Relationship between Tax Revenue and Economic Growth in Nepal

Abstract

The study seeks to find out the trend of tax revenue in Nepal. The relationship of economic growth rate and tax revenue is debatable and have mixed results among the researchers. This study thus explores the relationship between tax revenue and economic growth which is measured in Real Domestic Gross Product. For the study, 34 years data from 1985/86 to 2018/19 have been used. ARDL techniques of cointegration and ECM transfomation of the ARDL have been used for the long run and short run analysis of the relationship between the variables, that are economic growth and tax revenue. To check the stability of the coefficient, CUSUM and CUSUMQ square have been used and the datas have been analysed through the descriptive analysis. Also, the relationship of economic growth and tax revenue implies that a 1 percent increase in tax revenue causes a 0.192032 percent increase in economic growth. This has rationality because increase in revenue contributes in economic activities which further increases the income of the public. The R-squared and adjusted R-squared shows that there is overall significance of the model. This implies that 61.67 percent of the variation in economic growth (measured by Real Gross Domestic Product) can be explained by tax revenue. The residual and stability diagnostic show that the data is free of Heteroskedasticity and Serial Correlation and also concludes that the model used in the research is stable. The coefficient of error correction term, on the other hand implies that about 41.55 % of total adjustment takes place annually when shock arises.