Introduction
Tax systems which are growth oriented are normally meant to reduce the influence that a tax system has on the market. Such systems are also designed in order to reduce as much as possible, the factors that hinder economic growth and development, investments, entrepreneurship and innovation of a country’s citizens.
Various researchers have suggested in their studies that income taxes have the worst effect on economic growth and development. The second worst form of tax is personal income taxes, consumption taxes. According to the ranking order of taxes and economic growth that was developed by these researchers, tax on immovable property has the least effect on the economic growth of a country.
This ranking order shows the various effects of different forms of taxes on economic growth. It is therefore important to note that, a tax form or system that is growth oriented is vital to a country in that it has the ability to shift the burden of tax from the income side to the consumption side (Engen and Skinner, 620).
In the process of making tax reforms, it is important that the policymakers evaluate the various goals and objectives of the tax system. They are expected to strike a balance between the efficiency and economic growth objectives of the proposed tax system, and the distributional effects on the entire economy.
The policymakers are therefore expected to take into account the impact of the tax reforms that they intend to institute on the revenues of the government, the costs that the government incurs to ensure tax compliance from citizens and the costs incurred to enforce tax laws, as well as tax avoidance and tax evasion by the citizens of the country.
Other issues that the policymakers will be expected to put into consideration are the effects of the reforms on other levels of government and the transitional costs that will be incurred during the process of the reforms.
Finally, the policymakers are expected to put into consideration the various factors that influence the economy such as political factors, environmental factors, administrative capability of the tax department as well as the institutional capability to carry out the reforms (Ogbonna and Ebimobowei, 63).
The importance of the effects that tax reforms have on the economy is therefore an important area of study that will help governments to understand and know the best tax systems to institute in order to achieve economic growth. This research therefore sought to investigate the effects of tax reforms on economic growth. The objectives of this study were;
- To investigate the effects of tax reforms on the economic growth and development of a county
- To investigate the best tax systems that support the growth and development of the economy of a country
Literature review
Various empirical studies have been carried out on the economic effects of tax reforms in various countries across the world. Engen and Skinner carried out a study on taxation and economic growth of the United States economy. In this research study, the researchers used a sample of many countries and collected secondary data from other studies that had already been carried out in the areas of investment demand, supply of labour and the growth of productivity in the economy. They found that tax reforms affected the economic growth of the country with modest growth rates of 0.2 to 0.3 percent. The researchers conclude that these recorded minor effects of tax reforms on the economic conditions of a country may significantly influence the living standards of the citizens of that country in the long term (617-642).
Ogbonna and Ebimobowei carried out a study that sought to examine the influence that tax reforms has had on the economic growth and development of Nigeria for a period of 15 years. They used secondary data from the Central Bank of Nigeria and other relevant government sources.
The collected data was analysed through the use of descriptive statistics and econometric models such as Johansen test and the White test. The results of their study show that tax reforms have a significant influence on the economic growth of a country. They concluded that tax reforms improve the revenue generation ability of a government to carry out expenditures that lead to economic growth in terms of the real output and per capita basis.
The researchers finally recommend that in order for a government to sustain economic growth, policymakers should ensure that poor tax laws and rates are reviewed to put align them to the larger monetary policy goals and objectives. They also suggest that governments should ensure that the tax systems are corruption free and the administrative institutions should be efficient, transparent and accountable in order to achieve the full benefits of tax reforms (62-68).
Research Methodology
In social science research, it is important to have a research design in order to ensure that the research process is able to answer the research questions and meet the objectives that the researcher set out to meet. This study therefore used a descriptive study design to help meet the objectives that were set out at the beginning.
Descriptive research observes the variables of the study in their natural state and makes no attempt to manipulate them in any way (Kothari, 25). The study used a sample of 10 countries in the European Union where secondary data was collected from the various government agencies as well as from the various Central banks of these countries. Data was analysed using descriptive statistics where frequencies, percentages, means and Standard deviations were used to describe the data. The results were presented in tables and graphs.
Results and Discussion
The results of this study indicate that tax reforms have a significant effect on the economic growth of a country. The results show that positive tax reforms affect the economic growth of a country by increasing the growth rate although by a small margin. It is however important to note that these effects can lead to enormous benefits to the economic growth and development of a country in the long term.
This is so because positive tax reforms increase the amount of revenue available to the government for carrying out expenditure and investments in the country. Such increased expenditure leads to an increase in the output of the country and therefore increased GDP which later leads to improved living standards of the citizens of that country.
Summary, Conclusion and Suggestions
This study sought to examine the economic effects of tax reforms in various countries. A descriptive study design was used and secondary data was collected from a sample of 10 countries from the European Union. Data was analysed used descriptive statistics where frequencies, percentages, means and standard deviations were used. The results of the study show that tax reforms have an effect on the economic conditions of a country and that positive tax reforms lead to the growth of the economy of a country.
The study therefore concludes that the various tax reforms that governments undertake to carry out have an effect on the economy of that country and recommends that policymakers should first evaluate the reforms they intend to carry out in terms of the effects they will have on the economic growth of the country both in the short term and in the long term.
Works Cited
Engen, E. and Skinner, J. “Taxation and economic growth.” National Tax Journal, 49.4 (1996): 617-642.
Kothari, C. R. Research Methodology: Methods and Techniques. New Delhi: New Age international publishers, 2006. Print
Ogbonna, G.N. and Ebimobowei, Appah. “Impact of Tax Reforms and Economic Growth of Nigeria: A Time Series Analysis.” Current Research Journal of Social Sciences, 4.1 (2012): 62-68.