First, after making the critical literature review of relationship among tax revenue, government expenditure, and economic growth, this research finds the complicated linkage of public finance, which was measured by total tax revenue and general government expenditure and growth of economy.
Furthermore, in the case of analyzing the influences of the share of government revenue and government expenditure evaluated public finance factor in an economy, Su Dinh Thanh (2014) indicated that these factors have negative effects on economic growth in both long and short-term. Until now, the long run relationship among these variables are complicated and need to be clarified. In addition, both public choice and cost-benefit theories pose a challenge to researchers for investigating the relationship among total tax revenue, government expenditure, and economic growth. Last, previous empirical researchers mentioned that between public finance and economic growth exists the complicated relationship and need to be clarified. These points lead this thesis to develop the first, hypothesis.
The first hypothesis (1): There is a long run correlation between public finance and economic growth.
Proving the first hypothesis helps this dissertation enlarge the generation of the economic growth model in long-term by public finance factors. The expectation is that public finance may have positive or negative effects on economic growth according to different its subcomponents such as tax revenue or public spending.
Second, World Bank (2017) noted that to gain high income, government should try to keep their economy to be more stable. Additionally, deficit is a factor that leads the status of economy. Nevertheless, to helps government well control deficit, the hypotheses of “tax-spend, spend and tax”
can be a basic argurement supporting accademic rsearchers to identify the direction of linkage between tax revenue and government expenditure.
Additionally, tax and spend theory, which argures the three hypotheses (see point 2.4.2) for handling deficit and creating government budget in both developed and developing countries. As my mentioned argument, public choice theory showed two types of government, who concerns the trade-off theory or not. Until now public choice theory does not clearly confirm that what kind of government operate their economy better. That is why this argument needs to be clarified. These points lead this thesis to develop the second hypothesis. We expect that there is a positive causal link between tax revenue and government expenditure.
The second hypothesis (2): Tax revenue and government expenditure cause each other.
Third, the corruption and governance theory confirmed that quality of governance and corruption play a crucial role in an economy. Corruption is a difficult definition and need to be explored. As you may know that both corruption and governance theory and endogenous growth theory pose the challenge of evaluation the capability of governance as well as investigation of linakge between governance and economic growth. Furthermore, corruption represents the quality of governance, total tax revenue and total government expenditure can reveal the capacity of government. Therefore, much of empirical studies tried to examine the role of corruption in an economy.
However, these studies explained the way corruption affect economy through activites of tax payers, housheholds, or government officials that represent
partilly the society and economy. Rarely, to see the research, which verifies the quality and quantity capability of governance in leading economy.
In addition, summary of literature saying about verifying the role of corruption in modifying influences among tax revenue, governemnt expenditure and economic growth, shed light on the corruption theory, which posed the “greasing and salting wheels” of corruption in an economy.
Furthermore, corruption theory with “greasing and salting wheels” of economy confirms that corruption diversely affects economies depending on different group of countries, different times and places, where it appears. In last decades, debates over influence of corruption becomes ambigious. Rent- secking may distort the public choice theory. A small group of people, who voted for the authorities, they may ask the benefit for them later. For meeting these requirements the government should try to collect more tax or cutting spending that affects economic activities.
Lastly, endogenous growth theory alway is a mixed issue, which attracts more literature. That’s why, this research following three above theories to develop third research hypothesis.
The third hypothesis (3): Governance modifies the effects of public finance on economic growth differently according to different group countries.
From these above hypotheses, this thesis develops the research analytical framework as seen as below.
Public Finance:
Tax revenue
Government expenditure
Governance:
Control of corruption
Figure 2.2: Analytical framework of correlation of public fiance, governance and economic growth
Source: Author made.
Figure 2.2 shows that the control of corruption indicator denotes the governance and logarithm of GDP per capita represents the economic growth of a country. Furthermore, this figure also indicates the beneficial role of governance in an economy. Additionally, when governance interacts with any part of public finance, the effect of these interactions on growth may be changed. Through this figure, we can see the bi-directional causal link between tax revenue and government spending.