AN IN-DEPTH ANALYSIS OF ECONOMIC INFLUENCES ON FISCAL OUTCOMES

Abstract

Tax revenue is playing a vital part in determining an economy’s structure in modern era. The primary goal of this research is to estimate the impact of economic determinants on the tax revenue. Economic determinants include inflation, Agricultural sector’s share in national output, industrial sector’s share in national output and service sector’s share in national output. The sample of the study is consists of 74 developing countries. The study used Ordinary Least Squares (OLS) model for estimation and employed the cross-sectional data for 2021. Using cross-sectional data is very important for the study this is because of several prominent reasons which make the study unique and rare. Worldwide when there is a big structural break happens during the pandemic, the economic relationships between the variables change dynamically which becomes the hot-cake for the economists to the check the strength of relationship between economic variables. So that, the policy makers make adjustments in the policy formulation process as well as reformations of policies which are made earlier to the structure break. The study found Inflation, agriculture share in Gross Domestic Product (GDP), industrial share in GDP and services share in GDP are significant negatively impacting tax revenue generation during the period. 1 percent increase in inflation decline revenue performance by 0.953 percent. The impact of inflation on revenue performance is significant at the 1% level with a negative coefficient. The theoretical reason behind it during the study period inflation rise all over the world while economic activity slow down due to massive structural break and its impacts on global economy. Unadjusted tax brackets and variations in purchasing power are also the same reason for warm up to inflation during the study period. Agriculture sectoral share in GDP contributing negatively and significantly in the performance of revenue generation for government. The composition of its negative effect is classified into direct and indirect tax revenue. The crux of the empirical analysis is composed by numerous factors. As the agriculture sector is non-formal and there are also very inadequate taxpayers with limited income and profits due to most of the agricultural sector belongs to small- scale. Due to high consumption rate, significant portion of production become the part of consumption. There is a large part of production which is even not marketed. Traded agricultural products are largely exempt from indirect taxes. 1 percent increase in industrial share in GDP decline revenue performance by 0.531 percent and is significant at the 1% level with a negative coefficient. During the pandemic, many industrial sectors faced disruptions in production due to lockdowns, supply chain interruptions, and decreased consumer demand. As industrial output decreases, tax revenue generated from these sectors could also decline, reflecting reduced taxable profits or sales. 1 percent increase in services share in GDP decline revenue performance by 0.416 percent and is significant at the 1% level with a negative coefficient. Services sector revenue performance depends upon the nature of Services: Services encompass a wide range of economic activities. Digital Economy: Often operate across borders, posing challenges for tax authorities in terms of identifying taxable transactions and enforcing compliance.