IDEAS home Printed from https://ideas.repec.org/a/rfa/aefjnl/v4y2017i3p89-101.html
   My bibliography  Save this article

Tax-financing of Budget Deficits in LDCs: Re-validation of Laffer Curve Theory

Author

Listed:
  • Samuel O.Okafor
  • Olisaemeka D. Maduka
  • Ann N. Ike
  • Benedict I. Uzoechina

Abstract

Urgent need for quick action to put Nigeria and other developing economies back to the path of economic recovery has almost imposed state of emergency on these economies. Most LDCs are faced with acute shortage of development funds due to recessions accompanying incessant crashes in international financial market. Raising existing tax rates to finance budget deficit in LDCs often generates public debate on pros and cons of such policy option. Study considered Nigeria as typical case of LDCs. Study focused on establishing the effectiveness of tax-financing of budget deficit under Laffer curve theory. Study spanned across 1970-2015. Data were analyzed using ADF, CUSUM, heteroskedasticity, multiple regression, Johansen cointegration and ECM. Results indicate that: (1) Custom and exercise duties, petroleum profit tax and value-added tax contributed significantly to the reduction in budget deficit while company income tax had nonsignificant impact(2)Total government revenue constituted major chunk of planned income for budget deficit financing(3) Deficit financing of capital health expenditure yielded high returns while that of recurrent education expenditure and capital education expenditure was accompanied by low returns (4)Growth and employment generation accelerated deficit financing while private investment decelerated it (5) There were long and short-run relationships among budget deficit, taxes, human capital investment and macroeconomic indicators with significant rate of adjustment of short-run disequilibrium. Study concluded that tax-financing of budget deficit was effective under Laffer curve effect. It was recommended, among others, that LDCs should enlarge their tax bases through inclusion, to finance budget deficit.

Suggested Citation

  • Samuel O.Okafor & Olisaemeka D. Maduka & Ann N. Ike & Benedict I. Uzoechina, 2017. "Tax-financing of Budget Deficits in LDCs: Re-validation of Laffer Curve Theory," Applied Economics and Finance, Redfame publishing, vol. 4(3), pages 89-101, May.
    • Handle: RePEc:rfa:aefjnl:v:4:y:2017:i:3:p:89-101
    as

    Download full text from publisher

    File URL: http://redfame.com/journal/index.php/aef/article/view/2297/2416
    Download Restriction: no
    File URL: http://redfame.com/journal/index.php/aef/article/view/2297
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Govinda Bahadur Thapa Ph. D., 2005. "Deficit Financing: Implications and Management," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 17, pages 16-26, April.
    2. Trostel, Philip A., 1995. "The Effect of Deficit Finance on Human Capital," National Tax Journal, National Tax Association;National Tax Journal, vol. 48(4), pages 531-546, December.
    3. Gaber, Stevan, 2010. "Economic implications from deficit finance," BERG Working Paper Series 69, Bamberg University, Bamberg Economic Research Group.
    4. Upender, M., 2008. "Degree Of Tax Buoyancy In India : An Empirical Study," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 5(2).
    5. Trostel, Philip A., 1995. "The Effect of Deficit Finance on Human Capital," National Tax Journal, National Tax Association, vol. 48(4), pages 531-46, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Samuel O. Okafor & Olisaemeka D. Maduka & Ann N. Ike & Benedict I. Uzoechina & Celestine I. Ohachosim, 2017. "Tax-budget Deficit Relationships: Fiscalists¡¯ Platform for Deficit Financing Policy," Business and Management Studies, Redfame publishing, vol. 3(3), pages 53-68, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Samuel O. Okafor & Olisaemeka D. Maduka & Ann N. Ike & Benedict I. Uzoechina & Celestine I. Ohachosim, 2017. "Tax-budget Deficit Relationships: Fiscalists¡¯ Platform for Deficit Financing Policy," Business and Management Studies, Redfame publishing, vol. 3(3), pages 53-68, September.
    2. Maria Carme Riera i Prunera, 2003. "Deficit, human capital and economic growth dynamics," Working Papers in Economics 102, Universitat de Barcelona. Espai de Recerca en Economia.
    3. Riera Prunera, Maria Carmen, 2000. "A Role For Deficit In Economic Growth," ERSA conference papers ersa00p335, European Regional Science Association.
    4. Nazia Abdul Rehman & Musarrat Shamshir & Khurram Shakir, 2020. "Correlation of Macroeconomic Variables with Twin Deficit in Pakistan," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 16(1), pages 16-11.
    5. Fatoke Dato, Mafaizath A., 2015. "Impact of income shock on children’s schooling and labor in a West African country," MPRA Paper 64317, University Library of Munich, Germany.
    6. Dräger, Lena & Proaño, Christian R., 2015. "Cross-border banking and business cycles in asymmetric currency unions," Discussion Papers 21/2015, Deutsche Bundesbank.
    7. Fulgence Dominick Waryoba, 2018. "Import Base and Revenue Improvement Possibilities in Tanzania," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 4(1), pages 21-28, March.
    8. Franke, Reiner & Westerhoff, Frank, 2012. "Structural stochastic volatility in asset pricing dynamics: Estimation and model contest," Journal of Economic Dynamics and Control, Elsevier, vol. 36(8), pages 1193-1211.
    9. Shoora B. Paudyal, 2013. "Do Budget Deficits Raise Interest Rates in Nepal?," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 25(1), pages 51-66, April.
    10. Alfarano Simone & Milakovic Mishael, 2012. "Identification of Interaction Effects in Survey Expectations: A Cautionary Note," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 16(4), pages 1-23, October.
    11. Meyer, Dietmar & Shera, Adela, 2015. "Remittances' impact on the labor supply and on the deficit of current account," BERG Working Paper Series 97, Bamberg University, Bamberg Economic Research Group.
    12. Vincent Belinga & Ms. Dora Benedek & Ruud A. de Mooij & Mr. John Norregaard, 2014. "Tax Buoyancy in OECD Countries," IMF Working Papers 2014/110, International Monetary Fund.
    13. Schmitt, Noemi & Tuinstra, Jan & Westerhoff, Frank, 2017. "Side effects of nonlinear profit taxes in an evolutionary market entry model: Abrupt changes, coexisting attractors and hysteresis problems," Journal of Economic Behavior & Organization, Elsevier, vol. 135(C), pages 15-38.
    14. Nazia Abdul Rehman & Musarrat Shamshir & Khurram Shakir, 2020. "Correlation of Macroeconomic Variables with Twin Deficit in Pakistan," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 16(1), pages 1-16.
    15. Imtiaz Arif, Lubna Khan, Faheem Hussain, 2017. "Impact of Semi-Autonomous Revenue Authority on Tax Revenue and Buoyancy: Evidence from Pakistan," Journal of Finance and Economics Research, Geist Science, Iqra University, Faculty of Business Administration, vol. 2(2), pages 164-174, October.
    16. Nepal Rastra Bank, 2017. "Elasticity and Buoyancy of Taxation in Nepal: A Revisit of the Empirical Evidence," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 29(1), pages 19-32, April.
    17. Seregi, János & Lelovics, Zsuzsanna & Balogh, László, 2012. "The social welfare function of forests in the light of the theory of public goods," BERG Working Paper Series 87, Bamberg University, Bamberg Economic Research Group.
    18. Imami, Drini & Lami, Endrit & Kächelein, Holger, 2011. "Political cycles in income from privatization: The case of Albania," BERG Working Paper Series 77, Bamberg University, Bamberg Economic Research Group.
    19. Martina Yakova, 2019. "Tax buoyancy of the EU-28 countries – a comparative analysis," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 5, pages 59-73.
    20. Audi, Marc & Ali, Amjad & Roussel, Yannick, 2021. "Measuring the Tax Buoyancy: Empirics from South Asian Association for Regional Cooperation (SAARC)," MPRA Paper 109567, University Library of Munich, Germany.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rfa:aefjnl:v:4:y:2017:i:3:p:89-101. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Redfame publishing (email available below). General contact details of provider: https://edirc.repec.org/data/cepflch.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.