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Tax-financing of Budget Deficits in LDCs: Re-validation of Laffer Curve Theory

Applied Economics and Finance

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Title Tax-financing of Budget Deficits in LDCs: Re-validation of Laffer Curve Theory
 
Creator Okafor, Samuel O.
Maduka, Olisaemeka D.
Ike, Ann N.
Uzoechina, Benedict I.
 
Description Urgent need for quick action to put Nigeria and other developing economies back to the path of economic recovery has almost imposed state of emergency on these economies. Most LDCs are faced with acute shortage of development funds due to recessions accompanying incessant crashes in international financial market. Raising existing tax rates to finance budget deficit in LDCs often generates public debate on pros and cons of such policy option. Study considered Nigeria as typical case of LDCs. Study focused on establishing the effectiveness of tax-financing of budget deficit under Laffer curve theory. Study spanned across 1970-2015. Data were analyzed using ADF, CUSUM, heteroskedasticity, multiple regression, Johansen cointegration and ECM. Results indicate that: (1) Custom and exercise duties, petroleum profit tax and value-added tax contributed significantly to the reduction in budget deficit while company income tax had nonsignificant impact(2)Total government revenue constituted major chunk of planned income for budget deficit financing(3) Deficit financing of capital health expenditure yielded high returns while that of recurrent education expenditure and capital education expenditure was accompanied by low returns (4)Growth and employment generation accelerated deficit financing while private investment decelerated it (5) There were long and short-run relationships among budget deficit, taxes, human capital investment and macroeconomic indicators with significant rate of adjustment of short-run disequilibrium. Study concluded that tax-financing of budget deficit was effective under Laffer curve effect. It was recommended, among others, that LDCs should enlarge their tax bases through inclusion, to finance budget deficit.
 
Publisher Redfame Publishing
 
Contributor —
 
Date 2017-05-22
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
Peer-reviewed Article
 
Format application/pdf
 
Identifier http://redfame.com/journal/index.php/aef/article/view/2297
10.11114/aef.v4i3.2297
 
Source Applied Economics and Finance; Vol 4, No 3 (2017); 89-101
2332-7308
2332-7294
 
Language eng
 
Relation http://redfame.com/journal/index.php/aef/article/view/2297/2416
 
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