If a theoretical relationship exist for the control variables, you should state it in the manuscript.

The main reason for choosing these two variables and making them control variables must be known through the correlation between the variables according to the logic of economic theory

You may want to read about the Modern Monetary Theory of Inflation (MMT) or Keynesian General Theory.

For inflation: The Modern Monetary Theory of Inflation (MMT) or Keynesian General Theory can be helpful. Demand-pull inflation, a term used in MMT and true inflation Keynesian term, occurs when the system reaches the point of full utilisation of its productive capacity requiring the government to curb inflation. These features supported the development of money through government cash as tax collection. Then government policy raises the taxes by a certain percentage at certain times, which would finance much-needed spending on the system, such as infrastructure, human capital and social protection, spur growth, poverty reduction and raise well-being.

For GDP: Keynesian Absolute Income Hypothesis asserts that the main factor influencing consumption is the level of current income, that is, GDP. According to the theory, household consumption will increase as income does. This implies that individuals’ initial wealth determines their capacity to invest in physical capital or to consume. The Law of Demand and Supply also suggests that as income changes, so does the demand for products and services, with more demand resulting from higher income. For example, when workers lose their income due to the economic shock, they cut back on their spending, which results in a decrease in demand. The theory suggests that a rise in GDP (income level) will cause the demand for consumption to grow and eventually result in a rising consumption price.

Hello again

Adding real GDP and inflation rate as control variables is sufficient. But as you already pointed out, providing theories to justify your argument is essential. The following resources might help you.

Carnevali, E., & Deleidi, M. (2022). The trade-off between inflation and unemployment in an ‘MMT world’: an open-economy perspective. European Journal of Economics and Economic Policies: Intervention, 1(aop), 1-35.

Kalecki, M. (2021). Political aspects of full employment. In The political economy (pp. 27-31). Routledge.

Kotilainen, K. (2022). A cosmopolitan reading of Modern Monetary Theory. Global Society, 36(1), 89-112.

Mitchell, W., Wray, L. R., & Watts, M. (2019). Macroeconomics. Bloomsbury Publishing.

Osband, K. (2022). Modern Monetary Theory: Cautionary Tales from the Soviet [Dis] Union. Available at SSRN 4066101.

Palley, T. (2020). What's wrong with Modern Money Theory: macro and political economic restraints on deficit-financed fiscal policy. Review of Keynesian Economics, 8(4), 472-493.

Pérez-Montiel, J. A., Sansó, A., & Pariboni, R. (2022). Autonomous and induced demand in the United States between 1960-2019: A long-run approach.

Prates, D. (2020). Beyond Modern Money Theory: a Post-Keynesian approach to the currency hierarchy, monetary sovereignty, and policy space. Review of Keynesian Economics, 8(4), 494-511.

Storm, S. (2021). Cordon of conformity: Why DSGE models are not the future of macroeconomics. International Journal of Political Economy, 50(2), 77-98.

You are very welcome dear Tharani Kanthasamy.

I am pleased and satisfied that these scholarly papers reached you when you needed information about the control variables you are utilising in your research.

If you add inflation rate and income inequality as control variables, why are you assuming there is a relationship between them? In reality these two variables may be completely uncorrelated at this point in time. Present inflation rate is so high right now because of the fed's actions and you would have to look back to the 1980s to find the same situation. My guess is that at this point in time no relationship exists between inflation rate and income inequality, therefore there is no reason to expect such a relationship to exist in theory.

Dear Allen Sweet,

As control variables, I am using the inflation rate and real GDP not the inflation rate and income inequality. Is this has the same theoretical problem?

Hello everyone,

I have another doubt about the variables. Can I use these two variables (real GDP and inflation rate) as additional independent variables instead of using them as control variables while keeping my tax revenue structure as the primary independent variable?

Hello Tharani Kanthasamy

Yes, you can. You can use the two variables as independent variables because you want to use them to explain the dependent variable of your choice.

Thank you, Asrat Araya. I have another doubt: can I apply the same theories that you previously recommended for those variables as control variables?

Yes, you can. Use the Modern Monetary Theory of Inflation (MMT) for inflation and Keynesian General Theory for real GDP. These two macroeconomic variables, inflation and real GDP, are the main explanatory variables widely used in the academic world to explain performances or growth such as tax revenue and so on.

Hello again, Tharani Kanthasamy

Regarding how you use the two macroeconomic variables, inflation and real GDP, to explain your dependent variable (tax revenue), I suggest you read the following articles.

Lee, Y., & Azlan, M. I. B. (2022). Determinants of Housing Prices: Evidence from Malaysia and Singapore. Asian Journal of Research in Education and Social Sciences, 3(4), 91-106.

Alpha Kabine, C. (2022). Determinants of house prices in Malaysia. International Journal of Housing Markets and Analysis.

Korkmaz, Ö. (2019). The relationship between housing prices and inflation rate in Turkey: Evidence from panel Konya causality test. International Journal of Housing Markets and Analysis.

Kónya, L. (2006). Exports and growth: Granger causality analysis on OECD countries with a panel data approach. Economic Modelling, 23(6), 978-992.

The first article used a multiple regression model to explain the effect of inflation rates and GDP on a price index. In comparison, the three research papers used the ARDL model and Granger Causality Analysis to study the relationships between inflation rates, GDP and the dependent variables of their choice. So you can do the same. I hope this helps you.