Would Tax Cut Induce Economic growth and investment

 

Tax revenues is very crucial for the country's economy,yet the important of taxation on the growth and investment has remained a hostly debated issues, not only to the academic but also to the politician as well as policy makers.

     Both changes in the level of revenues and the structure of the tax system can influence economic activity, but not all tax changes have equivalent, or even positive, effects on long-term growth. 

Tax cuts offer the potential to raise economic growth by improving incentives to work, save, and invest. But they also create income effects that reduce the need to engage in productive economic activity, and they may subsidize old capital, which provides windfall gains to asset holders that undermine incentives for new activity.

 In addition, tax cuts as a stand-alone policy will typically raise the government budget deficit. The increase in the deficit will reduce national saving and the capital stock owned by national income and raise interest rates, which will negatively affect investment. The net effect of the tax cuts on growth is thus theoretically uncertain and depends on both the structure of the tax cut itself and the timing and structure of its financing.

   Feldstein and Elmendorf (1989) find that the 1981 tax cuts had virtually no net impact on economic growth. They find that the strength of the recovery over the 1980s could be ascribed to monetary policy. In particular, they find no evidence that the tax cuts in 1981 stimulated labor supply.They concluded that tax cut  increase by 1% of GDP lower in  real GDP by roughly 3%.

   In most developing countries,a low tax revenues relative to GDP prevent them from undertaking ambitious development expenditure programs.Furthermore, due to the inefficient of tax distribution system in these countries,,tax rate tend to be high and concentrated on the few tax payer and on indirect tax.Mobilizing additional resources through new tax regime, external financing support and deficit financing to finance budgetary expenditure is therefore a policy priority.

   For Instance ,Ghana has pursued the major tax reform over the last two decade. The country has moved progressively from historically high corporate tax rate regime of 65% in 1980 to 32% in 2001 and 25% in 2006. In 2006,when the corporate tax rate revenues dropped by 3.1%, GDP growth rose by 0.3% before falling by 1.9% in 2007.

   Non-tax oil revenues increased from GhC 4.5billion in 2008 to GhC23.7 billion, representing increase of 461.6% in nominal term and 137.3% increase in real term. Tax revenues as a percentage of GDP also increase from 14.01% in 2008 to about 17.09% in 2015.

   Ghana tax system especially corporate income tax regime compare favorably with its peers in the lower middle income countries(LMIC). The average corporate income tax rate for the LMIC is 29.6% compare to Ghana 25%.The movement of the real GDP and real tax revenues has always been positive with growth rate higher than than the growth in the real tax revenues. This explain that the fact that growth rate in real GDP  is not strong enough to pull up the growth rate in the real tax revenues

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