Empirical results show that taxes have a positive effect on economic growth with a significance level of 1%.. OECD Organization for EconomicCooperation and Development Tô chức Hợp tác và
Concepts and theories
A tax is a mandatory financial charge imposed on individuals or entities, required to be paid to the government to fund public services Taxation is influenced by economic factors such as GDP, consumer and producer price indices, income, and interest rates Collected without the expectation of direct reimbursement, taxes play a vital role in society by supporting regulatory functions, administration, and the promotion of production and commerce across various sectors Additionally, taxes help to rectify significant imbalances within the national economy, aligning with the state's developmental goals.
To understand the connection between taxes and economic growth, it's crucial to develop a strong theoretical framework According to the neoclassical model, economic growth largely depends on the accumulation of both physical and human capital.
A specific tax structure establishes a stable capital-to-labor ratio and a corresponding level of education for each worker over time Any long-term increase in per capita output is driven by external technical advancements Changes in tax policy can influence these equilibrium values, leading to temporary growth effects (Young Lee, 2004).
Research indicates that reforming tax laws can significantly enhance macroeconomic growth, particularly through a 5% tax rate reduction Two main mechanisms are identified: first, changes in tax structure can boost short-term growth and lead to a sustained GDP increase, as suggested by the Solow model Second, the endogenous growth model posits that taxes and government spending can affect the steady growth rate by influencing technology and labor dynamics Additionally, the impact of tax policies on growth varies between wealthy and poorer nations, with wealthier countries typically relying more on personal income taxes and maintaining higher tax rates.
Many developing and emerging market economies remain reliant on trade taxes for government revenue, despite recent advancements in trade liberalization In sub-Saharan Africa, trade taxes account for about 25% of government revenues, while in the developing countries of Asia and the Pacific, this figure is around 15% Although the initial revenue impacts of trade reforms may be modest, ongoing moves toward free trade could lead to a decline in tax revenue Consequently, countries might find it challenging to maintain their overall tax-to-GDP ratio as the trade tax-to-GDP ratio decreases, potentially resulting in an unforeseen tax burden, such as reduced income during this transition.
Inflation significantly affects economic growth through various channels, including savings, real interest rates, money velocity, and production efficiency Research shows that inflation can reduce economic growth by over 10 to 20 percent annually To grasp this impact, factors such as inflation rates, the proportion of fixed capital to GDP, population growth, education levels, and government spending as a share of GDP have been analyzed in relation to domestic economic growth (Mehrnoosh Mohseni a, 2016).
Neoclassical economists contend that inflation creates uncertainty regarding future income, negatively impacting investment decisions High inflation rates lead to increased volatility, sending mixed signals to economic agents and causing a decline in investment, which can result in economic stagnation (Chowdhury, 2010) Additionally, inflation can lead to a real appreciation of the local currency, further harming export activities.
Tax reform can significantly impact structural unemployment, even when considering unemployment benefits as part of wages (A Lans Bovenberg, 2002) While some theories argue that rapid population growth leads to capital scarcity and underemployment, resulting in low wages and diminished market demand, others view an expanding labor force as beneficial for the economy (Edward M Crenshaw, 1997) Various sociological studies have explored the relationship between population changes and national economic growth, with mixed findings (Jr., 1983; Waller Gillis Peacock, 1988; Firebaugh, 1983) However, the industrial revolution's concurrent rise in production and population indicates that population growth may actually serve as a catalyst for economic development.
Figure 1 Impact of tax and some other factors on economic growth.
Methods
Previous research has utilized a variety of estimation methods, such as OLS, FEM, REM, GLS, and the S-GMM two-step regression method, to explore the long-term relationship between dependent and independent variables (Pro and associates, 2019) Non-linear models, particularly the Barro, Alexander, and Sarel (1997) model, have been commonly applied to analyze the relationship between inflation and economic growth in the context of Iran The CLS squared method was used for model estimation, focusing on minimizing the least squares error, while the Lag Model automatic regression distribution was employed to investigate both long-run and short-run relationships among the variables.
Findings
Research on the relationship between taxes and economic growth focuses on empirical evidence related to tax rates and structures A significant amount of literature highlights the negative impact of taxes on economic growth, although some studies suggest that this relationship is more complex.
High tax rates can adversely affect business activities and hinder Total Factor Productivity (TFP) growth, particularly at excessively high levels (Djankov et al., 2010; Romer & Romer, 2010) Such elevated taxes discourage investment by reducing incentives to work and save, which can slow economic growth as businesses become less willing to invest in new capital and individuals are less likely to save for retirement (Ohm, 2018) Additionally, high marginal tax rates can deter both employment and investment, further contributing to diminished economic growth (Feldstein, 2008).
Certain taxes, particularly consumption taxes, are believed to have a lesser negative impact on economic growth compared to income taxes (Alesina & Ardagna, 2010) Reducing personal income tax is thought to significantly boost economic growth, whereas lowering sales tax is expected to have a more modest effect While tax reductions can provide short-term economic stimulation, their long-term consequences may depend on factors like the effectiveness of public services (Ferede & Dahlby, 2012).
Capital taxes may enhance economic growth by shifting the tax burden from labor taxes, as suggested by Aghion et al (2013) When tax revenues from capital taxes are allocated efficiently for public spending, they can further stimulate growth (Aghion et al., 2016; Jones et al., 1993) Research indicates that increases in corporate income tax have a more significant negative effect on economic growth compared to equivalent hikes in personal income tax (Arnold et al., 2011) Therefore, analyzing changes in corporate taxes is crucial for understanding their impact on economic growth (Devereux et al., 2008).
The contrast between advanced and developing economies reveals significant disparities in economic growth Elevated corporate taxes can foster growth in advanced economies, as they incentivize private sector innovation and generate revenue for public spending (Kale & Milionis, 2019) In contrast, developing economies, which focus on emulating technology, may face a stronger negative correlation between corporate tax rates and growth, necessitating tax reductions to attract foreign capital.
The overall tax burden significantly affects economic growth, with direct taxes negatively impacting growth when the burden is high Conversely, indirect taxes can positively influence economic growth under the same conditions (Stoilova, 2017).
Taxes significantly impact economic growth, but this relationship is complex and depends on multiple factors Key elements include the type of tax imposed, the overall tax burden on individuals and businesses, and the specific tax policies being implemented.
Research gaps
Previous studies have largely focused on the effects of individual taxes on a nation's economic growth, often overlooking the complexity of varied tax systems and related factors (Zhixin & Ya, 2011) The diverse impacts of corporate tax reductions across different countries and timeframes have not been sufficiently examined (Gechert & Heimberger, 2022) Therefore, it is essential to explore the trade-offs between lowering corporate taxes and investing in other policy areas, such as human capital, infrastructure, or social welfare, to better understand their relationship with economic growth.
The relationship between tax composition and economic growth has been studied, but it remains underexplored in specific countries and across various nations, including both developed and developing economies A comprehensive analysis is needed to understand the differences among countries with varying tax systems and economic conditions This investigation will help clarify the mechanisms and constraints that connect tax composition to economic growth, particularly regarding its effects on investment, productivity, and government revenue.
Existing research has mainly concentrated on the effect of lax revenue as a percentage of GDP on economic growth, often overlooking the composition of tax revenue and specific taxes collected Studies have also failed to analyze the effects of individual tax policies or tax structures The predominant methodology relies on pooled data and regression analysis, which does not incorporate company or industry-level data and neglects potential confounding variables that may influence the relationship between taxes and economic growth.
METHODOLOGY AND DATA 8
Research model
This article aims to clarify the impact of taxes on economic growth in Asian countries by building on the research conducted by Xing (2012) It constructs a research model that covers a 21-year period from 2000 to 2020 The author finds the sample used in Xing's study comparable to the one in this analysis, while also considering the different tax factors influencing economic growth The extended research introduces a model represented by equation (1).
InGDP =po+piAnTAX.+pjnTRADEừ+pỉJnPOPUL.+p4JnUNEMPll+p5.INFiỊ (1)
The total import-export turnover is a crucial factor influencing economic growth globally Greater openness to international trade boosts a country's income by increasing exports and providing access to essential imports, which in turn enhances labor productivity and stimulates economic expansion This beneficial effect on economic growth is observable from both macroeconomic and microeconomic viewpoints, as supported by empirical studies, including those by Edwards (1992) and Ahmed & Suardi.
2009), and (Keho, 2017) have indicated a positive correlation between higher GDP growth rates and larger total import-export turnovers However, (Batra & Slottje,
Free trade, as noted by scholars in 1993, can significantly contribute to economic downturns The process of trade liberalization and increased openness typically includes reducing tariffs, which may decrease the appeal of domestically produced goods in comparison to imported alternatives This shift can result in economic difficulties for the domestic economy.
The population of a country (POPUL) plays a crucial role in determining its economic growth, though the relationship between population growth and economic development remains debated Some studies, such as those by Mankiw et al (1992) and Mierau & Turnovsky (2014), suggest that population growth may hinder economic progress Conversely, other research indicates that population growth can drive economic expansion by fostering innovation (Kuznets, 1960; Kremer, 1993) Additionally, a larger population can enhance national output, consumption, and savings, further promoting economic growth (Kuznets, 1960).
The relationship between unemployment and economic growth is a critical concern for economies worldwide, as reducing unemployment and enhancing GDP are vital macroeconomic goals Addressing unemployment is essential, and economic growth acts as a key indicator that can alleviate this issue Economic development creates opportunities for new businesses, which leads to job creation, lower unemployment rates, and reduced poverty Consequently, many nations are implementing policy initiatives to encourage entrepreneurship, aiming to generate more jobs and promote overall economic progress.
Policymakers and central banks globally aim for high and stable economic growth alongside low inflation, as both factors are closely interconnected Research indicates that inflation tends to exert a considerable negative influence on a country's economic growth over both medium and long-term periods.
& Ssnhadji, 2001) Some previous empirical studies, such as those by (Barro, 1995),
Research by Malla (1997) and Valdovinos (2003) indicates a negative correlation between inflation and economic growth However, Keynes’ model suggests that while there may be a trade-off between output and inflation changes, it does not necessarily imply a direct trade-off between output and inflation itself The Phillips curve further posits that high inflation can positively influence economic growth by aiding in the reduction of unemployment Additionally, the Tobin effect (Tobin, 1965) argues that inflation encourages individuals to shift cash holdings into more profitable assets, thereby increasing capital in the economy and fostering economic growth (Stockman, 1981) As a result, the actual relationship between inflation and economic growth, whether beneficial or detrimental, continues to be a topic of active research and debate.
In model (1), we utilize logarithmic transformations of six variables to reduce discrepancies in economic size over time Drawing from prior research and theoretical frameworks, we predict a positive long-term impact of taxes on economic growth, suggesting a positive coefficient for pl Additionally, we anticipate that control variables, including trade openness (indicated by total import-export turnover), total population, unemployment rate, and inflation, will exhibit both positive and negative influences on economic growth Consequently, we expect the coefficients p2 and p3 to be positive, while p4 and p5 are predicted to be negative.
Data
Table 1 Measurement of variables and data sources.
Dependent GDP Gross Domestic Product WB
Independence TAX Total tax collection WB
TRADE Total exports and imports WB
POPUL Total population (people) WB
Control ƯNEMP Number of unemployed WB workers (person)
This study focuses on Asian countries from 2000 to 2020, utilizing a dataset sourced from the reputable World Bank Open Data, which is widely referenced in related research (Nazir et al., 2020; McNabb, 2018; Siyanbola et al., 2017) We have chosen to employ panel data for our analysis, which offers numerous advantages in research (Hsiao).
The study utilizes panel data spanning 21 years (2000-2020) from 19 Asian countries, ensuring complete datasets for analysis The selected countries include Bhutan, Cyprus, Georgia, India, Indonesia, Israel, Jordan, South Korea, Malaysia, Mongolia, Philippines, Singapore, Thailand, Uruguay, Vietnam, Armenia, Bangladesh, Cambodia, and Kazakhstan This comprehensive dataset enhances variability and reduces collinearity, providing more degrees of freedom for robust analysis.
Research method
The Pooled Ordinary Least Squares (POLS) method was chosen for this study due to its importance as a data analysis tool in economics, finance, and various data-intensive fields POLS facilitates the estimation of independent and dependent variables without considering individual or time-specific factors, making it ideal for analyzing variable relationships in statistical models using panel data Consequently, POLS was recognized as an effective model for the panel dataset in this research, enabling the exploration of complex questions related to variable interactions.
After applying the POLS methodology for model processing, the next crucial step is to evaluate multicollinearity using the Variance Inflation Factor (VIF) test A mean VIF below 10 indicates that the model is free from multicollinearity, while a mean VIF above 10 suggests its presence To assess variable variance, the Breusch-Pagan LM test is employed, where the null hypothesis (Ho) assumes fixed variance and the alternative hypothesis (H1) indicates variable variance If the p-value from the Breusch-Pagan LM test is less than 0.05, Ho is rejected, signifying variable variance; otherwise, if the p-value exceeds 0.05, Ho is accepted, indicating fixed variance In cases of variable variance, the POLS model can be adjusted using the robust standard error estimation method as an alternative to the original approach.
RESULT 12
Descriptive statistics
Table 2 Descriptive statistics of base variables.
The gross domestic product of countries ranges from a low of 190.754.162 (current USS) to a peak of 1.060.791.000.000.000.000 (current USS) with a standard deviation of 195.615.300.000.000.000.000.000.000 (current USS).
The average annual cumulative tax revenue across 19 Asian countries is approximately 4.65 trillion USD, highlighting significant disparities in tax revenue distribution This is evidenced by a standard deviation of about 13.88 trillion USD, indicating a wide variation among these nations The minimum tax revenue recorded is around 19.17 million USD, while the maximum reaches an impressive 103.45 trillion USD, as detailed in the accompanying table.
Countries experiencing high inflation rates show an average of 4.48%, with a standard deviation of 3.92 The inflation levels vary significantly, ranging from -2.1% to 27.96%, indicating that while some nations effectively manage inflation, others struggle to maintain control.
The total import and export turnover of countries ranges from the lowest level of 153277560 (current USS) to the highest level of 428.244.600.000.000.000 (current USS) with a standard deviation of 55.983.930.000.000.000 (current USS).
The total global population averages approximately 1.1 billion, with a standard deviation of 274.8 million, ranging from a low of 5.9 million to a high of 1.4 billion Meanwhile, the average number of unemployed individuals stands at about 2.7 million, with a standard deviation of 8.3 million, showing a range from 4,128 to over 50.6 million unemployed workers across different countries.
Figure 2 The trend between GDP and TAX of 19 countries in Asia 2000-2020.
The analysis of the chart over a 21-year period (2000-2020) highlights a significant trend among Asian countries, where 14 of the 19 nations show a direct correlation between Gross Domestic Product (GDP) and tax revenues, as seen in countries like Jordan, Israel, and Mongolia This finding supports previous research by Babatunde et al (2017), indicating that in countries heavily dependent on consumption tax, increased consumption leads to higher tax revenues, thereby promoting economic growth However, exceptions exist, including Singapore, Armenia, Indonesia, India, and South Korea, where GDP and tax revenues display an inverse relationship This negative correlation is linked to how taxes influence household decisions on savings, labor participation, and human capital investment, with higher tax rates potentially causing individuals to reduce working hours or withdraw from the labor market, ultimately hindering economic growth (Poulson & Kaplan, 2008).
Table 3 Correlation between variables in the model.
InGDP InTAX InTRADE InUNEMP InPOPUL INF InGDP 1.000
Table 3 reveals a statistically significant positive correlation at the 10% significance level between economic growth and several factors, including total tax revenue, total import and export turnover, total population, the number of unemployed individuals, and the inflation rate.
A detailed analysis of Table 3 reveals that the correlation coefficients for the variables TAX, UNEMP, POPUL, and INF are all below 0.8, indicating a lack of strong correlation However, the correlation coefficient for "total import and export turnover" surpasses 0.8, suggesting a potential issue with multicollinearity in the experimental model.
Discussion of research result
fable 4 The results of Pooled OLS model regression.
POOLED OLS MODEL POOLED OLS WITH
(The regression coefficients are tested by t-test symbols ,*,* *,*** indicate that the regression coefficients are statistically significant at the 10%, 5%, 1% and 0,1%)
Breuch-Pagan LM lest p-value = 2.62e-14
The pooled ordinary least squares (OLS) model shows no signs of multicollinearity, as indicated by a Variance Inflation Factor of less than 10 However, it does reveal variable variance, with a p-value of 2.62e-14, which is below the 10% threshold Consequently, we will proceed with the regression results from the pooled model, applying robust standard errors for accuracy.
The estimation results from Table 4 indicate that many variables have the expected signs in the pooled model with robust standard errors.
The independent variable Total Tax Revenue (TAX) demonstrates a positive beta coefficient, as anticipated, and exhibits a high level of statistical significance
A 1% increase in total tax revenue is linked to a 0.056% rise in GDP, indicating that higher tax revenue correlates with stronger economic growth This relationship is supported by previous research from Dladla & Khobai (2018) and Canavire-Bacarreza et al (2013) The study emphasizes that in countries focusing on consumption tax, increased consumption not only boosts tax revenue but also fosters economic development.
The control variable for total import and export turnover (TRADE) shows a positive beta coefficient and is statistically significant (p-value of 0.1%), indicating that higher trade turnover correlates with stronger economic growth Specifically, a 1% increase in total tax revenue is associated with a 0.943% rise in GDP This highlights the economic advantages of a country’s openness to international trade, which can enhance income through increased exports and boost labor productivity by providing access to essential imported goods and materials for domestic production, ultimately stimulating economic growth.
The control variable for the number of unemployed individuals (UNEMP) exhibits a positive beta coefficient, which, although unexpected, is statistically significant with a p-value of 5% This finding challenges some initial assumptions but aligns with long-term studies that suggest a positive correlation between the unemployment rate and economic growth (Li & Liu, 2012; Karikari-Apau & Abeti).
The variation in study findings can be explained by differences in data sources and econometric methods used Current regression analysis indicates that, with other factors constant, a 1% rise in the unemployment rate correlates with a 0.158% increase in GDP.
The total population (POPUL) control variable shows a negative beta coefficient, while inflation (INF) displays a positive beta coefficient, both of which are unexpected and statistically insignificant The model boasts an impressive fit, with an adjusted R-squared value of 99.7%, indicating that the independent variable and four control variables explain most of the variation in GDP However, the remaining 0.3% may be attributed to other factors not included in the model, such as government spending and corruption levels, suggesting that additional influences on economic growth exist beyond those currently analyzed.
CHAPTER 5: CONCLUSION AND POLICY IMPLICATIONS
This study examines the effects of taxation on economic growth across 19 Asian countries from 2000 to 2020 Utilizing the Pooled Ordinary Least Squares (POLS) model, the research reveals significant insights into how taxation influences economic development in this region.
There is a significant correlation between total tax revenue and economic growth, highlighting that the countries examined depend heavily on tax income to drive economic expansion Consequently, governments should contemplate raising taxes to enhance budgetary investments By directing these additional funds towards infrastructure, education, healthcare, and other critical sectors, they can create new job opportunities, boost productivity, and improve overall infrastructure, ultimately fostering sustainable economic development.
Trade openness positively influences GDP by lowering trade barriers like tariffs and market protections, fostering a competitive environment for both domestic and international businesses This heightened competition encourages companies to enhance productivity, quality, and innovation, ultimately propelling economic growth.
The unemployment rate negatively affects economic growth, with this relationship being statistically significant As economies expand, the demand for labor rises, but fulfilling this demand often necessitates time for training or job transitions (Chand et al., 2017) This can lead to temporary spikes in unemployment Furthermore, economic growth may trigger structural changes, economic instability, and technological advancements, which can contribute to increased unemployment rates in certain industries or regions (Tumanoska, 2020).
To enhance economic growth, policymakers in Asian countries, including Vietnam, must address significant challenges such as complex tax regulations, tax evasion, and inefficiencies in tax management, which hinder budgetary revenue and compromise the tax system's transparency and equity The government is actively working to streamline tax procedures, implement electronic filing systems, strengthen enforcement measures, and reform tax management to boost effectiveness and taxpayer compliance Establishing a stable tax environment is essential for attracting investment and fostering economic growth; therefore, tax policies should minimize abrupt changes, allowing businesses and individuals to confidently plan long-term investments.
Policymakers should consider implementing tax increases across various categories to stimulate economic growth Specifically, higher taxes on environmentally harmful products, such as carbon emissions, can encourage a shift towards clean energy, spur technological innovation, and create opportunities in renewable energy sectors Additionally, increasing consumption taxes on luxury items can boost government revenue, while higher taxes on unhealthy products like tobacco and alcohol may promote healthier choices among consumers Targeting personal income taxes, especially for high earners, can further enhance revenue to support development initiatives Moreover, raising business taxes could attract domestic and foreign investment, foster industrial growth, generate jobs, and ultimately contribute to GDP expansion.
Taxes play a crucial role in shaping fiscal policies and boosting national revenue, but policymakers need to carefully analyze and determine optimal tax rates that foster economic growth By embracing policies that enhance openness and integration with the global economy, they can elevate per capita income and drive economic development through technology transfer, product diversification, scaling up the economy, and efficient resource allocation.
To foster innovation, it is crucial to implement tax policies that incentivize research and development, such as offering tax deductions for R&D expenses and financial support for new projects (Lhuillery, 2005; Sawyer, 2004) Additionally, encouraging infrastructure investment through targeted tax benefits can significantly enhance economic development, attracting funding for essential projects in transportation, power, telecommunications, and energy (Bhasin, 2015; Juswanto & Abiyunus, 2022).
This study has notable limitations, including a restricted data collection that encompasses only 19 countries within a specific timeframe, potentially failing to represent the entire Asian region Additionally, the research model may not effectively optimize results, as it overlooks short-term influencing factors and the unique time characteristics of each country Finally, the proposed policies stem from subjective viewpoints and are contingent upon the study's findings.
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