The Dynamic Relationship between Tax Policy Uncertainty and Economic Growth

Document Type : Original Article

Authors

1 M.A. Student in Economics, University of Gillan, Rasht, Iran,

2 Faculty of Management and Economics, University of Guilan, Rasht, Iran.

3 Assistant Professor of Economics, Department of Economics, Faculty of Management and Economic, University of Gillan, Rasht, Iran

Abstract

Tax policy is a pivotal government instrument for resource allocation, income distribution, and macroeconomic stability, thereby playing a significant role in economic growth. However, tax policy uncertainty can adversely affect economic activity. This study employs Continuous Wavelet Coherence analysis to investigate the dynamic, time- and frequency-dependent relationship between economic growth and two proxies for tax policy uncertainty—uncertainty in tax revenue growth and in the tax-to-GDP ratio—within the Iranian economy from 1991 to 2022.
The findings reveal three empirical regularities. First, in the short run, tax uncertainty can both exacerbate recessions and rise during economic booms due to unexpected reforms. Second, in the medium run, government attempts to boost tax revenue during recessions amplify uncertainty. Third, in the long run, the tax reform process itself becomes a source of structural uncertainty.
The results indicate that the flawed and unpredictable nature of the reform process has itself become a primary source of instability. This research, therefore, underscores the necessity of a transparent and stable roadmap for tax reform. Such a framework is crucial for managing short-term uncertainty, fostering a more predictable investment climate, and smoothing the transition towards a robust fiscal state as an ultimate anchor of economic stability.

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