Quality of institutions and threshold effect on the relationship between taxation and economic growth in the CEMAC zone.
- Country : Republic of the Congo
- Subject : Laboratory of Economics and Management
Keywords : economic growth, budget deficit, taxation, and institutions.
Abstract
This article aims to assess the impact of fiscal policies on tax revenues and economic growth. It builds on previous work seeking to validate the thesis of the nonlinear effects of taxation on economic activity, in the context of broadening the determinants to include institutional factors. To achieve this, we used the ARDL approach in PMG. Like Hausnai et al. (2015) and Minea and Vilieu (2009), this article considers an economy with a budget deficit. The budget deficit is mainly financed by borrowing. The use of panel data economics, covering the period 1985-2024, suggests that in the short term, taxation has positive effects on economic growth, but in the long term, these effects are reversed. This result led us to conclude that there is a tax burden threshold above which taxation has a distorting effect on economic growth. Thus, our results indicate that, without taking into account the poor quality of institutions, the optimal tax burden threshold in the presence of a budget deficit is 23.12% of GDP. Including the quality of institutions, as approximated by the control of corruption, our results suggest that the tax burden rate that maximizes growth is 15.29% when the quality of institutions is poor. However, when the quality of institutions improves, this threshold rises to 27.98% of GDP.As an economic policy implication, we have suggested that it is important for the tax administration to strengthen VAT measures in order to combat tax evasion, on the one hand, and to further reduce tax rates, particularly on corporate and personal income, on the other. This should enable CEMAC countries to optimize the effects of taxation on non-oil economic activity, while promoting private initiative for sustained growth and greater success in ongoing projects, particularly the poverty reduction strategy.
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