Abstract
Tax policies and reforms sometimes have strong effects on economic growth. This paper examines the relationship between tax and economic growth. The paper will explore the impact of changes in tax on economic growth. This is done using secondary sources found by searching databases that have past works on the same topic or related topics. The literature review is also used in this examination. The findings suggest that different taxes changes have different impacts on economic growth both positive and negative.
References7
1. Introduction
For a long time, researchers and policy makers have had an interest in how changes in the income tax system affect the size or growth of the economy. Taxes are one of the important revenue for any country because taxes are collected by the government from citizens, companies and investors. The tax system is the most important code of any state and the degree of its perfection depends on the state of the national economy and solving social problems (Palomba, 2004). The tax system is an important managerial and economic act of the state to influence the economic and social processes in the country (Aurebach & Hines, 2002). A fair assessment would conclude that tax policies that are well crafted should have the potential to increase economic growth. However, there are many barriers along the way and there is no guarantee that all tax changes will improve economic performance hence the negative effects of such tax changes on economic growth.
1.1 Problem statement
Many studies and researchers have determined that there is a direct relationship between tax and economic growth. However, it is not clear what kinds of taxes affect economic growth and whether the effects are positive or negative. There is need for a better understanding of the types of taxes or tax reforms or policies that affect economic growth and whether the effects are positive or negative.
1.2 Purpose of study
The purpose of this paper is to examine the type of taxes that affect the economic growth whether those effects are negative or positive, one of the issue of taxes and their impact on the development of national economy, and the studies on the effect of personal income taxes rates on the economic growth.
1.3 Aims and objectives of study
The overreaching aim of this study is to give a concrete examination of the effects that change in tax has on economic growth.
The following are the objectives of the study:
1.4 Research questions
- How do changes in tax affect the growth of the economy?
- What are the negative and positive effects of changes in tax on economic growth?
- What are the types of taxes, tax reforms and tax policies that have an effect on economic growth?
1.5 Hypotheses
H1: Progressive or higher taxes have a negative impact on economic growth.
H2: Tax policies and reforms have a significant impact on the level of investment in a country and as a result affect economic growth
2. Literature Review
With the help of the tax system, the state can create the propriety conditions for the development of business structure and the solution of social problems. In modern conditions, the most important task is to ensure the steady rates of long-term development of the national economy, which is hardly possible without improving the tax system. The state and tax payers have different attitudes towards the tax system. The state is interested in maximizing income with the tax payments, and tax payers want to minimize them (Acemoglu, Aghion & Zilibotti, 2002). The main basis of the tax system is the balance of state interests and taxpayers. One of the issues of tax policy is the relation between the growth stimulation and social persecution purposes for example, the elimination of inequalities in society (Auerbach & Hines, 2002). An important aspect of the analysis of tax system is a progressive tax. The taxes can affect the incentives of different kinds of activities, which are aimed to receive income (entrepreneurial activity, labor supply, etc.), and then, influence the economic growth. On the other hand, the most progressive income tax leads to some degree of risk sharing between employers and fiscal authorities because the potential losses can be written off against other income. Thus, Aghion and Howitt (1992) explain that Keushnig and Nelson study of the system of interactions between institutions and venture capital firms. Also the impact of various types of taxes on venture capital activity is studied (Caucutt, Selahattin & Kumar, 2003). It was found that the tax on capital leads to an increase in demand for managerial advice, but it reduces the amount of businessman. Payroll tax has the opposite effect. Flat tax is undistorted. Progressive tax, which is used to finance subsidies, interferes with entrepreneurship. Carroll has revealed a relationship between the magnitude of the marginal rates of personal income tax and the growth of small firms, showing that high marginal personal income tax rates lead to lower rates of growth of such firms (Benhabib & Spiegel, 1994). In spite of the fact generally it is obvious that the tax policies can have a significant impact on the level of investment in individual firms and in the country, the impact of tax policy on various sectors may be uneven. An important area of analysis, which allows determining which sectors and which taxes should be introduced, is the industry Analysis of total factor productivity.
3. Methodology
3.1 Research design
This study will use both qualitative and quantitative research designs. Qualitative research applies in this study because a database of literature was used to explore the effects of tax on economic growth. Quantitative research was important because it provided descriptive data that captures a snapshot of user population.
3.2 Sample, participants and setting
A random sample will be used to choose the participants. The number of participants will be about 50 public servants working for government in the tax department and managerial staff of companies. The sample size is small enough because the number of potential participants is relatively small. The setting will be in the offices of the participants.
3.3 Data collection
Data collection will be done through use of questionnaires and interviews. Each participant will be given a questionnaire of about ten questions regarding tax systems and how they affect economic growth. The questionnaire will be administered early for deliberation because the questions are a bit lengthy and complex.
3.4 Data Analysis
Considering the sample is small, the analysis of data will not include any statistical or mathematical function. The questionnaires are few and they will be compared to determine similar information and those that are contrasting before making conclusions. The analysis will therefore be done by comparison of all data collected and grouping information into categories for purposes of making a concrete analysis.
3.5 Limitations of study
This study was limited by its small sample size. A larger sample size would have benefited the results by giving more comprehensive results. Another limitation was the potential of bias since interviews and analysis is carried out by the same person.
References
Acemoglu, D., Aghion, P., & Zilibotti, F. (2002). Distance to Frontier, Selection, and Economic Growth/ NBER, Working Paper No 9066.
Aghion, P., & Howitt. P. (1992). A model of growth through creative destruction. Econometrica, 60, March, 323-351.
Auerbach., A., & Hines., J. (2002). Taxation and Economic Efficiency. Handbook of Public Economics.
Benhabib., J., & Spiegel., M. (1994). The Role of Human Capital in Economic Development: Evidence from Aggregate Cross-Country Data. Journal of Monetary Economics, 34, 143- 173.
Caucutt., E., M., Selahattin I., & Kumar., K., B. (2003). Growth and Welfare Analysis of Tax Progressivity in a Heterogeneous-Agent Model. Review of Economic Dynamics, 6:546- 577
Palomba, G. (2004). Capital Income Taxation and Economic Growth in Open Economies. New York: International Monetary Fund
