Research Article
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The Effect of the Share of Taxes and Expenditures in National Income on Growth, a Multi-Country Analysis

Year 2024, Volume: 26 Issue: 1, 84 - 97, 29.06.2024

Abstract

Economic growth stands as a crucial objective in macroeconomic policies. Within the scope of fiscal policy, government expenditures and tax revenues play significant roles. This study utilizes panel data from 103 countries spanning the period 2005 to 2019. After conducting tests for stationarity, homogeneity, and cross-sectional dependency, Panel Granger Causality tests and panel data analyses are carried out. Instead of nominal values, the shares of government expenditures and tax revenues in national income are considered. The findings reveal a reciprocal causal relationship between government expenditures and tax revenues, as indicated by the Granger Causality tests. Furthermore, economic growth is identified as a Granger cause for both tax revenues and government expenditures. While government expenditures Granger-cause growth in the short term, there is no statistically significant impact of tax revenues on economic growth. The panel regression analysis reveals a negative coefficient of government expenditures on growth, as well as a positive coefficient of taxes, both of which are statistically significant. Hence, it can be inferred that decreasing the share of government expenditures in national income positively affects economic growth while simultaneously increasing the share of tax revenues in national income. This dual effect not only contributes to economic growth but also helps achieve budget equilibrium.

References

  • Agell, J., Ohlsson, H. & Thoursie, P. S. (2006). Growth Effects of Government Expenditure and Taxation in Rich Countries: A Comment. European Economic Review, 50(1), 211-218.
  • Angelopoulos, K., Economides, G. & Kammas, P. (2007). Tax-spending Policies and Economic Growth: Theoretical Predictions and Evidence from the OECD. European Journal of Political Economy, 23(4), 885-902.
  • Arvin, M. B., Pradhan, R. P., & Nair, M. S. (2021). Are There Links Between Institutional Quality, Government Expenditure, Tax Revenue and Economic Growth? Evidence From Low-Income and Lower Middle-Income Countries. Economic Analysis and Policy, 70, 468-489.
  • Awaworyi Churchill, S., Ugur, M. & Yew, S. L. (2017). Does Government Size Affect Per‐Capita Income Growth? A Hierarchical Meta‐Regression Analysis. Economic Record, 93(300), 142-171.
  • Aydın, C., & Esen, Ö. (2019). Optimal Tax Revenues and Economic Growth in Transition Economies: A Threshold Regression Approach. Global Business and Economics Review, 21(2), 246-265.
  • Balaev, A. (2019). The Structure of Public Spending and Economic Growth in Russia. Russian Journal of Economics, 5(2), 154-176.
  • Baltagi, B. H., Feng, Q. & Kao, C. (2012). A Lagrange Multiplier Test for Cross-sectional Dependence in a Fixed Effects Panel Data Model. Journal of Econometrics, 170(1), 164-177.
  • Barro, R. J. (1991). Economic Growth in a Cross Section of Countries. The Quarterly Journal of Economics, 106(2), 407.
  • Bernholz, P. (1986). Growth of Government, Economic Growth and Individual Freedom. Journal of Institutional and Theoretical Economics (JITE)/Zeitschrift für die gesamte Staatswissenschaft, 661-683.
  • Bhattarai, K., Nguyen, D. T. K. & Nguyen, C. V. (2019) Impacts of Direct and Indirect Tax Reforms in Vietnam: A CGE Analysis. Economies, 7(2):50. https://doi.org/10.3390/economies7020050
  • Breusch, T. S. & Pagan, A. R. (1980). The Lagrange Multiplier Test and Its Applications to Model Specification Tests in Econometrics. Review of Economic Studies, 47, 239-253.
  • Chu, T. T., Hölscher, J. & McCarthy, D. (2020). The Impact of Productive and Non-Productive Government Expenditure on Economic Growth: An Empirical Analysis in High-Income Versus Low-To Middle-Income Economies. Empirical Economics, 58, 2403-2430.
  • Devarajan, S., Swaroop, V. & Zou, H. F. (1996). The Composition of Public Expenditure and Economic Growth. Journal of Monetary Economics, 37(2), 313-344.
  • Dumitrescu, E. I. & Hurlin, C. (2012). Testing for Granger Non-Causality in Heterogeneous Panels. Economic Modelling, 29(4), 1450-1460.
  • Easterly, W. & Rebelo, S. (1993). Fiscal Policy and Economic Growth. Journal of Monetary Economics, 32(3), 417-458.
  • Fisher, W. H. & Keuschnigg, C. (2002). Public Policy for Efficient Education. Metroeconomica, 53(4), 361-390.
  • Forte, F. & Magazzino, C. (2011). Optimal Size Government and Economic Growth in EU Countries. Economia Politica, 28(3), 295-322.
  • Government Revenue Dataset. (2023). UNU-WIDER. Retrieved from https://www.wider.unu.edu/project/grd-government-revenue-dataset Date of access: 15.05.2023
  • Granger, C. W. J. (1969). Investigating Causal Relations by Econometric Models and Cross-spectral Methods. Econometrica, 37(3), 424.
  • Grier, K. B. & Tullock, G. (1989). An Empirical Analysis of Cross-National Economic Growth, 1951–1980. Journal of Monetary Economics, 24(2), 259-276.
  • Gürdal, T., Aydın, M., & Inal, V. (2021). The Relationship Between Tax Revenue, Government Expenditure, and Economic Growth in G7 Countries: New Evidence from Time and Frequency Domain Approaches. Economic Change and Restructuring, 54, 305-337.
  • Hassan, M., Oueslati, W., & Rousselière, D. (2020). Environmental Taxes, Reforms and Economic Growth: An Empirical Analysis of Panel Data. Economic Systems, 44(3), 100806.
  • King, R. G. & Rebelo, S. (1990). Public Policy and Economic Growth: Developing Neoclassical Implications. Journal of Political Economy. https://doi.org/10.1086/261727
  • Kneller, R., Bleaney, M. & Gemmell, N. (1999) Fiscal Policy and Growth: Evidence from OECD Countries. Journal of Public Economics, 74(1): 171–190.
  • Landau, D. L. (1985). Government Expenditure and Economic Growth in the Developed Countries: 1952-76. Public Choice, 459-477.
  • Lin, S. A. (1994). Government Spending and Economic Growth. Applied Economics, 26(1), 83-94.
  • Martin, R. & Fardmanesh, M. (1990) Fiscal Variables and Growth: A Cross-Sectional Analysis. Public Choice, 64, 239–251. https://doi.org/10.1007/BF00124369
  • Musgrave, R. A. (1959). The Theory of Public Finance. New York: McGraw-Hill.
  • Nguyen, H. T., & Darsono, S. N. A. C. (2022). The Impacts of Tax Revenue and Investment on the Economic Growth in Southeast Asian Countries. Journal of Accounting and Investment, 23(1), 128-146.
  • Onifade, S. T., Çevik, S., Erdoğan, S., Asongu, S., & Bekun, F. V. (2020). An Empirical Retrospect of the Impacts of Government Expenditures on Economic Growth: New Evidence From the Nigerian Economy. Journal of Economic Structures, 9(1), 1-13.
  • Pesaran, M. H. (2004). General Diagnostic Tests for Cross Section Dependence in Panels. Cambridge Working Papers in Economics, 435.
  • Pesaran, M. H. (2007). A Simple Panel Unit Root Test in The Presence of Cross‐ Section Dependence. Journal of Applied Econometrics, 22(2), 265-312.
  • Pesaran, M. H. & Yamagata, T. (2008). Testing Slope Homogeneity in Large Panels. Journal of Econometrics, 142, 50-93.
  • Pițu, I. C., Ciocanea, B. C. & Vodă, A. D. (2019). The Influence of the Variation of Taxes and Duties on the National Economy in the Context of Ensuring the Need for Revenues to the State Budget. Ovidius University Annals, Economic Sciences Series, 19(2), 850-860.
  • Romer, C. D. & Romer, D. H. (2010). The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks. American Economic Review, 100(3), 763-801.
  • Sheehey, E. J. (1993). The Effect of Government Size on Economic Growth. Eastern Economic Journal, 19(3), 321-328.
  • Tashevska, B., Trenovski, B., & Trpkova-Nestorovska, M. (2020). The Government Revenue–Expenditure Nexus in Southeast Europe: A Bootstrap Panel Granger-Causality Approach. Eastern European Economics, 58(4), 309-326.
  • World Bank. (2023a). GDP growth (annual %) [Data file]. Retrieved from https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG Date of access: 15.05.2023
  • World Bank. (2023b). Expense (% of GDP) [Data file]. Retrieved from https://data.worldbank.org/indicator/GC.XPN.TOTL.GD.ZS Date of access: 15.05.2023
  • Zagler, M. & Durnecker, G. (2003). Fiscal Policy and Economic Growth. Journal of Economic Surveys, 17(3), 397-418. doi:10.1111/1467-6419.00199
  • Zidar, O. (2019) ‘Tax Cuts for Whom? Heterogeneous Effects of Income Tax Changes on Growth and Employment’. Journal of Political Economy, 127, 1437–1472.

Vergi ve Harcamaların Milli Gelirdeki Payının Büyümeye Etkisi, Çok Ülkeli Bir Analiz

Year 2024, Volume: 26 Issue: 1, 84 - 97, 29.06.2024

Abstract

Ekonomik büyüme, makroekonomik politikaların temel amaçlarından biridir. Devlet harcamaları ve vergi gelirleri ise maliye politikasının iki önemli bileşenidir. Çalışmada verileri eksiksiz mevcut olan 103 ülkede 2005-2019 yılları arası panel veri kullanılmıştır. Durağanlık, homojenlik ve yatay kesit bağımlılığı için testler yapıldıktan sonra verilere uygun Panel Granger Nedensellik testleri ve panel veri analizleri uygulanmıştır. Devlet harcamaları ve vergi gelirleri değişkenlerinin aldıkları değerler değil, milli gelir içindeki payları kullanılmıştır. Çalışmada devlet harcamalarının ve vergi gelirlerinin birbirlerinin Granger nedeni olduğu bulunmuştur. Büyüme ise hem vergi gelirleri hem de devlet harcamalarına Granger nedendir. Devlet harcamaları da kısa vadede büyümeye Granger neden iken vergi gelirlerinin büyüme üzerinde bir etkisine ise rastlanmamıştır. Panel regresyon sonucunda, devlet harcamalarının büyüme üzerindeki etkisinin katsayısı negatif, vergilerin ise pozitif olduğu görülmüştür. Katsayılar istatistiksel olarak anlamlı bulunmuştur. Bunların sonucu olarak devlet harcamalarının milli gelir içindeki payının azaltılmasının büyümeye pozitif etkisinin olduğu ve bu durumun aynı zamanda vergi gelirlerinin milli gelir içindeki paylarını da arttırdığı için bütçe dengesi üzerinde de pozitif etkide bulunacağı söylenebilir.

References

  • Agell, J., Ohlsson, H. & Thoursie, P. S. (2006). Growth Effects of Government Expenditure and Taxation in Rich Countries: A Comment. European Economic Review, 50(1), 211-218.
  • Angelopoulos, K., Economides, G. & Kammas, P. (2007). Tax-spending Policies and Economic Growth: Theoretical Predictions and Evidence from the OECD. European Journal of Political Economy, 23(4), 885-902.
  • Arvin, M. B., Pradhan, R. P., & Nair, M. S. (2021). Are There Links Between Institutional Quality, Government Expenditure, Tax Revenue and Economic Growth? Evidence From Low-Income and Lower Middle-Income Countries. Economic Analysis and Policy, 70, 468-489.
  • Awaworyi Churchill, S., Ugur, M. & Yew, S. L. (2017). Does Government Size Affect Per‐Capita Income Growth? A Hierarchical Meta‐Regression Analysis. Economic Record, 93(300), 142-171.
  • Aydın, C., & Esen, Ö. (2019). Optimal Tax Revenues and Economic Growth in Transition Economies: A Threshold Regression Approach. Global Business and Economics Review, 21(2), 246-265.
  • Balaev, A. (2019). The Structure of Public Spending and Economic Growth in Russia. Russian Journal of Economics, 5(2), 154-176.
  • Baltagi, B. H., Feng, Q. & Kao, C. (2012). A Lagrange Multiplier Test for Cross-sectional Dependence in a Fixed Effects Panel Data Model. Journal of Econometrics, 170(1), 164-177.
  • Barro, R. J. (1991). Economic Growth in a Cross Section of Countries. The Quarterly Journal of Economics, 106(2), 407.
  • Bernholz, P. (1986). Growth of Government, Economic Growth and Individual Freedom. Journal of Institutional and Theoretical Economics (JITE)/Zeitschrift für die gesamte Staatswissenschaft, 661-683.
  • Bhattarai, K., Nguyen, D. T. K. & Nguyen, C. V. (2019) Impacts of Direct and Indirect Tax Reforms in Vietnam: A CGE Analysis. Economies, 7(2):50. https://doi.org/10.3390/economies7020050
  • Breusch, T. S. & Pagan, A. R. (1980). The Lagrange Multiplier Test and Its Applications to Model Specification Tests in Econometrics. Review of Economic Studies, 47, 239-253.
  • Chu, T. T., Hölscher, J. & McCarthy, D. (2020). The Impact of Productive and Non-Productive Government Expenditure on Economic Growth: An Empirical Analysis in High-Income Versus Low-To Middle-Income Economies. Empirical Economics, 58, 2403-2430.
  • Devarajan, S., Swaroop, V. & Zou, H. F. (1996). The Composition of Public Expenditure and Economic Growth. Journal of Monetary Economics, 37(2), 313-344.
  • Dumitrescu, E. I. & Hurlin, C. (2012). Testing for Granger Non-Causality in Heterogeneous Panels. Economic Modelling, 29(4), 1450-1460.
  • Easterly, W. & Rebelo, S. (1993). Fiscal Policy and Economic Growth. Journal of Monetary Economics, 32(3), 417-458.
  • Fisher, W. H. & Keuschnigg, C. (2002). Public Policy for Efficient Education. Metroeconomica, 53(4), 361-390.
  • Forte, F. & Magazzino, C. (2011). Optimal Size Government and Economic Growth in EU Countries. Economia Politica, 28(3), 295-322.
  • Government Revenue Dataset. (2023). UNU-WIDER. Retrieved from https://www.wider.unu.edu/project/grd-government-revenue-dataset Date of access: 15.05.2023
  • Granger, C. W. J. (1969). Investigating Causal Relations by Econometric Models and Cross-spectral Methods. Econometrica, 37(3), 424.
  • Grier, K. B. & Tullock, G. (1989). An Empirical Analysis of Cross-National Economic Growth, 1951–1980. Journal of Monetary Economics, 24(2), 259-276.
  • Gürdal, T., Aydın, M., & Inal, V. (2021). The Relationship Between Tax Revenue, Government Expenditure, and Economic Growth in G7 Countries: New Evidence from Time and Frequency Domain Approaches. Economic Change and Restructuring, 54, 305-337.
  • Hassan, M., Oueslati, W., & Rousselière, D. (2020). Environmental Taxes, Reforms and Economic Growth: An Empirical Analysis of Panel Data. Economic Systems, 44(3), 100806.
  • King, R. G. & Rebelo, S. (1990). Public Policy and Economic Growth: Developing Neoclassical Implications. Journal of Political Economy. https://doi.org/10.1086/261727
  • Kneller, R., Bleaney, M. & Gemmell, N. (1999) Fiscal Policy and Growth: Evidence from OECD Countries. Journal of Public Economics, 74(1): 171–190.
  • Landau, D. L. (1985). Government Expenditure and Economic Growth in the Developed Countries: 1952-76. Public Choice, 459-477.
  • Lin, S. A. (1994). Government Spending and Economic Growth. Applied Economics, 26(1), 83-94.
  • Martin, R. & Fardmanesh, M. (1990) Fiscal Variables and Growth: A Cross-Sectional Analysis. Public Choice, 64, 239–251. https://doi.org/10.1007/BF00124369
  • Musgrave, R. A. (1959). The Theory of Public Finance. New York: McGraw-Hill.
  • Nguyen, H. T., & Darsono, S. N. A. C. (2022). The Impacts of Tax Revenue and Investment on the Economic Growth in Southeast Asian Countries. Journal of Accounting and Investment, 23(1), 128-146.
  • Onifade, S. T., Çevik, S., Erdoğan, S., Asongu, S., & Bekun, F. V. (2020). An Empirical Retrospect of the Impacts of Government Expenditures on Economic Growth: New Evidence From the Nigerian Economy. Journal of Economic Structures, 9(1), 1-13.
  • Pesaran, M. H. (2004). General Diagnostic Tests for Cross Section Dependence in Panels. Cambridge Working Papers in Economics, 435.
  • Pesaran, M. H. (2007). A Simple Panel Unit Root Test in The Presence of Cross‐ Section Dependence. Journal of Applied Econometrics, 22(2), 265-312.
  • Pesaran, M. H. & Yamagata, T. (2008). Testing Slope Homogeneity in Large Panels. Journal of Econometrics, 142, 50-93.
  • Pițu, I. C., Ciocanea, B. C. & Vodă, A. D. (2019). The Influence of the Variation of Taxes and Duties on the National Economy in the Context of Ensuring the Need for Revenues to the State Budget. Ovidius University Annals, Economic Sciences Series, 19(2), 850-860.
  • Romer, C. D. & Romer, D. H. (2010). The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks. American Economic Review, 100(3), 763-801.
  • Sheehey, E. J. (1993). The Effect of Government Size on Economic Growth. Eastern Economic Journal, 19(3), 321-328.
  • Tashevska, B., Trenovski, B., & Trpkova-Nestorovska, M. (2020). The Government Revenue–Expenditure Nexus in Southeast Europe: A Bootstrap Panel Granger-Causality Approach. Eastern European Economics, 58(4), 309-326.
  • World Bank. (2023a). GDP growth (annual %) [Data file]. Retrieved from https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG Date of access: 15.05.2023
  • World Bank. (2023b). Expense (% of GDP) [Data file]. Retrieved from https://data.worldbank.org/indicator/GC.XPN.TOTL.GD.ZS Date of access: 15.05.2023
  • Zagler, M. & Durnecker, G. (2003). Fiscal Policy and Economic Growth. Journal of Economic Surveys, 17(3), 397-418. doi:10.1111/1467-6419.00199
  • Zidar, O. (2019) ‘Tax Cuts for Whom? Heterogeneous Effects of Income Tax Changes on Growth and Employment’. Journal of Political Economy, 127, 1437–1472.
There are 41 citations in total.

Details

Primary Language English
Subjects Econometric and Statistical Methods
Journal Section Research Article
Authors

Bora Kurtuluş 0000-0002-1112-7758

Publication Date June 29, 2024
Submission Date August 15, 2023
Published in Issue Year 2024 Volume: 26 Issue: 1

Cite

APA Kurtuluş, B. (2024). The Effect of the Share of Taxes and Expenditures in National Income on Growth, a Multi-Country Analysis. Kastamonu Üniversitesi İktisadi Ve İdari Bilimler Fakültesi Dergisi, 26(1), 84-97. https://doi.org/10.21180/iibfdkastamonu.1343525