The Link between Tax Revenue Components and Economic Growth: Evidence from South Africa. An ARDL Approach

Abstract

This study examined the link between tax revenue components and economic growth in South Africa, utilizing time series data for the period of 22 years. The stationarity of the variables was established using the Phillips-Perron (PP) unit root test, and the existence of long-run and short-run equilibrium conditions was tested using the Autoregressive Distributed Lag (ARDL) model. As a proxy for economic growth, the study used the real GDP growth rate as the dependent variable, with company income tax, personal income tax, taxes on international trade and transactions, taxes on income, profits, and capital gains tax, foreign direct investment, inflation, and gross savings as the independent variables. According to the PP findings, none of the variables are integrated at a higher order than one, i.e. (1). All variables are found to be cointegrated, and all explanatory variables have a long-run link with economic growth. According to the ARDL findings, company income tax, personal income tax, and taxes on international trade and transactions all have a positive long-run and short-run link with economic growth, whereas capital gain tax, foreign direct investment, and gross savings all have a negative long-run and short-run link with economic growth. The long-run coefficient is negatively related to RGDP, while the short-run coefficient revealed a positive link between inflation and economic growth, among other findings. Heteroskedasticity and autocorrelation are not present in our model, according to diagnostic tests. The CUSUM and CUSUMSQ values indicate that the model is structurally sound.

Impacts of Taxation on Economic Growth in Africa in 2008-2018 - Panel Data Analysis

“…Thus 1% increase in income, profit, and capital gains tax lead to a 2.5% decrease in GDP in below mean GDP countries and 1% increase in income, profit, and capital gains tax leads to 8.8% increase in GDP in above mean GDP countries. It goes with Pamba's (2022) conclusion that Taxes on income, profits, and capital gains (CGT) have all been estimated to have a negative short and long-run coefficient. According to the findings, a 1% increase in government CGT would constrain South Africa's GDP growth over the study period.…”