2.4.7. ECONOMIC DEVELOPMENT
Rwanda embrace economic development since our nation is
experienced dramatic improvement in the sector of the economic, political, and
social well-being of its people. Economic development can also be referred to
the quantitative and qualitative changes in the economy
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Dafionone (2013), noted, «that for the country to lay
claim on growth and development through taxation, there must be an improvement
of the quality of life of the citizens, as measured by the appropriate indices
in economic social, political and environmental term.
2.5 RELATED CASE STUDY
In an attempt to evaluate tax revenue and economic development
of Rwanda, we are prone to utilizing regression analysis for the period of 2007
- 2017. It will therefore be worthwhile to look at the empirical literature.
Engen and Skinner (1996),also carried out a study of taxation
and economic growth of U.S. economy, using large sample of countries and
evidences from micro level studies of labour supply, investment demand, and
productivity growth. Their findings revealed modest effects on the order of 0.2
to 0.3 percentage and pointed differences in growth rates in response to a
major reform. They stated that such small effects can have a large cumulative
impact on living standards.
Brian (2007), analyzed the effects of tax revenue on economic
growth in Uganda`s experience for the period 1987 to 2005. From the study, tax
revenue was found to have had an impact on the economic growth level of the
country, with direct taxes having a positive effect while indirect taxes had a
negative impact. However, he stated that due to time, financial and data
constraints, not all essential issues could be analyzed. The issue arising from
this work is the fact that indirect taxes are not easily evaded when it comes
to payment because they are paid either at the time of consumption of the very
good or service and at source and so one expects that they should have a
positive impact on a country's' economic growth not negative as reported.
Babalola and Aminu (2011), also investigated the impact of
taxation on economic growth in Nigeria over the period 1977- 2009. They
examined the Unit roots of the series using the Augmented Dickey - Fuller
technique after which the co-integration test was conducted using the Engle -
Granger Approach. Error correction models were estimated to take care of
short-run dynamics. The overall results indicated that productive expenditure
did positively impacted on economic growth during the period of coverage and a
long-run relationship exists between them as confirmed by the co-integration
test.
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Ikem (2011), investigated the interaction between tax
structure and economic growth in Nigeria during the period 1961-2011. He made
his analysis using two different econometric models: the neoclassical growth
framework and Granger causality test in examining the level of impact and
direction of causality respectively. The growth model was decomposed during the
analysis into long run static equation and short run dynamic error correction
model. The results revealed that income and CIT is statistically significant in
promoting economic growth in Nigeria.
The impact of tax revenue on economic growth has been examined
severally by different researchers. The empirical studies of Anyanwu (1997),
Engen and Skinner, (1996), Tosun and Abizadeh, (2005) and Arnold (2011), were
used as the basis for different explanations of taxes on economic.
According to Karran (1985) the tax revenue raised by the
government depends to a large extent on the state of the economy; therefore the
relationship between tax revenue and economic growth is an issue of great
importance. Economic growth entails an increase in gross domestic product
overtime and is mainly linked to tax revenue through its effect on tax base. If
tax revenues are not sufficient to meet expenditure needs, the government must
resort to borrowing, printing money, selling assets, or slowing down the
implementation of development programs. All these actions generally damage the
economy, especially the poorest segment of the society.
Mansfied (1972) observes that high tax elasticity is a
desirable characteristic of a tax system since it allows growth in expenditure
to be financed by raising tax revenue without the need for politically
difficult decisions to raise the taxes.
Karran (1985) identifies three models of tax revenue change:
(i) Macroeconomic determination model, (ii) consumer preference model and (iii)
policy initiative model. Macroeconomic determination model holds that changes
in tax revenues are brought about by economic growth and inflation. Economic
growth may lead to increase in tax revenue by increasing the real value of the
tax base. Economic growth can also change purchasing patterns, thus altering
the revenues raised by particular taxes. Inflation has a direct effect on the
revenue yield of taxes.
If a tax base is measured in money terms and levied on a
percentage basis it is buoyant with respect to inflation; the increase in the
money value of the base increases the revenue yield.
According to Heinemann (2001) tax revenue may be linked to
changes in national income through fiscal drag. Fiscal drag describes the
phenomenon whereby inflation and economic growth push more tax payers into
higher tax brackets. This has the effect of raising tax revenue without
explicitly raising tax rates, or changing tax bases.
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