The Interrelationship between Economic Growth and Tax Revenues in Cambodia

Abstract

The relationship between economic growth and the growth rate of tax revenues on goods and services, tax revenue on income, profit, and capital gain, and tax revenue on international trade and transaction was analyzed using a VAR model. All variables in this study were found to be integrated of order one, therefore the model was run using first differences. The lag length of the model was determined to be optimal at lag-two based on the information criterion. The estimated results of the model successfully passed all diagnostic tests, including tests for residual normality, serial correlation, and heteroscedasticity. Since all the inverse roots of the AR characteristic polynomial were within the unit circle, the model was deemed stable. The empirical findings from the VAR model indicated that the growth rate of tax revenue on income, profit, and capital had the most significant impact on economic growth, ranging from 2.3505% to 2.7155%. This was followed by tax revenue on goods and services, ranging from 0.5776% to 0.5954%, and tax revenue on international trade and transaction, ranging from 0.2747% to 0.5930%. Furthermore, the response of the growth rate of all tax revenues to changes in the economic growth rate exhibited a cyclical pattern around its mean.