Journal of Economics and Financial Analysis, 5 (1), pp. 43-63, [2021]
URI: https://ojs.tripaledu.com/index.php/jefa/article/view/61/73

Real Gross Domestic Product as Value Added Tax Base: Evidence from Ghana



DOI: http://dx.doi.org/10.1991/jefa.v5i1.a40

Abstract

Total Private Consumption is the ideal Valued Added Tax base for Valued Added Tax revenue modelling and forecasting. However, data on private consumption expenditure is not available in most developing countries. With this reason, this study aims to study the appropriateness of real Gross Domestic Product as a Valued Added Tax base by testing the correlation between Valued Added Tax Revenue and Real Gross Domestic Product. It further examines the elasticity of Valued Added Tax revenue to changes in real Gross Domestic Product of Ghana. It is realized from the study that a one percent increase in real Gross Domestic Product results in a 3.7337 percent increase in Total Valued Added Tax revenue. Also, a, high correlation of 0.9365 is realized between real Gross Domestic Product and Total Valued Added Tax revenue. Since monthly and/or quarterly data on private consumption expenditure is not available in Ghana, real Gross Domestic Product can be used as VAT base (especially in VAT revenue modelling and forecasting) because of the high correlation and elasticity between Value Added Tax revenue and real Gross Domestic Product. Sequel to these, the study recommends that the government of Ghana implements supply-side policies that will boost investment and production, reduce imports and encourage import substitution, and also demand-side policies that will increase aggregate demand. These policies will expedite rapid economic growth, and an increase in Value Added Tax revenue will be a consequent result.

Keywords

Valued Added Tax (VAT); Real Gross Domestic Product; VAT Base; Elasticity; Private Consumption Expenditure; Correlation.

JEL Classification

C02, H20.

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