Tax Policy and Economic Growth: Evidence from Ghana

Abstract

An evaluation of the budgetary process in Ghana depicts that annual expenditure proposals are continuously anchored on projected revenue. This means that the accuracy of revenue projection is a necessary condition for devising a suitable framework for fiscal deficit management in Ghana. This study explores the impact of tax policy measures on economic growth using time series data for the period 1970 2013 to devise a reasonably accurate estimation of Ghana‟s sustainable revenue profile in a general Autoregressive Distributed- Lag model. This further leads in the design of an appropriate expenditure profile as a means of averting the persistent non- sustainable fiscal deficit in Ghana. The findings depict that economic growth benefits from increases in import taxes more than the other types of taxes both in the short and long run. However, increases in the share of personal income taxes have deleterious effect on economic growth in Ghana over time. This is because personal income taxes are progressive in nature having a higher marginal tax rates that discourages economic growth as compared to the lower average rates intended to generate more revenues. Consumption taxes and excise taxes have negative effect on economic growth in the long run. However, the short run dynamic results indicate that consumption and excise taxes at one period lag exert a positive and statistically significant effect on economic growth. University of Ghana http://ugspace.ug.edu.gh v The study concludes that the current revenue path is sustainable if broadening the tax base should be the utmost target of policy and this would be the most feasible solution to the problem of unsustainable fiscal deficit in Ghana. All in all, the study underscores the immediate need for the enhancement of the tax administration system to improve the assessment of the performance of Ghana‟s tax system as well as facilitating adequate macroeconomic planning and implementation.