Taxation is not only a major economic policy tool but also a means to encourage positive social behaviour and discourage negative social behaviour. Unfortunately, in Ghana, taxation is almost reduced to a tool for winning political power. Majority of the time, political discourse and economic policy discourse on taxation is at best anecdotal. The objective of this study is to investigate and provide empirical evidence on the relation between tax structure and growth in Ghana in order to inform future tax policy discourse. The study used ARIMAX time series model to estimate the relation between tax structure and growth over the research period 2009-2017. The relation between some individual taxes and growth was also estimated over the same period. The results suggest that tax structure (direct and indirect taxes) significantly impact economic growth in a positive direction. However, the positive effect of indirect taxes on growth is mainly driven by National Health Insurance Levy. Other indirect taxes considered like Value Added Tax, Communication Service Tax, and Excise Tax negatively impact growth. Based on the research findings, we recommended that going forward, government shift from the current tax structure where indirect taxes dominate direct taxes to a tax structure where direct taxes dominate indirect taxes.
CHAPTER ONE INTRODUCTION
Background of the Study
Tax policy debate continues to dominate economic policy discussions in the press, academia, and civil society advocacy (Mcbride, 2012). This observation is attributable to the fact that taxes are not only the largest source of revenue for governments, states or municipalities, but also a tool to effect fiscal policy and cause positive change in behaviour. For instance, carbon tax which is a tax imposed on fossil fuel, reduces the harmful effects of carbon dioxide on the environment. However, the impact of taxes on economic growth is not as definite as illustrated in the carbon tax example. The imposition of carbon tax may negatively affect economic growth via increased fuel prices (Zhou, Shi, Li, & Yuan, 2011).
The uncertainty about how taxes influence economic growth has prompted several empirical evaluations analysing the relation between taxation and economic growth. Whereas some studies conclude that taxes negatively impact economic growth (Ahmad, Sial, & Ahmad, 2016; Alesina & Ardagna, 2010; Atems, 2015; R. Barro & Redlick, 2011; Blanchard & Perotti, 2002; Dladla & Khobai, 2018; Ferede & Dahlby, 2012; International Monetary Fund, 2010; Koester & Kormendi, 1989; Lee & Gordon, 2005; Mertens & Ravn, 2012; Padovano & Galli, 2001; C. Romer & Romer, 2010), other studies suggest taxes lead to economic growth (Arnold, 2008; Azam & Shinwari, 2015; Egbunike, Emudainohwo, & Gunardi, 2018a; Kalaš, Mirović, & Andrašić, 2017; Mercedes & Mehrez, 2004; Miller & Russek, 1997; Stoilova, 2017; Yahaya, n.d.). In addition, there are some studies which observe no significant relation between taxes and economic growth (Easterly & Rebelo, 1993; Gale, Krupkin, & Rueben, 2015; Katz, Mahler, & Franz, 1983; Mendoza, Milesi-Ferretti, & Asea, 1997; Mendoza,
Razin, & Tesar, 1994). Thus, there is lack of consensus among researchers regarding the relation between taxation and growth.
In spite of the mixed empirical results, taxation remains a major tool in fiscal policy administration. Governments increase taxes to pursue contractionary fiscal policy or decrease taxes to pursue expansionary fiscal policy. In developing economies where financial markets are largely informal and underdeveloped, the unpredictability of tax-led fiscal policy is high. Consequently, tax policy initiatives are circumstantial rather than concrete.