ABSTRACT

The study examines the effect of tax on economic growth of developing countries for the period between 1990 to 2019. The independent variable (tax) was proxied with total tax while the independent variable (economic Growth) was proxied with Gross Domestic Product (GDP), Per Capita Income (PCI), Foreign Direct Investment (FDI) and Money Supply (MS). The objective of the study is to determine the effect of tax on GDP, PCI, FDI, and MS of Developing Countries. Other researchers have investigated the effect of taxes on economic growth of individual countries and continents or regions but this study include all the developing countries as classified into three regions. We used panel regression analysis techniques to analyze the data with E-view 9 software. From the result of hypotheses 1 to 4, the null hypotheses, which states that there is no significant effect on all the dependent variables were rejected since the t statistics values have probability value of 0.00% which is below 5% level of significance. The researcher, therefore, concluded that tax revenue has a positive and significant effect on all the dependent variables. The researcher also conducted panel regression using the three region’s dummy variables 1 to 3 to determine the effect of tax on the dependent variables of each of the three regions. The result shows that Tax revenue’s positive effect on GDP is more in Asia region followed by Africa and Latin America region with differential coefficients of 1.526, 1.542 and 1.461 for Africa, Asia and Latin America respectively. In the case of FDI, the result shows that tax has negative significant effect on FDI with differential coefficient values of -0.594, -0.545, and -0.206 for Africa, Latin America, and Asia respectively. In the case of money supply, the result shows that tax revenue has a positive and significant effect on money supply in all the regions. The result shows that it affected the Africa region more than Asia and Latin America/Caribbean region with a differential co-efficient of 8.73 (Africa) 8.37 (Asia) and 8.05 Latin America/Caribbean. From the study’s result; the researcher concluded by saying that tax revenue has a significant effect on the economic growth of developing countries. The researcher, therefore, recommended that government of developing countries should reinvigorate their tax system, fiscal institutional structure, and framework in other to sustain their gross domestic product, align their tax policies relative to their per capita income to assuage the tax burden on the people, initiate and implement tax policies that will attract foreign direct investment and articulate tax policies in a manner that would not increase the money supply to a point of inflation.