend to fluctuate around a certain more or less fixed value on the long run
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