Tax Structure and Economic Growth in Ghana

Abstract

Taxation is not only a major economic policy tool but also a means to encourage positive social behaviour and discourage negative social behaviour. Unfortunately, in Ghana, taxation is almost reduced to a tool for winning political power. Majority of the time, political discourse and economic policy discourse on taxation is at best anecdotal. The objective of this study is to investigate and provide empirical evidence on the relation between tax structure and growth in Ghana in order to inform future tax policy discourse. The study used ARIMAX time series model to estimate the relation between tax structure and growth over the research period 2009-2017. The relation between some individual taxes and growth was also estimated over the same period. The results suggest that tax structure (direct and indirect taxes) significantly impact economic growth in a positive direction. However, the positive effect of indirect taxes on growth is mainly driven by National Health Insurance Levy. Other indirect taxes considered like Value Added Tax, Communication Service Tax, and Excise Tax negatively impact growth. Based on the research findings, we recommended that going forward, government shift from the current tax structure where indirect taxes dominate direct taxes to a tax structure where direct taxes dominate indirect taxes.