Determinants of tax revenue: Evidence from Ghana

Abstract

Most developing countries face the problem of raising tax revenue to carry out public sector spending. Tax revenue is necessary for economic growth and development. Unfortunately tax revenue generation has been low in Ghana. This study therefore examined the determinants of tax revenue with evidence from Ghana using quarterly data from 1988 to 2008. The tax effort function is used by regressing government expenditure, real gross domestic product and financial deepening on tax revenue. The study employed Auto Regressive Distributed Lag (ARDL) approach to cointegration. Results from the analysis showed that government expenditure is vital in generating tax revenue in the long run while it has a negative effect in the short run on tax revenue for the period selected for the study. It implied that government expenditure is a good policy instrument in raising tax revenue in the long run. Also, real gross domestic product exhibited a positive effect on tax revenue in the short run while it showed a negative impact on tax revenue in the long run over the study period. Furthermore, the study revealed that, financial deepening had a negative impact on tax revenue when both the short run and long run dynamics were employed. The study recommends that the government of Ghana increases government expenditure in the productive sectors that would impact positively on all forms of taxes that would ultimately lead to increase in tax revenue. Also, the number of years of tax holidays and tax exemptions should be reduced so as to increase tax revenue that would enhance economic growth and development.