Correlation between tax revenues and gross domestic product: Evidence from the developing economy

Abstract

This paper examines the relationship between tax revenues and the economic growth of Kosovo as a developing country. The paper uses quarterly time series data for 2010:Q1–2021:Q4 collected by the Kosovo Statistical Agency and the Ministry of Finance of Kosovo. The data were analyzed using EViews v10. Augmented Dickey-Fuller (ADF), Johansen cointegration test, vector autoregressive (VAR) model, vector error correction model (VECM) estimation, and Granger causality test was used to analyze the model. The VECM results showed that fluctuations in tax revenues have a negative effect on the gross domestic product (GDP) in the long run. Using data from nine countries, Nguyen and Darsono (2022) demonstrated that tax revenues have an adverse effect on economic growth. Using Granger causality, the results showed that tax revenue growth could cause GDP growth, and GDP growth can cause tax revenue. Okonkwo (2018) recommends that the government tighten tax collection methods and regularly evaluate tax policies to maintain the country’s tax revenue. Since taxes boost economic growth and boost taxes in emerging economies, the government should implement effective tax collection measures. The importance of the paper lies in the fact that fluctuations in tax revenues are an important cause of negative changes in GDP in the long run.