ESTIMATING THE IMPACT OF STANDARD TAX MEASURES ON ECONOMIC GROWTH: EVIDENCE FROM 5 DEVELOPING ASIAN COUNTRIES

Generoso, Nikki Joy S.

Isidro, Nicole Louise B.

Sy, Mary Tiffany E.

Scope

Standard tax measures Personal income tax Corporate income tax Indirect Tax

Scope

Five (5) developing Asian countries Philippines Indonesia India Sri Lanka Nepal

Defining Conceptual Tags

Corporate Income Tax - tax based on the income made by the corporation

Personal Income Tax - kind of tax imposed on an individual with respect to his/her income

Defining Conceptual Tags

Indirect tax– tax on consumption levied on the sale/exchange/lease of goods or services

Real Gross Domestic Product – inflation-adjusted measure of the value of a nation’s total output of goods and services

Research Questions

What is the impact of the 3 standard tax measures (corporate, income, indirect) as a whole on the economic growth from 5 Asian Developing countries (Philippines, Indonesia, India, Sri Lanka, and Nepal)?

Research Questions

What is the impact of each of the tax measures on the real GDP from 5 Developing Asian countries?

Research Questions

Do higher marginal tax rates automatically lead to a country’s growth and development? Or do lower taxes do better?

Research Simulacrum

Personal Income

Tax

Corporate Income Tax

Value-Added Tax

Real Gross Domestic Product (RGDP)

P1 (-)

P2 (-)

P3 (-)

P4 (-)

Proposition #1

Higher marginal tax rates on all three standard tax policies have a negative impact on the real GDP of the selected five developing Asian countries—Philippines, Indonesia, India, Sri Lanka, and Nepal.

(Poulson and Kaplan 2008, Dahlby and Ferede, 2006, Lee and Gordon, 2004, Romer and Romer, 2007, Geloso and Guenette, 2010, Padda and Akram, 2006, Bonu N. S. and Motau P., 2009, Peter and Kerr 2001)

Proposition #2

Higher tax rates on compensation tax or personal income tax slows down economic growth of this study’s scope.

(Caucutt and Imrohoroglu, 2006, Rider 2006, OECD, 2009, Tripathi, Sinha and Agarwal, 2011, Weichienriede, 2005, Romer and Romer, 2007, Geloso and Guenette, 2010, Arnold, Brys, Heady, Johansson, Schwellnus and Vartia, 2011, Lee and Gordon, 2011, Yamarik, 2000, Rivas 2003)

Proposition #3

Higher tax rates on corporate income taxes have a negative influence on individual and business decisions that decrease economic growth of this study’s scope.

(Rider 2006, Young and Saltiel 2011, Tripathi, Sinha and Agarwal, 2011, Romer and Romer, 2007, Geloso and Guenette, 2010, Arnold, Brys, Heady, Johansson, Schwellnus and Vartia, 2011, Lee and Gordon, 2011, Yamarik, 2000, Rivas 2003)

Proposition #4

Flat tax rates on indirect/sales tax/Value-Added Tax discourage employment, thus leading to lower economic growth of this study’s scope.

(Weichienriede, 2005, Sheshinski 2002, Liao and Lia 2011, Nurudeen and Usman 2010)

Research Method

The researchers’ study is quantitative in nature and is going to have a panel data that will cover periods starting from 1992-2010.

Research Method

Eq. 1 (RGDPit ) = β0 - (β1τit) - (β2 tit ) - (β3 sit ) -

Eq.2 (RGDPit) = ʆ0-(ʆ1τit)- Eq.3 ln(RGDPit) = Ɣ0-ln(Ɣ2tit)- Eq.4 ln(RDGPit ) = Ω0 - ln(Ω3 sit )-

Research Method

Where

RGDPit = real gross domestic product of each country belonging

to the scope of the study

τit = percentage share of personal income tax in the total revenue

tit = percentage share of the consumption tax/ taxes on goods

and services (VAT) as a part on the total revenue

sit = percentage share of the corporate income tax as a share in

the total revenue

e = stochastic error term

Results

Negative impact of all three standard tax variables on the economic growth (rGDP) of the 5 developing Asian countries

Results

Negative relationship between compensation tax/personal income tax and economic growth (rGDP)

Results

Negative relationship between corporate income tax and economic growth (rGDP)

Results

Negative relationship between indirect tax and economic growth (rGDP)

Policy Implications

In a developing country with low levels of human capital, income and investments, imposing higher tax rates will reduce incentives to:

Entrepreneurs Employees Consumers

Recommendations

Comparison between developing Asian countries and developed Asian countries

Allocation of tax revenues to different public sector activities