Tax Revenues and Economic Growth: An Empirical Investigation for Greece Using Causality Analysis

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Abstract: This study examines the relationship between tax revenues and the rate of economic growth for Greece. The viewpoint that the low ratio of direct to indirect taxation promotes high economic growth has been a main subject for discussion. However, not many papers have attempted to test the above hypothesis. One of the main problems that researchers are facing is the lack of time series data over a sufficiently long period. This brings out particular problems when testing for unit roots and cointegration between time series of the variables used. In this study, we try to analyse the relationship between total tax revenues, income tax and tax on capital gains, gross domestic saving and the rate of economic growth. In order to find this relationship, annual data from 1965 until 2002 and causality analysis are used. The findings have shown that there exists causal relationship between tax revenues and economic growth in Greece.

Key words: Tax Revenues, Economic Growth, Granger Causality

INTRODUCTION

Tax policy can be regarded as the necessary component of economic policies for every country in order to sustain and strengthen their global competitiveness and growth internationally. Nowadays, with the highly moving capital and specialized work, the tax structure should be competitive in order to attract capital, specialized work and technology which are essential elements for maximizing economic growth.

The first who examined how taxation affects growth was Solow [1]. The neoclassical growth model of Solow implies that steady state growth is not affected by tax policy. In other words, tax policy, however distortionary, has no impact on long-term economic growth rates, even if it does reduce the level of economic output in the long-term. Unlike, the 'new' endogenous growth theory pioneered by Romer [2], produced growth models in which government spending and tax policies can have long-term or permanent growth effects.

Countries have very different philosophies about taxation and very different methods of collecting their revenue. Castles and Dowrick [3], Atkinson [4], Agell, Lindh and Ohlsson [5] all argue that the different uses of total government expenditure affect growth differently and a similar argument applies to the way tax revenue is raised. During the past decades, some countries have increased taxation quite dramatically, while in other countries tax rates have remained roughly the same. Some countries incorporated value-added taxation in the 1960's (France, Britain) while others shifted away from corporate taxation (USA).

Due [6] supports that countries which are based on indirect taxation have grown more rapidly than those based on direct taxation. For example, the economic growth of Singapore can be attributed to low rates of corporate taxation and personal income taxation.

From 1980 and then, developed countries felt disappointed with taxes levied on income and gains and under pressure from taxpayers and in response to the structural pressures related to the increasing globalization of capital, they started to reduce the percentages from taxes of personal and corporate income and moved towards greater reliance on broad-based indirect taxes.

Burgess and Stern [7] argue that the structure of taxation in developing countries differs from that of developed. For developing countries, we have roughly two-thirds of tax revenue coming from indirect taxes, while for developed countries two-thirds comes from direct taxes. They suggest that tax structure can change over time to maximize the economic growth rate. Another important finding is that within developing countries there was a weak but significant relationship between the tax ratio and GNP per capita but no significant relationship for industrial countries.

Lehmussaari [8], Marsden [9], Trella and Whalley [10] have proven that taxation mix or the level of taxation have had an important influence on economic growth in developing countries. Economic growth relies on the increase of the savings rate and level of investment. If there exists a discernible influence of taxation policy on savings, capital allocation and economic growth, then, there are many lessons to be learned from developing countries about taxation levy and taxation policies which are adopted from mature developed economies and those developing economies which are growing fast.

Devereux and Love [11] explored the quantitative and qualitative effects of tax changes on growth and welfare in an endogenous …