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How Taxes Relate to Potential Welfare Gain and Appreciable Economic Growth

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  • Sorana Vatavu

    (Finance Department, Faculty of Economics and Business Administration, West University of Timisoara, 300115 Timisoara, Romania)

  • Oana-Ramona Lobont

    (Finance Department, Faculty of Economics and Business Administration, West University of Timisoara, 300115 Timisoara, Romania)

  • Petru Stefea

    (Management Department, Faculty of Economics and Business Administration, West University of Timisoara, 300115 Timisoara, Romania)

  • Daniel Brindescu-Olariu

    (Management Department, Faculty of Economics and Business Administration, West University of Timisoara, 300115 Timisoara, Romania)

Abstract

This paper investigates new insights into the effect taxation has on the welfare state, using Granger causality analysis, and focusing on both economic growth and human development as welfare components. Moreover, Granger causality allows us to determine whether or not there is a bidirectional causal relationship between taxes, growth, and human development. The analysis is based on a comparative study between part of the Central and Eastern Europe (CEE) countries and the richest European Countries, over the period 1995–2015. Taxes are illustrated by different types of tax revenues to GDP ratio, economic growth is defined by gross domestic product and gross national income, while the human development index (HDI) included in the analysis is a composite measure used to rank countries based on their social and economic development level. Results confirm the fact that taxes support economic growth, but their impact on human development is rather limited. However, in countries with higher HDI, an increase in tax revenues is expected, but over long-term. This study confirms that taxes are an important instrument for governments, and should be used in economic growth. In addition, taxes are closely related to well-being, as citizens from countries with large HDI values are more likely to pay higher taxes over time. Therefore, practical tax reforms should imply an equilibrium between equity and a decent standard of living that supports life expectancy, increased tax revenues, and efficiency.

Suggested Citation

  • Sorana Vatavu & Oana-Ramona Lobont & Petru Stefea & Daniel Brindescu-Olariu, 2019. "How Taxes Relate to Potential Welfare Gain and Appreciable Economic Growth," Sustainability, MDPI, vol. 11(15), pages 1-16, July.
    • Handle: RePEc:gam:jsusta:v:11:y:2019:i:15:p:4094-:d:252710
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    References listed on IDEAS

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    4. Cordelia Onyinyechi Omodero, 2022. "Value-Added Tax Revenue Transfers and Regional Social Development: Evidence from Nigeria," Sustainability, MDPI, vol. 14(21), pages 1-15, November.
    5. Urgaia R. Worku, 2022. "The Role of Endogenous Technology in Making Sustained Economic Growth in Sub‒Saharan Africa: Panel GMM and VECM Approaches," World Journal of Business and Management, Macrothink Institute, vol. 8(2), pages 1-24, December.
    6. Marcus-Radu Man & Sorana Vatavu, 2022. "Can progressive taxation contribute to human development?," Journal of Financial Studies, Institute of Financial Studies, vol. 13(7), pages 132-145, November.
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    8. Tongning Li & Daozheng Li & Diling Liang & Simin Huang, 2022. "Coupling Coordination Degree of Ecological-Economic and Its Influencing Factors in the Counties of Yangtze River Economic Belt," Sustainability, MDPI, vol. 14(22), pages 1-21, November.

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