Open AccessThe Impact of Tax Policies on Economic Growth: Evidence from South-Asian Economies.
Author(s) -
Ihtsham Ul Haq Padda,
Naeem Akram
Publication year - 2009
Publication title -
pakistan development review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.154
H-Index - 26
ISSN - 0030-9729
DOI - 10.30541/v48i4iipp.961-971
Subject(s) - economics , endogenous growth theory , tax revenue , tax rate , monetary economics , macroeconomics , tax reform , fiscal policy , public economics , market economy , human capital
The public policy instruments, such as tax rate changes, havedifferent implications in exogenous (neoclassical) and endogenous growththeories. The neoclassical theory predicts that changes in a country’stax structure should have only transitory impact on its long-runeconomic growth while endogenous growth theory argues that such changesmay have an effect impact on the growth. This study tests whether taxpolicies conducted by Pakistan, India and Sri Lanka have transitory orpermanent effect on their economic growth. The study finds transitoryand negative effect of tax rate on the growth only for short-term buthas no effect in the long-term. The tax rates in all these countries arelow as compared to developed countries. Due to low tax rates thesecountries heavily depend on bond financing and foreign debt. In view ofthe findings of this study most important policy implication of thestudy is that to finance the budget and most of their revenuerequirements should be financed with tax increases and if necessary bondfinancing should be contingent providing a guard against transitoryshocks to the budget. JEL classification: H10, E62, O40 Keywords:Neoclassical Growth; Endogenous Growth; Fiscal Policy; TaxSmoothing