Effect of distortionary and non-distortionary taxes on economic growth: evidence from sub-Saharan African countries

Effect of distortionary and non-distortionary taxes on economic growth: evidence from sub-Saharan African countries

Studies on economic growth have provided insights into why states grow at different rates over time. Most recently, endogenous growth economics asserts that government expenditure and taxation will have both temporary and permanent effects on economic growth. The debate on the effectiveness of taxes as a tool for promoting growth and development remains inconclusive. Against this background, this study sought to determine the effect of distortionary and non-distortionary taxes on the economic growth of sub-Saharan African countries. The ex-post facto research design was adopted which enabled the study to make use of secondary data of sub-Saharan African countries in a panel least squares. The hypotheses were linearly modelled while adopting the panel data estimation under the fixed-effect assumptions.

Findings reveal that distortionary tax (a proportional tax on output at rate) has a negative and insignificant effect while non-distortionary tax has a positive and insignificant effect on the economic growth of sub-Saharan African countries. Given the positive but insignificant effect of non-distortionary taxes on economic growth, the study thus recommends that Governments of sub-Saharan African countries should improve on the mechanisms for the collection of non-distortionary taxes while deemphasizing the use of distortionary taxes for enhanced economic growth in the economies.