The Effect of Tax Revenues on Value Added in Manufacturing Industry: A Study on Germany with the ARDL Bounds Test

Abstract

This study aims to examine the short- and long-run impacts of tax revenues on manufacturing value added in the German economy. In addition, GDP growth is treated as a control variable to provide a comprehensive assessment of the role of the tax structure in shaping manufacturing performance. The analysis uses annual data for the period 1991–2023 sourced from the World Bank. The stationarity properties of the variables are examined using Augmented Dickey–Fuller (ADF) and Phillips–Perron (PP) unit root tests, and due to the mixed order of integration, the ARDL bounds testing approach is employed. Short- and long-run dynamics are analyzed using the ARDL error correction model (ECM), while model stability is assessed using the CUSUM and CUSUMSQ tests. Structural breaks identified through stability tests are controlled by incorporating dummy variables into the autoregressive distributed lag (ARDL) model.

The empirical findings indicate that the share of tax revenue within GDP exerts a negative and statistically significant effect on manufacturing value added in the long run. Conversely, GDP growth positively influences manufacturing value added in both the short and long run. The negative and significant error correction term confirms that deviations from long-run equilibrium are corrected rapidly. Overall, the results suggest that while economic growth supports manufacturing performance in Germany, a higher tax burden may constrain production capacity in the long term.

Keywords

• Manufacturing Value Added
• Tax Revenues
• Economic Growth
• ARDL Bounds Testing

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