Taxation Effects - Research Proposal Example

TAXATION EFFECTS Name: Course: Instructor: Institution: Location: Taxation effects Introduction The complex nature of the global economic environment has forced many countries to evaluate and comprehend the main factors that are affecting economic growth. This paper investigates the argument that, within the European Union, lower taxation produces economic growth. Financial experts have found it difficult to manage the current economic crisis while trying to make their economic perform well in the ever-changing global economic environment. Many factors affect the competitiveness and productivity of a country’s economy. A comprehension of these factors has been the subject of an investigation by many economists who have proposed numerous theories such as Adam Smith’s theory labor division and specialization. Others have introduced with the focus on developing a country's capital and physical infrastructure as a catalyst for economic growth. Will all this and more are crucial for growth taxation and tax revenue generation have a direct and significant role to play in setting the pace for a country's economic growth. In 2012, the European Union tax revenue, when taken as a ratio of GDP, accounted for more than forty percent. This figure represents almost half of the European Union’s total GDP, and it demonstrates the importance of tax revenue to the growth and prosperity of the European Union’s economy. To explain, theoretically the effect that taxation has on the economic performance of a country is very difficult. In some cases, high tax levels are seen as a barrier and counterproductive to a country’s sustained economic growth and improvement. The taxes charged by governments can have both negative and positive effects on a nation’s economic growth and wellbeing. Of great importance to a country's economy is its ability to transform successfully or convert resources into tangible and meaningful output. It is crucial because it allows a government to provide better social amenities such as improving roads and ports and better protection of property. In the recent time, many private facilities are provided at the government's expense and some states have implement direct income redistribution to the unemployed and vulnerable in the society. In some countries and some taxation cases the resources used in the private sector are more than the in the public sector. At the same time, a lot of resources is lost through the underground or informal economy that reduced the economic growth of a country. Several theoretical models such as the Keynesian and the neoclassical ones clearly show as that higher taxation has an adverse effect on economic growth. However, to some extent, tax may be useful for a country’s economy because it can be considered as one of the primary and most essential sources of finance that a state can use for government spending. If utilized efficiently taxes can enable, a government provide social amenities and improves both fixed capital and human productivity in the private Aim and methodology Taxation is each country has a unique structure and size. The purpose of this papers it to evaluate the effect of reducing tax on a country’s economy and to give direct numerical evidence in the European Union. The paper used data to group tax burdens and evaluated capital, labor and rates of consumption. The analysis was based on data collected from the 24 European Union member states between the years 1995 and 2010. The principal research methods were Pairwise Granger Causality Tests and Panel regression. The goal was to establish a statistical connection between the tax burden and the economic performance, which is in gross domestic product. The analysis utilizes panel data in dimensions of time series and cross-sectional while applying the regression models. There are a numbers of reasons why interests in panel data sets can be increased the most important is that it can deal with issues of biasness that may be as a result of unobserved heterogeneity. The other reason is that the data sets can be used to reveal the intricate dynamics that could otherwise not be detected when only using cross-sectional data. Modeling using data sets will allow the combination of elements from both regression and time series. Fixed effect regressions was used for the analysis and the and the panel model used is written below yit = αi + β'Xit + εit i = 1, 2, ..., N, t = 1, 2, ..., T, yit is dependent on xit , which is a group of Z explanatory variables. The countries are constants and are specific to the i-th unit in a time t. β ' = vector dimensions αi = Constants showing the of the variables εit = error component showing non-significant effects The data panel was made up of 24 European Union member countries. Romania Luxembourg and Malta were not included in the analysis due to lack of enough data. The model denotes a country as i and the duration of time as t. The analysis the annual tax burden data for each country which consists of Implicit tax rates of consumption-(ITR_C) Implicit tax rates on labor-(ITR_L) Implicit tax rates on capital-(ITR_K) Annual GDP data taken at market price Table shows a representation of the variables used in the analysis together with their descriptive statistics ITR_K ITR_L ITR_C GDP growth Minimum 4.80 20.80 11.10 -17,70 Maximum 49.90 49.90 32.20 11.70 Median 23.70 37.00 20.40 3.30 Std Dev 9.24 4.80 4.45 3.60 Mean 24.80 35.66 21.30 2.92 Observations 339 379 379 376 Table 1 calculations of variable statistics using data from Eurostat (2012) Results and discussion Taxation changes through economic functions The analysis of Tax burden through economic function reveals that eastern European Union member states derive a majority of their income from consumption taxes while those in central and northern Europe a high percentage of their income comes from consumption taxes. The results indicate that the EU members states a share of their total income is highly dependent on the labor factor more so for countries located in central Europe such as Germany, France Czech Republic, and Netherlands. The reliance on the labor factor is due to the huge amounts of contributions social security. EU governments have to find a balance of consolidating their budgets but at the same time stimulating economic growth. The lowering of capital and labour taxes and at the same time raising consumption taxes can have a positive effect on economic growth. For growth to be sustained, taxation on labor and capital should be kept at a minimum but consumption taxes can be increased because it has a lesser impact on the economy. Effects of taxttoion on ecomic growth While analsisng we estimated the effects that taxtation can have on the ecoomic growth ofthhe Europian Union member states. The main methods used in the analysis were Granger Causality and Time regression tests. For the panel regression a combination of implicit taexes, varable diffrences and time series of GDP growth wrer used. Table two is the calculation that the tax berdens have of the EU members ststes economies. Variable Method 1 Method I I Method I I I Constant 2.65* (0.19) -0.11 (0.22) -15.33* (4.30) ITR_K -0.08 ITR_L 0.39 (0.11) ITR_C 0.26 (0.14) dITR_K 0.19 (0.07) -0.10 (0.08) dITR_L -0.01 (0.20) -0.51** dITR_C 0.477** (0.23) 0.89* (0.25) Durbin-Watson stats 1.307 2.01 Adjusted R-squred 0.09 0.08 Observations 334 311 Table 2 Effect of taxation on the economic growth of EU member states using data from Eurostat (2012 The signs * and ** indicate statistical importance ranging from one percent, five percent, and ten percent. From our analysis, we can deduce that economic growth is influenced by implicit tax rates. The results indicate that a 1% increase in the consumption taxes the EU economy increased by 0.47%. The estimation shows a negative effect on the GDP with an increase in labor taxes. The consumption taxes affect the demand, and its increases can positive affect economic growth rates of the EU countries. The labor taxes can affect the GDP by affecting the productivity and utilization of labor. Nonetheless, it is very difficult to estimate or evaluate the effects of the overall taxation burden on economic growth. It is because consumption taxes have a lesser impact on the economic growth than income taxes and changes in any of the taxes can affect a number of GDP determinants Conclusion The aim of the paper was to evaluate the effect of reducing taxation on the economic growth and to get statistical evidence from the European Union. The paper used statistics from Eurostat to categorize the implicit taxes and their effects on economic growth of the Union. The analysis used statistics between the years of 1995 and 2010 on an annual basis. The methods used were Pairwise Granger Causality and panel Regression. The focus of the analysis was in 24 European Union member states. The results of the study confirmed that an increase in the consumption tax rate has positive effects on the economic growth. An increase in the labour tax rate has a negative effect on the economic growth of the European Union. The notion that a reduction in the taxes can positively affect the economic growth of as country is false. The analysis clearly shows that economic growth is dependent on several factors, and an increase or a decrease in the taxation can either have positive or negative effects. References ANDERSSON, K., EBERHARTINGER, E., & OXELHEIM, L. (2007). National tax policy in Europe to be or not to be? Berlin, Springer. http://public.eblib.com/choice/publicfullrecord.aspx?p=337677. CARAGATA, P. J. (1998). The economic and compliance consequences of taxation a report on the health of the tax system in New Zealand. Boston, Kluwer Academic Publishers. http://books.google.com/books?id=_8KzAAAAIAAJ. ERIC J. PENTECOST, & ANDRÉ VAN POECK. (2001). The historical background to European Monetary Union. FATÁS, A. (2003). Stability and growth in Europe: towards a better pact. London, Centre for Economic Policy Research. STIVACHTIS, Y. A. (2007). The state of European integration. Aldershot, England, Ashgate. http://public.eblib.com/choice/publicfullrecord.aspx?p=438940. Read More