I'm trying to analyze the effect of income level on indirect taxes and my results show that indirect taxes decline with higher levels of GDP per capital. As the correlation matrix confirm this result I'm trying this counterintuitive results. In fact, theoretically when countries income levels increases the consumption may increases. Hence indirect taxes should increase.
Dear Clery Nomo , yes theoretically indirect taxes should move along with economic development.
You could consider whether there is time lagging between economic growth and indirect taxes collection.
Second, more seriously, you may also consider that indirect tax is regressive, meaning that people with higher income level may in fact pay smaller indirect taxes (proportional to his income). Rich people's propensity to consume is less than his propensity to save, which explain why their consumption expenditure per total income is lower (and thus lower indirect tax payments).
Dear Clery Nomo,
In order to explain this correlation acting inversely, other factors of influence, other determinants of changes in tax revenues and economic growth should also be verified. It should first be clarified whether there really is a direct correlation inversely proportional or it is rather the influence of other factors that are not directly related to each other. If it turns out that the aforementioned correlation is inversely proportional, it may be associated with a decline in consumption of citizens and investment demand of enterprises despite the growing economic growth. In addition, it is important to diagnose the short-term or long-term effects of certain factors and the development of observed trends, relationships and correlations. For example, accelerated economic growth may be a short-term effect of the anti-crisis, interventionist programs limiting the scale of unemployment growth and the economic recession that occurred in 2020 in connection with the development of the SARS-CoV-2 (Covid-19) coronavirus pandemic. Besides, despite the large amounts of additional money introduced by the central bank into the economy, this money, despite low interest rates, is invested in bank deposits and in various investment assets, and only a certain part of this additional money causes an increase in the level of consumption, which previously fell largely due to pandemic. Therefore, despite the anti-crisis programs of socio-economic, fiscal, budgetary, sectoral and social policies as well as a mild monetary policy, the consumption level may not have returned to the pre-pandemic level. The reasons are citizens' concerns about a new wave of the pandemic, about a new economic crisis and an increase in unemployment, a decline in employment, and the loss of jobs. The decrease in consumption is the main factor behind the decrease in revenues to the state budget from indirect taxes. Of course, the above considerations are only one of many variants of potential case study analyzes, in which many other factors and determinants of the impact of economic growth, the applied socio-economic, fiscal, budget, sector, social and monetary policies, the specificity of a given economy, the economic system of the country should be taken into account, the sectoral structure of the economy, the main factors responsible for short-term economic growth and long-term economic development, etc.
Best regards,
Dariusz Prokopowicz
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