The Links between Economic Growth and Tax Revenue in Ghana: An Empirical Investigation

This paper explores the causal influence of tax revenue on economic growth in Ghana. Our point of departure from the existing studies lies in the fact that we examine causality instead of the impact. The causality analysis performed in this paper builds on a multivariate setup, allowing for key control variables to intermediate the nexus between tax revenue and economic growth. Such a rich environment can overcome variable omission bias; thus allowing for efficient estimates of the test statistics of the Granger causality. In addition, we employed the Toda-Yamamoto test instead of the canonical Granger causality test to avoid pre-testing bias. Using a quarterly dataset which spans the period 1986Q1-2014Q4, we found strong evidence of unidirectional causal flow from tax revenue to economic growth in Ghana. This finding agrees with the existing finding that taxation can influence economic growth. The policy implication is quite clear. Ghana is a net borrower since the country regularly suffers from budget deficits. The policymaker can implement policies that enhance the tax scope in order to increase the revenue from taxation. For a country whose economy has a large share of black market activities, such a policy may be challenging to implement. Thus, such policies will require collective efforts from the policymaker and the players in the economy. To induce people to buy into these kinds of policies, the policymaker must first embrace accountability of the revenue raised from taxation. Productive government spending will appeal to the players of the Ghanaian economy whereas unproductive and unaccountable government spending will not.