American Journal of Humanities and Social Sciences Research (AJHSSR)
2018
American Journal of Humanities and Social Sciences Research (AJHSSR) e-ISSN : 2378-703X Volume-02, Issue-05, pp-26-39 www.ajhssr.com
Research Paper
Open Access
Taxation, Private Fixed Domestic investment Behaviour and Zimbabwe’s Economic Growth 1
Joe Muzurura, 2DR N Sikwila
1
Chinhoyi University of Science and Technology, Zimbabwe Chinhoyi University of Science and Technology, Zimbabwe
2
ABSTRACT: The paper examines the taxation, private fixed domestic investment and economic growth nexus in Zimbabwe for the period 1998 to 2015 using Ordinarily Least Square regression. Private fixed investment decisions undertaken by firms and other economic agents are very critical for the economic growth. Levels of taxation affect production, consumption, and distribution of wealth in an economy. Taxation revenues can be utilised as a vital tool to: raise government revenue, enhance price stability, optimally allocate and distribute available resources, boost domestic savings, increase domestic investment as well as to accelerate the pace of economic growth.Taxation, domestic savings, public corruption and lagged GDP were found to be significant. Our results suggest that taxation revenue that are channelled to productive public expenditure such as roads, bridges, rail, energy, transport and other communication systems are likely to stimulate the productivity of private fixed domestic investment. The primary challenge for policy makers is devise tax rules that lowers tax evasion, reduce corruption, enhance domestic savings yet adequately protect the tax base whilst lessening the current heavy excess burden on firms. Key words: Taxation, Private fixed domestic investment, Economic Growth, Zimbabwe
I. INTRODUCTION AND BACKGROUND Private fixed domestic investment (PDFI) a major contributor to overall investments, is the leading source of business cycle volatility, employment generation and economic growth.The effects of taxation on private fixed domestic investment and economic have long been a central emphasis of research in public finance and economics. In the long-term the taxation of income whilst providing the revenues needed to fund government expenditure, may also depress output, consumption and private fixed domestic investment. Higher taxes such as corporate and personal income, presumptive and capital gain taxes inhibit domestic investment rate and subsequently economic growth. Higher taxes encourage tax evasion and distort the efficient utilisation of human capital and slow down growth in labour supply as economic agents substitute labour choice in favour of leisure. In addition, suboptimal taxes can lead to a huge flow of resources from high productivity sectors such as manufacturing industries to informal sectors that may have lower productivity and multiplier effects. The optimal long-run level of capital income taxation remains the subject of vigorous debate in both the theoretical economics literature and in public political discourse. The economic incidence of tax include micro effects on the distribution ofincome and efficient utilisation of resources as well as macro effect on the level of capacity, output, employment, prices and growth. Whilst taxes are the primary sources of government revenue in Sub-Saharan Africa accounting for between 15 and 20 percent of GDP in the past few years, in Zimbabwe it accounts for at least 75% of the GDP. The real tax burden on actual tax payers (firms and individuals) is very high in Zimbabwe since the country has enormous share of agricultural and informal sectors that often are underrated or/and untaxed. A major question in public finance is how variations in tax policy affect domestic and foreign investment, economic activity and social welfare. In theory, according toHarbinger (1879) and Ramsey (1947) taxes are negatively correlated with economic growth. Hence, higher taxes mean lower growth rates of both domestic investment and economic growth. All taxes, with the exception of lump taxes, introduce distortions to an economy by not having a neutral effect on the behaviour of economic agents. The distortionary effects of taxes on private fixed domestic investment result in loss of efficiency, often called dead weight loss or excess tax burden. Therefore, higher taxes mean higher rates of distortionary effects, which results in higher loss of efficiency and accordingly, the allocation of resources in an economy may not be Pareto optimal. The transmission channels of taxation revenue on domestic investment process and economic growth remains the subject of open debate.Understanding the relationship between taxation and private fixed domestic investment
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