Tax revenue, expenditure, and economic growth: An analysis of long-run relationships
Abstract: Focusing on the investigation of “long-term” relationship between tax revenue, expenditure, and economic growth, this paper employs the Granger causality test and finds that the linkage between tax revenue and spending is a bi-directional causal correlation. Furthermore, applying Persyn and Westerlund’s (2008) co-integration test allows for corroboration of existence of long-run cointegration linkages among outcome of economy and the three variables. In addition, by adopting two-step system generalized method … Show more
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Aiming to investigate the role of governance in modifying the relationship between public finance and economic growth, this study applied a seemingly unrelated regression model for the panel data of 38 developed and 44 developing countries from 1996 to 2016. It is easy to see that this research measures public finance by two parts of the subcomponents: total tax revenue and general government expenditure. We also call governance the “control of corruption indicator”. The finding indicates that governance always positively affects the economy. However, when it interacts with public finance, this interaction has a diverse effect on economic growth in developed countries, depending on tax revenue or government expenditure. Nevertheless, in developing countries, this interaction has a beneficial impact on the growth of an economy. Keywords: Governance, public finance, economic growth, developed and developing countries. References [1] Bird, R. M., Martinez-Vazquez, J. and Torgler, B., “Tax Effort in Developing Countries and High Income Countries: The Impact of Corruption, Voice and Accountability”, Economic Analysis and Policy, 38 (2008) 1, 55-71. https://doi.org/10.1016/S0313-5926(08)50006-3.[2] Dzhumashev, R. (2014) ‘Corruption and growth: The role of governance, public spending, and economic development’, Economic Modelling. Elsevier B.V., 37, pp. 202–215. https://doi.org/10.1016/j.econmod.2013.11.007.[3] d’Agostino, G., Dunne, J.P., & Pieroni, L. (2012). Corruption, military spending and growth. Defence and Peace Economics, 23(6), 591–604.[4] Ugur, M. (2014) ‘Corruption’s direct effects on per-capita income growth: A meta-analysis’, Journal of Economic Surveys, 28(3), pp. 472–490. https://doi.org/10.1111/joes.12035.[5] d’Agostino, G., Dunne, J. P. and Pieroni, L. (2016) ‘Government Spending, Corruption and Economic Growth’, World Development. Elsevier Ltd, 84(1997), pp. 190–205. https://doi.org/10.1016/j.worlddev.2016.03.011.[6] Kaul, I., & ConceiÇÃo, P.(2006). The new public finance: Responding to global challenges United Nations development programme, New York.[7] McGee, R. W. (2008) Taxation and public finance in transition and developing economies. Edited by R. W. Mcgee. North Miami: Springer.[8] Hague, R. and Martin, H. (2004) Comparative government and politics an introduction. 6th Editio. New York: Palgrave Macmillan.[9] Schumpeter, J. A. (1942). The Theory of Economic Development, Harvard Univer- sity Press, Cambridge, MA. [10] Cobb, C. W., & Douglas, P. H. (1928). A Theory of Production. American Economic Association, 18(1), 139–165.[11] Solow, R.M., 1956. A contribution to the theory of economic growth. The Quarterly Journal of Econometrics, 70(1), pp.65–94.[12] Mankiw, N.G., Romer, D. & Weil, D.N., 1992. A contribution to the empirics of economic growth*. Quarterly Journal of Economics, May(1992), pp.407–437.[13] Islam, Nazrul. (1995). “Growth empirics: A panel data approach.” TheQuarterly Journal of Economics, 110(4), pp. 1127-1170.[14] Barro, R. J. and Sala-i-Martin, X. (2004) Economic Growth. Second. London: The MIT press.[15] Devarajan, S., Swaroop, V., & Heng-fu, Z. (1996). The composition of public expenditure and economic growth. Journal of Monetary Economics, 37(2–3), pp.313–344.[16] Kneller, R., Bleaney, M.F., & Gemmell, N.(1999). Fiscal policy and growth: Evidence from OECD countries. Journal of Public Economics, 74(2), 171–190.[17] Ojede, A., & Yamarik, S. (2012). Tax policy and state economic growth: The long-run and short-run of it. Economics Letters, 116(2), 161–165.[18] Azam, M., Qayyum, A., Bakhtyar, B. and Emirullah, C. (2015) ‘The causal relationship between energy consumption and economic growth in the ASEAN-5 countries’, Renewable and Sustainable Energy Reviews. Elsevier, 47(2015), pp. 732–745. doi: 10.1016/j.rser.2015.03.023.[19] Ramírez, J. M., Díaz, Y. and Bedoya, J. G. (2017) ‘Property tax revenues and multidimensional poverty reduction in Colombia: A spatial approach’, World Development, 94, pp. 406–421. doi: 10.1016/j.worlddev.2017.02.005.[20] Stiglitz, J.E., (2000). Economics of the public sector Third edit. E. Parsons et al., eds., New York/London.[21] Hillman, A.L., 2009. Public Finance and Public policy, New York: Cambridge University Press.[22] Zellner, A. (1962) ‘An efficient method of estimating seemingly unrelated regressions and tests for aggregation bias’, Journal of the American Statistical Association, 57(298), pp. 348–368.[23] Yanev, P. I. and Kontoghiorghes, E. J. (2007) ‘Computationally efficient methods for estimating the updated-observations SUR models’, Applied Numerical Mathematics, 57(11-12), pp. 1245-1258. doi: 10.1016/j.apnum.2007.01.004.[24] Blundell, R. and Bond, S. (1998) ‘GMM estimation with persistent panel data : an application to production functions’, Journal of Econometrics, 87(1), pp. 115–143.[25] [25] Baltagi, B.H.(2005). Econometric analysis of panel data, JohnWiley & Sons Ltd., West Sussex PO19 8SQ, England.[26] Sasaki, Y. (2015). Heterogeneity and selection in dynamic panel data. Journal of Econometrics, 188(2015), 236–249.[27] Acemoglu, D. and Robinson, J. (2001) ‘A Theory of Political Transitions.pdf’, The American Economic Review, pp. 938–963. doi: Doi 10.1257/Aer.91.4.938.[28] Windmeijer, F. (2005). A finite sample correction for the variance of linear e cient two-step GMM estimators. Journal of Econometrics, 126(2005), 25-51. https://doi.org/10.1016/j.jeconom.2004.02.005.[29] Law, S. H., Lim, T. C., & Ismail, N. W. (2013). Institutions and economic development: A Granger causality analysis of panel data evidence. Economic Systems, 37(4), 610–624.[30] Harris, R. D. F., and Tzavalis, E. (1999). Inference for unit roots in dynamic panels where the time dimension is fixed. Journal of Econometrics 91, 201-226.[31] Im, K. S., Pesaran, M. H., and Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics 115, 53-74.[32] Levin, A., Lin, C.-F. and Chu, C.-S. J. (2002), ‘Unit Root Tests in Panel Data: Asymptotic and Finite Sample Properties’, Journal of Econometrics, 108, pp. 1-24. https://doi.org/10.1016/S0304-4076(01)00098-7.[33] Lien, N. P. and Thanh, S. D. (2017) ‘Tax revenue, expenditure, and economic growth : An analysis of long-run relationships’, Journal of Economic Development, 24(3), pp. 4-26.[34] http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators. Accessed in May 16, 2017.[35] Imam, P. A and Jacobs, D. F. (2007) ‘Effect of corruption on tax revenues in the Middle East’, IMF Journal, WP/07/270(1), pp. 1-36. doi: 10.1515/rmeef-2014-0001.
Aiming to investigate the role of governance in modifying the relationship between public finance and economic growth, this study applied a seemingly unrelated regression model for the panel data of 38 developed and 44 developing countries from 1996 to 2016. It is easy to see that this research measures public finance by two parts of the subcomponents: total tax revenue and general government expenditure. We also call governance the “control of corruption indicator”. The finding indicates that governance always positively affects the economy. However, when it interacts with public finance, this interaction has a diverse effect on economic growth in developed countries, depending on tax revenue or government expenditure. Nevertheless, in developing countries, this interaction has a beneficial impact on the growth of an economy. Keywords: Governance, public finance, economic growth, developed and developing countries. References [1] Bird, R. M., Martinez-Vazquez, J. and Torgler, B., “Tax Effort in Developing Countries and High Income Countries: The Impact of Corruption, Voice and Accountability”, Economic Analysis and Policy, 38 (2008) 1, 55-71. https://doi.org/10.1016/S0313-5926(08)50006-3.[2] Dzhumashev, R. (2014) ‘Corruption and growth: The role of governance, public spending, and economic development’, Economic Modelling. Elsevier B.V., 37, pp. 202–215. https://doi.org/10.1016/j.econmod.2013.11.007.[3] d’Agostino, G., Dunne, J.P., & Pieroni, L. (2012). Corruption, military spending and growth. Defence and Peace Economics, 23(6), 591–604.[4] Ugur, M. (2014) ‘Corruption’s direct effects on per-capita income growth: A meta-analysis’, Journal of Economic Surveys, 28(3), pp. 472–490. https://doi.org/10.1111/joes.12035.[5] d’Agostino, G., Dunne, J. P. and Pieroni, L. (2016) ‘Government Spending, Corruption and Economic Growth’, World Development. Elsevier Ltd, 84(1997), pp. 190–205. https://doi.org/10.1016/j.worlddev.2016.03.011.[6] Kaul, I., & ConceiÇÃo, P.(2006). The new public finance: Responding to global challenges United Nations development programme, New York.[7] McGee, R. W. (2008) Taxation and public finance in transition and developing economies. Edited by R. W. Mcgee. North Miami: Springer.[8] Hague, R. and Martin, H. (2004) Comparative government and politics an introduction. 6th Editio. New York: Palgrave Macmillan.[9] Schumpeter, J. A. (1942). The Theory of Economic Development, Harvard Univer- sity Press, Cambridge, MA. [10] Cobb, C. W., & Douglas, P. H. (1928). A Theory of Production. American Economic Association, 18(1), 139–165.[11] Solow, R.M., 1956. A contribution to the theory of economic growth. The Quarterly Journal of Econometrics, 70(1), pp.65–94.[12] Mankiw, N.G., Romer, D. & Weil, D.N., 1992. A contribution to the empirics of economic growth*. Quarterly Journal of Economics, May(1992), pp.407–437.[13] Islam, Nazrul. (1995). “Growth empirics: A panel data approach.” TheQuarterly Journal of Economics, 110(4), pp. 1127-1170.[14] Barro, R. J. and Sala-i-Martin, X. (2004) Economic Growth. Second. London: The MIT press.[15] Devarajan, S., Swaroop, V., & Heng-fu, Z. (1996). The composition of public expenditure and economic growth. Journal of Monetary Economics, 37(2–3), pp.313–344.[16] Kneller, R., Bleaney, M.F., & Gemmell, N.(1999). Fiscal policy and growth: Evidence from OECD countries. Journal of Public Economics, 74(2), 171–190.[17] Ojede, A., & Yamarik, S. (2012). Tax policy and state economic growth: The long-run and short-run of it. Economics Letters, 116(2), 161–165.[18] Azam, M., Qayyum, A., Bakhtyar, B. and Emirullah, C. (2015) ‘The causal relationship between energy consumption and economic growth in the ASEAN-5 countries’, Renewable and Sustainable Energy Reviews. Elsevier, 47(2015), pp. 732–745. doi: 10.1016/j.rser.2015.03.023.[19] Ramírez, J. M., Díaz, Y. and Bedoya, J. G. (2017) ‘Property tax revenues and multidimensional poverty reduction in Colombia: A spatial approach’, World Development, 94, pp. 406–421. doi: 10.1016/j.worlddev.2017.02.005.[20] Stiglitz, J.E., (2000). Economics of the public sector Third edit. E. Parsons et al., eds., New York/London.[21] Hillman, A.L., 2009. Public Finance and Public policy, New York: Cambridge University Press.[22] Zellner, A. (1962) ‘An efficient method of estimating seemingly unrelated regressions and tests for aggregation bias’, Journal of the American Statistical Association, 57(298), pp. 348–368.[23] Yanev, P. I. and Kontoghiorghes, E. J. (2007) ‘Computationally efficient methods for estimating the updated-observations SUR models’, Applied Numerical Mathematics, 57(11-12), pp. 1245-1258. doi: 10.1016/j.apnum.2007.01.004.[24] Blundell, R. and Bond, S. (1998) ‘GMM estimation with persistent panel data : an application to production functions’, Journal of Econometrics, 87(1), pp. 115–143.[25] [25] Baltagi, B.H.(2005). Econometric analysis of panel data, JohnWiley & Sons Ltd., West Sussex PO19 8SQ, England.[26] Sasaki, Y. (2015). Heterogeneity and selection in dynamic panel data. Journal of Econometrics, 188(2015), 236–249.[27] Acemoglu, D. and Robinson, J. (2001) ‘A Theory of Political Transitions.pdf’, The American Economic Review, pp. 938–963. doi: Doi 10.1257/Aer.91.4.938.[28] Windmeijer, F. (2005). A finite sample correction for the variance of linear e cient two-step GMM estimators. Journal of Econometrics, 126(2005), 25-51. https://doi.org/10.1016/j.jeconom.2004.02.005.[29] Law, S. H., Lim, T. C., & Ismail, N. W. (2013). Institutions and economic development: A Granger causality analysis of panel data evidence. Economic Systems, 37(4), 610–624.[30] Harris, R. D. F., and Tzavalis, E. (1999). Inference for unit roots in dynamic panels where the time dimension is fixed. Journal of Econometrics 91, 201-226.[31] Im, K. S., Pesaran, M. H., and Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics 115, 53-74.[32] Levin, A., Lin, C.-F. and Chu, C.-S. J. (2002), ‘Unit Root Tests in Panel Data: Asymptotic and Finite Sample Properties’, Journal of Econometrics, 108, pp. 1-24. https://doi.org/10.1016/S0304-4076(01)00098-7.[33] Lien, N. P. and Thanh, S. D. (2017) ‘Tax revenue, expenditure, and economic growth : An analysis of long-run relationships’, Journal of Economic Development, 24(3), pp. 4-26.[34] http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators. Accessed in May 16, 2017.[35] Imam, P. A and Jacobs, D. F. (2007) ‘Effect of corruption on tax revenues in the Middle East’, IMF Journal, WP/07/270(1), pp. 1-36. doi: 10.1515/rmeef-2014-0001.
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