Impact of Taxation on Economic Growth in an Emerging Country

Tax revenue and economic growth in Jordan have been undertaking an upward growth path in absolute terms. A number of studies indicated mixed results for the effect of taxes on economic growth. Numerous of these studies found a negative relationship, others found that taxes affect economic growth positively. So this paper trying to investigate the short and long run effects of taxation on economic growth in an emerging country, Jordan. Annual data for the time period 1980 – 2018 used to develop an Auto-Regressive Distribution Lag (ARDL) approach. Results of the bounds test specify that the variables of economic growth, taxes, capital and trade are cointegrated. The empirical results of the estimated model confirm that there is a negative short and long run relationship between taxes and economic growth in Jordan. Also results of the cointegration estimation indicate that the short run deviations from long run equilibrium is adjusted by 60% towards long run equilibrium each year. Thus the paper proposes that fiscal policy is essential to promote sustainable economic growth. Therefore policy makers of the fiscal policy should take in account a tax rates that are appropriate to make enough revenues needed to finance government utility expenses that promote economic growth.