{"id":273649,"date":"2016-12-02T13:06:17","date_gmt":"2016-12-02T13:06:17","guid":{"rendered":"http:\/\/citifmonline.com\/?p=273649"},"modified":"2016-12-02T13:06:17","modified_gmt":"2016-12-02T13:06:17","slug":"would-tax-cuts-induce-growth-in-ghana-an-assessment-of-npps-manifesto-promises","status":"publish","type":"post","link":"https:\/\/citifmonline.com\/2016\/12\/would-tax-cuts-induce-growth-in-ghana-an-assessment-of-npps-manifesto-promises\/","title":{"rendered":"Would tax cuts induce growth in Ghana: An assessment of NPP\u2019s manifesto promises"},"content":{"rendered":"

Abstract <\/strong><\/p>\n

The paper estimates the Total Cost of major NPP Promises in their manifesto and assesses the Party\u2019s proposed tax cuts on economic growth and revenue generation to finance the cost of the promises.\u00a0 The relationship is robust even after controlling for economic growth.<\/p>\n

The paper finds a negative and elastic relationship between corporate tax rate and economic growth with an elasticity of about 3.17, suggesting that a 1% reduction in corporate tax rate will increase economic growth by 3.17% at the margin.<\/p>\n

The paper also finds a positive, significant but inelastic relationship between real GDP growth and real tax revenue with an elasticity of 0.2, suggesting that a 1% increase in real GDP would increase real tax revenue by 0.2% at the margin. Deducing from the two results, a 1% reduction in corporate tax rate would cause about a 3.2% increase in economic growth at the margin which would further increase real tax revenue by 0.64% (i.e. 0.2% x 3.2%) at the margin.<\/p>\n

Hence the increase in tax revenue resulting from the stimulation of the economy would not be enough to compensate for the loss in tax revenue resulting from the tax cuts. Hence the proposed strategy of reducing corporate tax to stimulate economic growth and relying on the ensuing tax revenue increase from the growth stimulus to finance the proposed promises is very far-fetched.<\/p>\n

The paper concludes, therefore, that given the rigid nature of budget allocations due to the statutory expenditures in the budget, the expenditures associated with the promises could only be financed through deficit financing ,and therefore a significant increase in debt which will render public debt unsustainable<\/p>\n

Introduction<\/strong><\/p>\n

Tax revenue is very critical for every economy. Yet, the impact of taxation on growth and investment has remained a hotly debated issue, not only to the academics but to politicians and policy makers as well. Proponents of tax cuts argue that lower taxes would both stimulate the economy in the short run and increase normal output in the long run through their positive effects on incentives to work, spend, save, and invest. To them, higher taxes hurt the economy by distorting behaviour \u2013 reducing work effort, spending, saving, and risk-taking. For example,\u00a0 Romer and Romer (2014), investigated the impact of tax changes on economic activity in the postwar United States (1950-2007). They found that an exogenous tax increase of 1 percent of GDP lowers real GDP by roughly 2 to 3 percent.<\/p>\n

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In many poor developing countries, a low tax-revenue relative to GDP prevents them from undertaking ambitious development expenditure programs. Furthermore, due to the inefficient tax administration systems in these countries, tax rates tend to be high and concentrated on few tax payers and on indirect taxes.\u00a0 Mobilizing additional resources through new tax regimes, external financial support, and deficit financing to finance budgetary expenditures is therefore a policy priority.<\/p>\n

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Ghana has pursued major tax reforms over the last two decades. The country moved progressively from a historically high corporate tax rate regime of 65 percent in the 1980s to 32 percent in 2001 and 25 percent in 2006. In 2006, when the corporate tax rate fell to 25 percent, corporate income tax revenue dropped by 3.1 percent while real GDP growth rose by 0.3 percent, (up from 5.9 percent in 2005 to 6.2 percent in 2006) before falling by 1.9 percent in 2007, (down from 6.2 percent in 2006 to\u00a0 4.3 percent in 2007).<\/p>\n

Non-oil tax revenue increased from GH\u023b4.2 billion in 2008 to GH\u023b23.7 billion in 2015, representing an increase of 461.6 percent in nominal terms and 137.3 percent increase in real terms. Tax Revenue as a percentage of GDP also increased from 14.0% in 2008 to about 17.0% in 2015.<\/p>\n

Ghana\u2019s tax system, especially the corporate income tax regime compares favorably with its peers in the lower middle income bracket\u2014the average corporate income tax rate for LMIC is 29.6% compared to Ghana\u2019s 25%. The movement of real GDP and real tax revenue has always been positive, with growth rate higher than the growth in real tax revenue. This explains the fact that the growth rate in real GDP is not strong enough to pull up the growth rate in real tax revenue.<\/p>\n

 <\/p>\n

Figure 1: Trends in Various Economic Indicators: 1980 – 2015<\/strong><\/p>\n

\"cassiel\"<\/p>\n

The NPP argue that Ghana has a very high tax regime and that a further reduction in corporate income tax rate and abolition of other indirect taxes could generate substantial benefits to the country. In this spirit, the New Patriotic Party\u2019s (NPP) as stated in its 2016 Manifesto, promises to reduce corporate income tax rate from the current 25 percent to 20 percent and also abolish a host of other indirect taxes, including the following, when it wins the power to govern.<\/p>\n

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