Journal of Economics and Modelling

Journal of Economics and Modelling

The Dynamic Relationship between Tax Policy Uncertainty and Economic Growth

Document Type : Original Article

Authors
Seyyedeh Zahra Asghari Hoseinabadi 1
Saleh Taheri Bazkhaneh 2
Narjes Zamani 2
1 M.A. Student in Economics, Faculty of Management and Economic, University of Guilan, Rasht, Iran
2 Assistant Professor of Economics, Faculty of Management and Economic, University of Guilan, Rasht, Iran
10.48308/jem.2025.241162.2003
Abstract
Tax policy, as a government tool for resource allocation, income distribution, and maintaining macroeconomic stability, plays an important role in economic growth; however, uncertainty in tax policies can harm economic activities. This study employs continuous wavelet coherence analysis to examine the dynamic and time-frequency dependent relationship between economic growth and two measures of tax policy uncertainty (uncertainty in tax growth and uncertainty in the tax-to-GDP ratio) in Iran’s economy during the period 1991–2022. The findings reveal three empirical regularities: first, in the short term, tax uncertainty can both exacerbate recessions and increase during economic booms through unexpected reforms; second, in the medium term, government efforts to raise tax revenues during recessions intensify uncertainty; and third, in the long term, the process of tax reforms itself becomes a source of structural uncertainty. This research highlights the necessity of prioritizing the predictability of tax policy and developing a clear, long-term roadmap for tax reforms to reduce uncertainty, create a more stable environment for investment and sustainable growth, and facilitate the transition toward a stable tax-based government.
Keywords
Economic Growth
Fiscal Policy Uncertainty
Tax Policy
Time-Frequency Analysis
Subjects
- Afonso, A., & Furceri, D. (2010). Government size, composition, volatility and economic growth. European Journal of Political Economy, 26(4), 517-532. https://doi.org/10.1016/j.ejpoleco.2010.02.003
- Alavi Bajegani, S. A., Peykarjou, K., Hojabr Kiani, K., & Torabi, T. (2019). Investigating the asymmetric effects of fiscal policy on economic growth in Iran: A quantile regression approach. Journal of Economics and Modeling, 10(4), 139-158 (In Persian).
- Amin, A., Chen, Y., & Huang, S. (2018). Personal income tax and economic growth: A comparative study between China and Pakistan. Asian Journal of Economics and Modeling, 6(1), 65–73.
- Asafo-Adjei, E., Agyapong, D., Agyei, S. K., Frimpong, S., Djimatey, R., & Adam, A. M. (2020). Economic policy uncertainty and stock returns of Africa: A wavelet coherence analysis. Discrete Dynamics in Nature and Society, 2020, Article 8846507. https://doi.org/10.1155/2020/8846507
- Babaki R, Effati M (2022) The effect of tax structure on economic growth in Iran. Tax Research Journal 30(54): 29-54. https://doi.org/10.22055/ tax.2022.40422.2530 (In Persian).
- Babatunde, O. A., Ibukun, A. O., & Oyeyemi, O. G. (2017). Taxation revenue and economic growth in Africa. Journal of Accounting and Taxation, 9(2), 11-22. https://doi.org/10.5897/JAT2016.0232
- Chehreghani A, Ansari Samani H (2021) Investigating the effect of payroll tax on economic growth in Iran. Economic Policy, 13(26): 121-162. https://doi.org/10.22054/joep.2021.57943.3278 (In Persian).
- Cornevin, A., Corrales, J. S., & Mojica, J. P. A. (2024). Do tax revenues track economic growth? Comparing panel data estimators. Economic Modelling, 140, 106867. https://doi.org/10.1016/j.econmod.2024.106867
- Dixit, A. K., & Pindyck, R. S. (1994). Investment under uncertainty. Princeton University Press.
- Eaton, J., & Rosen, H. S. (1980). Taxation, human capital, and uncertainty. The American Economic Review, 70(4), 705-715.
- Faramarzi, A., Dashtban Farouji, M., Hakimipour, N., Alipour, S. & Jabbari, A. (2015). Investigating the relationship between tax and economic growth: A case study of Iran and OPEC and OECD member countries. Quarterly Journal of Financial Economics, 9(32), 103-122 (In Persian).
- Gençay, R., Selçuk, F., & Whitcher, B. (2002). An introduction to wavelets and other filtering methods in finance and economics. Academic Press.
- Grinsted, A., Moore, J. C., & Jevrejeva, S. (2004). Application of the cross wavelet transform and wavelet coherence to geophysical time series. Nonlinear Processes in Geophysics, 11(5/6), 561-566.
- Gurdal, T., Aydin, M., & Inal, V. (2021). The relationship between tax revenue, government expenditure, and economic growth in G7 countries: New evidence from time and frequency domain approaches. Economic Change and Restructuring, 54(2), 305-337. https://doi.org/10.1007/ s10644-020-09298-9
- Hassett, K. A., & Metcalf, G. E. (1999). Investment with uncertain tax policy: Does random tax policy discourage investment? The Economic Journal, 109(457), 372-393. https://doi.org/10.1111/1468-0297.00452
- In, F., & Kim, S. (2013). An introduction to wavelet theory in finance: A wavelet multiscale approach. World Scientific.
- Jeet, P., & Vats, P. (2017). Learning quantitative finance with R. Packt Publishing Ltd.
- Khalili, A., Rahmani, L., & Najafi Z (2010) The effect of government's economic policy uncertainty with emphasis on tax revenue on economic growth. Proceedings of the Conference on Fiscal and Tax Policies in Iran (In Persian).
- Kim, I., Snow, A., & Warren J.R.S. (1995). Tax-rate uncertainty, factor supplies, and welfare. Economic Inquiry, 33(1), 159-169.
- Loh, L. (2013). Co-movement of Asia-Pacific with European and US stock market returns: A cross-time-frequency analysis. Research in International Business and Finance, 29, 1-13. https://doi.org/10.1016/j.ribaf.2013.01.001
- Mendoza, E. G., Razin, A., & Tesar, L.L. (1994). Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption. Journal of Monetary Economics, 34(3), 297-323.
- Oshemi, O.O., & Otusanya, O.J. (2022). Tax revenue volatility and economic growth in Nigeria. In Proceedings of the 7th Annual International Academic Conference on the Institute of Chartered Accountants of Nigeria (ICAN). University of Port Harcourt, Rivers State.
- Özmen, M. U., & Yılmaz, E. (2017). Co-movement of exchange rates with interest rate differential, risk premium and FED policy in “fragile economies”. Emerging Markets Review, 33, 173-188.
- Porter, N. (2007). Revenue volatility and fiscal risks: An application of value-at-risk techniques to Hong Kong's fiscal policy. Emerging Markets Finance & Trade, 43(6), 6-24. https://doi.org/10.2753/ree1540-496x430601
- Randy, K. Y., & Young, K. (1993). Wavelet theory and its application. Kluwer Academic.
- Rösch, A., & Schmidbauer, H. (2018). Wavelet analysis in R: A guided tour. Springer. (Note: The 2016 reference is a package guide; this 2018 book is a more stable academic reference by the same authors).
- Sameti, M., Hamdi, V., & Mozaffari, SH. (2019). An investigation of the dynamic relationship between tax structure and economic growth in Iran with an emphasis on uncertainty. Quarterly Journal of Applied Economics Studies of Iran, 8(32), 161-193 (In Persian).
- Saptono, P. B., Mahmud, G., Salleh, F., Pratiwi, I., Purwanto, D., & Khozen, I. (2024). Tax complexity and firm tax evasion: A cross-country investigation. Economies, 12(5), 97.
- Skinner, J. (1988). The welfare cost of uncertain tax policy. Journal of Public Economics, 37(2), 129-145.
- Slemrod, J., & Yitzhaki, S. (2002). Tax avoidance, evasion, and administration. In A. J. Auerbach & M. Feldstein (Eds.), Handbook of Public Economics (Vol. 3, pp. 1423-1470). Elsevier. https://doi.org/10.1016/ S1573-4420(02)80021-1.
- Taheri Bazkhaneh, S. (2022) Fiscal consolidation and expansion and macroeconomic uncertainties in Iran. Macroeconomics Research Letter, 17(35), 73-108. https://doi.org/10.30473/jmer.2022.64571.2464 (In Persian).
- Takumah, W. (2014). Cointegration and causality between tax revenue and economic growth in Ghana. International Research Journal of Marketing and Economics, 1(6), 30-44.
- Talvi, E., & Végh, C. A. (2005). Tax base volatility and procyclical fiscal policy in developing countries. Journal of Development Economics, 78(1), 156–190. https://doi.org/10.1016/j.jdeveco.2004.07.002
- Torrence, C., & Webster, P. J. (1998). The annual cycle of persistence in the El Niño/Southern Oscillation. Quarterly Journal of the Royal Meteorological Society, 124(550), 1985-2004.
- Tursoy, T., & Mar'i, M. (2020). Lead-lag and relationship between money growth and inflation in Turkey: New evidence from a wavelet analysis. Economies, 8(4), 97. https://doi.org/10.3390/economies8040097