Journal of Tax Reform
Taxation, government spending and economic growth: The case of Bulgaria
G. Ganchev, I. Todorov
Southwest University “Neofit Rilski”, Blagoevgrad, Bulgaria
Abstract
The objective of this article is to estimate the impact of three fiscal instruments (direct taxes, indirect taxes, and government expenditure) on Bulgaria’s economic growth. The study employs an autoregressive distributed lag model (ARDL) and Eurostat quarterly seasonally adjusted data for the period 1999–2020. Four control variables (the shares of gross capital formation, household consumption, and exports in GDP as well as the economic growth in the euro area) are included in the model to account for the influence of non-fiscal factors on Bulgaria’s real GDP growth rate. The empirical results indicate a long-run equilibrium relationship between Bulgaria’s economic growth and the independent variables in the ARDL. In the short term, Bulgaria’s real GDP growth rate is affected by its own past values and the previous values of the shares of direct tax revenue, exports, government consumption, and indirect tax revenue in GDP. In the long term, Bulgaria’s economic growth is influenced by its own previous values and the past values of the share of household consumption in GDP and the euro area’s real GDP growth rate. Fiscal instruments can be used to stabilize Bulgaria’s growth in the short run but they are neutral in the long run. The direct tax revenue, government consumption, and indirect tax revenue are highly effective and can be used as tools for invigorating and stabilizing Bulgaria’s economic growth in the short run. However, in the long term, the real GDP growth rate can be hastened only by encouraging domestic demand (final consumption expenditure of households) and promoting exports. This research cannot answer the question of whether flat income taxation stabilizes the economy or not, since it does not separate the impact of tax rate changes from the influence of tax base modifications.
Keywords
Bulgaria, taxation, government spending, economic growth, autoregressive distributed lag model
JEL classification
E62, F43, H24, H25, O47References
1. Han P. Effects of Fiscal Policy under Different Capital Mobility. Accounting and Finance Research. 2014;3(1):111–115. https://doi.org/10.5430/afr.v3n1p111
2. Domac I., Peters K., Yuzefovich Y. Does the Exchange Rate Regime affect Macroeconomic Performance? Evidence from Transition Economies. The World Bank, Policy Research Working Paper Series 2642. 2001. Available at: https://openknowledge.worldbank.org/handle/10986/19572
3. Andersen T.B., Malchow N. Denmark’s fixed exchange rate regime and the delayed recovery from the Global Financial Crisis: A comparative macroeconomic analysis. University of Southern Denmark, Discussion Papers on Business and Economics No. 10/2014. 2014. Available at: https://www.sdu.dk/-/media/files/om_sdu/institutter/ivoe/disc_papers/disc_2014/dpbe10_2014.pdf
4. Prachowny M. The Effectiveness of Fiscal and Monetary Policies under Fixed and Flexible Exchange Rates: Empirical Evidence for Canada, 1950–1970. Working Paper 185, Economics Department, Queen’s University. 1975.
5. Stupak J. Fiscal Policy: Economic Effects. Congressional Research Service, R45723. 2019. Available at: https://crsreports.congress.gov/product/pdf/R/R45723/1
6. Farhi E., Werning I. Fiscal Multipliers: Liquidity Traps and Currency Unions. Handbook of Macroeconomics. 2016;2:2417–2492. https://doi.org/10.1016/bs.hesmac.2016.06.006
7. Backus D.K., Kehoe P.J., Kydland F.E. Dynamics of the trade balance and the terms of trade: the J-curve? American Economic Review. 1994;84(1):84–103. Available at: https://www.theigc.org/wp-content/uploads/2014/08/Backus-et-al-1994AER-1.pdf
8. Schmitt-Grohe S., Uribe M. Downward nominal wage rigidity, currency pegs and involuntary unemployment. Journal of Political Economy. 2016;124(5):1466–1514. https://doi.org/10.1086/688175
9. Born B., D’Ascanio F., Müller G.J., Pfeifer J. Mr. Keynes Meets the Classics: Government Spending and the Real Exchange Rate. IFO Working Paper No. 352. 2021. Available at: https://www.econstor.eu/handle/10419/235239
10. Obstfeld M., Rogoff K. The Six Major Puzzles in International Macroeconomics: Is There a Common Cause? NBER Macroeconomics Annual. 2000;15:339–390. https://doi.org/10.3386/w7777
11. Lai Ch.-F. Fiscal Policy in a Fixed Exchange Rate Regime. International Research Journal of Finance and Economics. 2018;169:57–69. Available at: http://www.internationalresearchjournaloffinanceandeconomics.com/ISSUES/IRJFE_169_04.pdf
12. Pierdzioch C. Capital Mobility and the Effectiveness of Fiscal Policy in Open Economies. Kiel Working Paper No. 1164. 2003. Available at: https://www.files.ethz.ch/isn/102955/kap1164.pdf
13. Tevdovski D., Petrevski G., Bogoev J. The effects of macroeconomic policies under fixed exchange rates: A Bayesian VAR analysis. Munich Personal RePEc Archive. 2016. Available at: https://mpra.ub.uni-muenchen.de/73461/
14. Bhattarai K. Taxes, public spending and economic growth in OECD countries. Problems and Perspectives in Management. 2010;8(1):14–30. Available at: https://www.businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/3074/PPM_EN_2010_01_Bhattarai.pdf
15. Gechert S., Heimberger P. Do Corporate Tax Cuts Boost Economic Growth? The Vienna Institute for International Economic Studies. Working Paper No. 201. 2021. Available at: https://wiiw.ac.at/do-corporate-tax-cuts-boost-economic-growth-dlp-5821.pdf
16. Farmer R., Zabczyk P. A Requiem for the Fiscal Theory of the Price Level. IMF Working Paper 19/219. 2019. Available at: https://www.imf.org/en/Publications/WP/Issues/2019/10/11/A-Requiem-for-the-Fiscal-Theory-of-the-Price-Level-48715
17. Benhabib J., Farmer R. Indeterminacy and sector-specific externalities. Journal of Monetary Economics. 1996;37(3):421–443. https://doi.org/10.1016/0304-3932(96)01257-3
18. Menuet M., Minea A., Villieu P. Budget Rules, Distortionary Taxes and Aggregate Instability: A Reappraisal. hal-02153856. 2019. Available at: https://hal.archives-ouvertes.fr/hal-02153856v2/document
19. Chen B.-L., Hu Y., Mino K. Income Taxation Rules and Stability of a Small Open Economy. Journal of Macroeconomics. 2020;65:103236. https://doi.org/10.1016/j.jmacro.2020.103236
20. Darvas Z. The Economic Growth and Income Distribution Implication of Public Spending and Tax Decisions. Working Paper 2020/05, Bruegel. 2020. Available at: https://www.bruegel.org/2020/10/the-economic-growth-and-income-distribution-implications-of-public-spending-and-tax-decisions/
21. Giannitsarou C. Balanced Budget Rules and Aggregate Instability: The Role of Consumption Taxes. Economic Journal. 2007;117(523):1423–1435. https://doi.org/10.1111/j.1468-0297.2007.02089.x
22. Saavedra P., Marcincin A., Valachy J. Flat Income Tax Reforms. In: Gray Ch., Lane T., Varoudakis A. (eds). Fiscal Policy and Economic Growth: Lessons from Eastern Europe and Central Asia. The World Bank, Washington, D.C.; 2007, pp. 253–280. Available at: https://openknowledge.worldbank.org/handle/10986/6883
23. Ganchev G., Tanchev S. Why Post-Communist Countries Choose the Flat Tax: A Comparative Welfare Approach. Acta Oeconomica. 2019;69(1):41–62. https://doi.org/10.1556/032.2019.69.1.3
24. Klemm A., Liu L., Mylonas V., Wingender P. Are Elasticities of Taxable Income Rising? IMF Working Paper 2018/132. 2018. https://doi.org/10.5089/9781484361566.001
25. Chen B.-L., Hu Y., Mino K. Does Nonlinear Taxation Stabilize Small Open Economies? KIER Discussion Paper Series, Kyoto Institute of Economic Research, Discussion Paper No. 997. 2018. Available at: https://www.kier.kyoto-u.ac.jp/DP/DP997.pdf
26. Vasilev A. Progressive taxation and (in)stability in an exogenous growth model with Epstein-Zin recursive preferences. Journal of Economics and Econometrics. 2020;64(1):51–68.
27. Nelson J., Phillips K. The Economic Effects of Financing a Large and Permanent Increase in Government Spending. Congressional Budget Office Washington, D.C., Working Paper 2021-03. 2021. Available at: https://www.cbo.gov/publication/57021
28. Hassler U., Wolters J. Autoregressive Distributed Lag Models and Cointegration. No 2005/22, Discussion Papers. 2005. Available at: https://www.econstor.eu/bitstream/10419/28020/1/507401956.PDF
29. Lustenhouwer J., Mavromatis K. The Effects of Fiscal Policy when Planning Horizons are Finite. SUERF Policy Briefs, 2021;(190)1–5. Available at: https://www.suerf.org/docx/f_b1ff86a5f63c33a35b44640aa148b33d_33591_suerf.pdf
30. Todorov I., Durova K. The Fiscal Policy of Bulgaria from the Standpoints of the Business Cycle and the Twin Deficits Hypothesis. Journal of Tax Reform. 2020;6(3):256–269. https://doi.org/10.15826/jtr.2020.6.3.085
31. Amaglobeli D., Jaramillo L., Karnane P., Zdzienicka A. Tax Reforms and Fiscal Shock Smoothing. IMF Working Paper, WP/19/113. 2019. https://doi.org/10.5089/9781498315623.001
About Authors
Gancho Ganchev – PhD, Full Professor, South-West University “Neofit Rilski”, Faculty of Economics, 66 Ivan Mihaylov Str., Blagoevgrad 2700, Bulgaria; ORCID: 0000-0002-9267-9422; email: ganchev@swu.bg
Ivan Todorov – PhD, Associate Professor, South-West University “Neofit Rilski”, Faculty of Economics, 66 Ivan Mihaylov Str., Blagoevgrad 2700, Bulgaria; ORCID: 0000-0002-4325-0195; e-mail: ivank.todorov@swu.bg
For citation
Ganchev G., Todorov I. Taxation, government spending and economic growth: The case of Bulgaria. Journal of Tax Reform. 2021;7(3):255–266. doi.org/10.15826/jtr.2021.7.3.102
Article info
Received February 24, 2021; Revised April 4, 2021; Accepted December 7, 2021
DOI: https://doi.org/10.15826/jtr.2021.7.3.102
Download full text article:
~479 KB, *.pdf
(Uploaded
20.12.2021)
Created / Updated: 31 August 2015 / 3 July 2017
© Federal State Autonomous Educational Institution of Higher Education «Ural Federal University named after the first President of Russia B.N.Yeltsin»
Remarks?
select the text and press:
Ctrl + Enter
Portal design: Artsofte
ISSN 2414-9497 (online)